Central & Eastern European Strategy Q3 2011
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20 August 2011 |
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RAIFFEISEN BANK S.A. |
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Piaţa Charles de Gaulle, Nr. 15
011857 Bucureşti, Sector 1
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Website
www.raiffeisen.ro
Fragmented, cumbersome economic recovery
The topics of Greece and the public debt crisis are indeed ubiquitous, but the focal points in Central and Eastern Europe lie elsewhere. Here there is justified hope that the very differentiated upswings in 2010 will broaden going forward after a transitional year in 2011. To date, all of the countries with highly competitive export economies clearly have their noses in front. Countries with close ties to Germany and German businesses in particular are enjoying expansion, which in Poland and Slovakia has already helped the economies reach their potential growth rates. By contrast, it is primarily states in South-Eastern Europe that have posted sluggish progress in the first half of 2011. Obviously the difference here is that – with the exception of the growth leaders – end-consumer domestic demand has yet to recover. We expect improvements in 2011 and exports to be overtaken in 2012 as the growth driver, which will slow markedly as European growth trends turn down. Against this backdrop our forecasts for 2011 are well supported, but looking ahead to 2012 there is a risk of overestimating domestic economic activity.
In Austria real GDP growth should come in at 3.3% in 2011, one of the strongest rates in the Eurozone, but with declining export activity and consumption spending slow to return to normal we reckon growth will fall just short of 2% in 2012. Rates of inflation across the region should fall from the second half of this year until mid-2012.
Impacts on monetary policy and currencies
The sometimes underestimated inflation will prompt other central banks in CEE to make moves on their interest rates, in addition to the European Central Bank (ECB). We feel there is a need for action in Poland and the Czech Republic in particular, while Russia is likely to reach the top of the interest rate summit in the second half of the year at 8.5%. Even in countries where rates of inflation are expected to be far lower due to base effects (Hungary, Romania), currency factors may result in key rates remaining constant until the end of the year.
Assuming that the Greek situation will calm down in the short term we anticipate a slightly stronger performance for most CEE currencies. However, the aggregate yield spreads to the Eurozone mean we refrain from recommending a buy for bonds, which applies both for Eurobonds issued in CEE as well as local government bonds.
Impact on equities markets
The encouraging first six months on the CEE stock exchanges (with the exception of Vienna and Moscow) should be followed by benign trends in the second half of the year. The current momentum of economic activity is favouring earnings growth rates in the region, most of which are sitting comfortably in double-digits. Alongside Russia we should emphasise the countries in South-Eastern Europe, which are benefiting from the low base effects caused by the recession. A provisional solution to the Greek problem should provide the index with some breathing space and generate price gains of between 7% and 10%. Although earnings growth in Austria is expected to stay robust at +31.8% (2011) and +20.9% (2012), in light of the sector weighting in the ATX we are taking a moderate approach in the summer months.
Forecasts
