2Q 2010 - A two speed recovery in CEE
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17 Aprilie 2010 |
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UNICREDIT TIRIAC BANK S.A. |
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Global backdrop: a mixed input for CEE
The global recovery unfolding broadly
The global recovery is unfolding broadly according to our expectations, as we outlined them in our year-ahead outlook three months ago. At the time we had flagged that there were upside risks to our US growth forecast, and indeed we have now revised it upwards to close to 3% for 2010, compared to a previous forecast of about 2%, reflecting encouraging signs of firming up in both private consumption and the housing market. Record-high productivity levels give reason to hope that we might see a more robust recovery in employment; for the time being, however, the labor market remains fragile, with the unemployment level hovering near 10%. The main obstacle to a more decisive recovery in employment seems to be the persisting uncertainty on the tax and regulatory environment. The US administration's medium term budget plans confirm that public finances will remain weak for some time, and we are beginning to see the first signs of weakening in investor appetite for USTs: swap spreads have turned negative, and demand has flagged in the face of larger issuance. Against this background, the risk of a meaningful rise in taxation cannot be easily dismissed. In addition, discussions continue on changes in financial sector regulation. This uncertainty seems to be having a negative impact on business sentiment, slowing down hiring and investment plans.
As we go forward, headline growth numbers in the US will suffer from the fading out of the fiscal stimulus plan. Fiscal stimulus added as much as 3 percentage points to growth in 2H09; its contribution will slow to about 1pp in 1H10, and will turn negative to the tune of 1pp in the second half of this year. The underlying momentum of private sector growth will continue to pick up, but headline figures will be dominated by the disappearing contribution of fiscal stimulus. Overall therefore, we still expect the US recovery to continue apace, and remain relatively optimistic.
The Federal Reserve, for the time being, maintains a cautious assessment of the economic recovery, and at its March meeting confirmed that interest rates would be kept exceptionally low for an "extended period", coded language indicating about six months. We expect the first hike in the Fed funds rate to take place only in early 2011. We should note, however, that there are clearly diverging opinions within the FOMC, with some members increasingly uncomfortable with maintaining the current exceptionally supportive stance of monetary policy at a time when the recovery seems to be entrenched. In the meanwhile, the Fed is gradually beginning to phase out its liquidity support.
European recovery prospects are less buoyant
In Europe the recovery prospects remain lackluster, and we have kept unchanged our growth forecast for 2010 of just under 1%. Recent data have confirmed that exports remain the sole engine of the recovery, boosting manufacturing output. As the euro has weakened significantly since the beginning of the year, export performance is likely to remain robust in the months ahead. The data, however, also confirm that domestic demand continues to lag behind: the services PMI underperforms the manufacturing PMI by a clear margin. The normal unfolding of the Eurozone recovery would see exports kick start growth, followed by investment and finally consumption. This time, however, we remain skeptical on the prospects for both private consumption and investment. Eurozone non-financial corporates are burdened by a much higher debt level than in the past, and this will hinder investment and poses the risk of a credit squeeze as banks will see more indebted corporate as riskier borrowers. As far as consumption is concerned, the slow adjustment in the Eurozone labor market implies that unemployment is likely to keep rising throughout this year and into 2011, preventing private consumption from taking off.
European growth outlook significantly differs among countries
The growth outlook varies significantly across Eurozone countries, and these differences are likely to intensify as we go forward. At the positive extreme we have France and Germany with the strongest recovery prospects. Germany is riding the recovery in global trade thanks to the competitiveness of its manufacturing sector; whereas France benefits from a more balanced growth mix, with a more resilient domestic demand. On the other end of the spectrum, Greece and Spain remain mired in recession, and Italy seems set to register barely positive growth this year.
From the point of view of CEE, therefore, the Eurozone growth outlook contains mixed signals. On the one hand, the fact that Germany is outperforming should be encouraging news for countries like Czech, Hungary and Slovakia which have very strong trade links with Europe's locomotive. This, however, is tempered by the fact that Germany's growth is largely export-driven, and that the broader outlook for the Eurozone is much less buoyant. Overall, therefore, CEE countries which can count on a stronger domestic demand or on a somewhat more diversified export market should enjoy a relative advantage.
The Greek saga is not over
The Greek saga continues, and is likely to affect the European growth outlook as well as the outlook for financial markets in Europe and elsewhere. EU leaders have finally agreed to that the IMF should play a role in a potential support package, but also that no support will be given unless Greece has exhausted all remaining options. Greece has therefore come back to tap the markets, where it is indeed being able to place its bonds, but only at a high spread against bunds, and with visible signs of hesitation on the part of investors – indeed spreads have widened to new record in the days immediately following the Easter holidays. The medium term outlook for Greece remains uncertain: redemptions over the next four years will be significantly higher than in 2010, and combining fiscal austerity with robust growth is a formidable challenge, given a dramatic cumulated loss of competitiveness which cannot be offset via an exchange rate depreciation. We therefore see a very significant risk that market pressure and volatility will continue, resulting eventually in the negotiation of an IMF program, which should then allay concerns both on Greece itself and on the other peripheral countries which are seen as potentially at risk. Moreover, the protracted noise and uncertainty on Greece continues to steadily erode support for the EUR, and poses the risk of a further sudden depreciation of the common currency against the USD, should we see further and more convincing signs of a sustainable firming-up in the US recovery.
A two speed recovery in CEE
CEE: export driven recovery is under way…
The good news is that 4Q GDP headline data improved across the board in the region with Poland remaining in positive territory whilst Turkey delivered a strong positive surprise. The details are, however, more mixed as exports were the main driver of growth whilst domestic demand remained at depressed levels and actually slowed and surprised on the downside in many countries.
