Poland: Difficult navigation of anti-inflation coverage amid stagflation threat
Within the second quarter of 2022, Poland’s GDP stored sound momentum of seven% year-on-year, solely marginally weaker than the cyclical peak of 8.5% within the first quarter. Trade is rising at a double-digit tempo, and market companies even accelerated, with solely the development sector slowing. However the PMI collapse in June was essentially the most extreme within the area, with the index reaching a 25-month low. The principle parts, notably output and new orders, skilled a drop solely seen through the pandemic and the worldwide monetary disaster. This helps our expectations for a technical recession within the second half of 2022, when GDP ought to sluggish to round 0.9% YoY within the fourth quarter. Alternatively, consumption doesn’t present any indicators of a slowdown regardless of very poor client confidence and spending plans. This can be defined by aggressive fiscal stimulus of greater than 3% of GDP in 2022. Nonetheless, this yr’s development ought to attain a sound 4.7% YoY. We’re extra frightened about development in 2023 which can attain 2.5% YoY.
CPI reached 15.6% YoY in June. Whereas there are some indicators that CPI is dropping momentum, the index has set a brand new 25-year excessive and is way from its peak. We see CPI plateauing in the summertime however then reaching an area peak in October and 1Q23 when a brand new wave of regulated costs and minimal wage hikes seem. The long-term challenges nonetheless stay: robust second-round results and really excessive inflation expectations.
The native inflation story and powerful hikes of the CEE central banks boosted expectations for aggressive tightening by the Nationwide Financial institution of Poland (NBP). However the robust decline in PMI alerts a slowdown and stagflation threat. In our opinion, if the financial coverage council offers an excessive amount of consideration to weak PMI and raises charges by 50bp, solely then ought to the Polish zloty (PLN) weaken. Within the case of a 75bp hike, this could trigger a barely damaging PLN – and a lot depends upon the governor’s rhetoric – whereas a 100bp can be impartial/constructive for the PLN. We anticipate an NBP hike of 75bp in July, which must be accompanied by a dovish remark.
Czech Republic: The tip of the mountaineering cycle as a summer season theme
As anticipated, the laborious month-to-month information and main indicators for the second quarter already suggest a slight decline within the financial system and an extra drop within the coming months. The June PMI fell to its lowest studying since mid-2020 and client confidence plunged to a report low. Total, we’re very prone to see a chilly bathe through the sizzling summer season months. Inflation, then again, continues to rise, hitting 16.0% YoY in Could and we predict it would peak at 17.0% in June/July. Nonetheless, the not too long ago introduced vitality worth hikes for 2H22 and the continued rise in gasoline costs once more suggest upside dangers. On the fiscal aspect, the federal government is engaged on numerous measures to mitigate the influence of rising costs on households. Nonetheless, it has to date lagged considerably behind its regional friends on this regard. A revised draft state funds for this yr is anticipated to be offered in mid-July, which ought to improve the projected deficit and consider the migration and vitality disaster. Total, nevertheless, we stay somewhat on the optimistic aspect with a deficit of 4.5% of GDP this yr and three.7% subsequent yr.
On the financial coverage aspect, there was a change in management on the Czech Nationwide Financial institution (CNB) for the reason that starting of July, shifting it from being the most important hawk within the area to the dovish aspect. Opposite to market expectations, we don’t anticipate one other charge hike this yr within the base case, however to date we now have not seen a lot from the brand new board members. Thus, it can’t be dominated out that additional upside inflation surprises will drive the central financial institution to boost rates of interest once more. Nonetheless, whereas we consider the brand new board is extra open to FX intervention, the dovish shift will drive the central financial institution to intervene extra no matter its view. Thus, we anticipate the koruna to stay round EUR/CZK 24.75 going ahead. Alternatively, we will anticipate the CNB to begin pushing to stronger ranges as a consequence of persistent inflationary pressures.
Hungary: A gloomier future forward
Incoming exercise information exhibits a marked slowdown within the second quarter and in our base case we see a minor contraction on a quarterly foundation. As we anticipate the federal government to take care of the anti-inflationary measures by way of the rest of the yr, and we nonetheless see a constructive actual wage development (fuelled by public wage settlements and labour shortages), this could assist home demand regardless of the weak exterior setting. This additionally means stronger demand-driven inflation, whereas the influence of provide shocks can be considerably restricted. In opposition to this backdrop, we see common inflation of 11% in 2022, with a peak at a tad beneath 13% within the autumn months. For extra particulars, take a look at our article: Six issues we take into consideration Hungary.
Because the begin of 2022, the Nationwide Financial institution of Hungary has raised the bottom charge by a complete of 535bp and it now sits at 7.75%. Regardless of finishing up the biggest tightening cycle within the area, Hungarian property have remained beneath strain as a consequence of a number of political and geopolitical dangers. The one reasonable level of the financial coverage influence stays the foreign money. To maintain EUR/HUF secure, the central financial institution must proceed its decisive tightening a minimum of till inflation peaks. We see the terminal charge within the vary of 9.25-9.75% with upside dangers. The forint continues to be our least favorite foreign money within the CEE area, however we proceed to observe headlines signalling a turnaround within the Rule of Regulation and EU funds disputes that ought to unlock the hidden potential of the forint within the second half of the yr (maybe in September).
Romania: Financial exercise flattening
Inflation continues to shock to the upside and can doubtless exceed 15.0% in June. We estimate this yr’s common inflation at 13.0% and eight.9% in 2023. This might mark the height of the present inflationary cycle however the highway to decrease ranges can be lengthy. A key issue for subsequent yr’s inflation profile would be the determination on whether or not to increase the present worth caps in place for pure fuel and electrical energy supplied to households. Provided that 2023 is a pre-electoral yr, we doubt that the caps can be totally eliminated.
Financial exercise is displaying indicators of flattening, with confidence surveys pointing to a slowdown in manufacturing and companies, although the retail sector nonetheless holds robust. Our +5.0% GDP development estimation for 2022 already assumes a quasi-stagnant financial system for the remainder of the yr, after the foremost upside shock from the primary quarter.
Now we have not too long ago revised marginally upwards our terminal key charge forecast from 5.50% to six.00% primarily based totally on the regional central banks’ newest (comparatively hawkish) choices. We see a 75bp hike in July and an analogous one in August, adopted by a moderation thereafter. On the FX aspect, the 4.95 stage for the EUR/RON nonetheless appears untouchable. Within the context of a persistent liquidity scarcity for the remainder of the yr, the related charge will actually stay the credit score facility (100bp greater than the important thing charge). On the bond market, with your complete curve buying and selling fairly flat near 9.0%, and extra hikes to come back each regionally and internationally, it’s troublesome to get constructive on it. Nonetheless, present ranges do appear to cost in a lot of the recognized dangers, and spreads versus the area are engaging once more, therefore the upside appears somewhat restricted as properly.