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CEE Biweekly

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The Georgia conflict and its likely economic impact

Thu, Sep 11 2008, 14:56 GMT
by Yapi Kredi Bank Economic Research Department

UniCredit Group

Contents

• 3 Key Economic News
  
• 6 Feature
  
• 6 The Georgia conflict and its likely economic impact
  
• 8 Country Monitoring
  
• 8 Ukraine
  
• 9 Tables
  
• 9 Two-week market movers and risk factors
  
• 10 Interest and exchange rates
  
• 10 Ratings 10 5Y-CDS
  
• 11 Monthly indicators
  
• 11 Quarterly GDP
  
• 12 Main indicators

Key Economics News

Bulgaria – Industrial production in July grew 3.3 % yoy, declining for a third consecutive month on the back of a drop in activity in the mining and electricity, heating, gas and water sectors. Industrial sales growth also slowed to 3.3 % in July on an annual basis down from a 5.0 % rise a month earlier. Despite the favorable base effect, inflation decreased only marginally in July (14.5 %) compared with June (15.3 %) when CPI accelerated to its highest level since the start of the transition. Retail sales climbed by 6.0 % yoy in July broadly in line with the performance in May and June, but in contrast to the double digit growth posted in the first four months of 2008.

Czech Republic – The recent soft GDP, industrial output and retail sales data suggest that the domestic economy will probably not remain immune to the global slowdown. In addition, faltering demand in the eurozone, high domestic inflation and the impact of a strong CZK will likely take their toll on GDP growth this year and next more heavily than we previously thought. Only the trade balance has shown a surprising resilience so far, but this was primarily due to weakening imports rather than steady export activity. On the interest rate front, we do not expect the CNB to continue its loosening policy after the August quarter- point cut, which brought the benchmark repo rate to 3.50 %. The main reason behind our belief is the sharp correction of the CZK/EUR, which could slow the predicted fall in inflation for the final months of this year.

Estonia – Estonia is the second EU-country after Denmark to slide into recession. Real GDP contracted by 1.1 % yoy in Q2 2008 after a marginal growth of 0.2 % yoy in Q1 (according to preliminary estimates, made for the first time after Statistics Estonia switched to the chainlinking methodology, which uses previous year’s prices instead of base year prices for deflating; past real GDP data also changed; nominal data were also revised). Real GDP decreased by 0.8 % qoq seasonally and working-day adjusted (after certainly negative qoq growth also in Q1). Domestic demand contracted by 2.8 % yoy as private consumption fell by 2.0 % due to weak spending on transportation, clothing and food. Gross fixed capital formation decreased by 2.5 % because of lower investment by households and the financial sector.With domestic demand contracting even more than we expected and the external environment providing little support, we reduce our forecast for real GDP growth in 2008 further from 0.1 % to –1.2 %.

Hungary – Hungarian GDP rose by 2.0 % yoy in Q2 2008 following 1.7 % growth in Q1. Although the acceleration is welcomed, its extent fell below expectations (2.4 %). Significant change took place in GDP components as main drivers for economic growth. In Q2 private consumption increased by 1.2 % yoy thereby providing major support for recovery and public consumption also recorded a minor gain of 0.5 % yoy. Gross fixed capital formation continued to decline (–2.2 % yoy). On the other hand, the export performance suffered from weakening external demand, especially from Germany, whereas the appreciating HUF and accelerating domestic consumption favoured imports steady rise. All in all, rebounding domestic demand ran ahead of net exports in the role of stimulating economic growth. Over the last couple of months CPI remained high, both June and July inflation were 6.7 % despite definite easing inflationary pressures in the form of slowly decelerating agriculture and industrial prices. The HUF has been reaching new heights against the Euro in recent months and this will probably help the CPI to embark upon a more descending trend. Nevertheless, as the National Bank is still not convinced of the current path of inflation, the Monetary Council is very likely to leave the actual 8.5 % base rate unchanged at least until late autumn.

Latvia – According to recently revised figures, Latvian GDP almost stagnated in Q2 2008, growing by a marginal 0.1 % yoy – down from a 3.3 % yoy increase posted in the previous three months. The economy is losing steam as lenders tighten credit and the inflation rate dampens consumer spending. In August, CPI inflation fell to 15.7 % yoy, the lowest level in seven months, on the back of decreasing pressures from food and oil prices. The Latvian economy may further contract through the rest of the year as already signaled by falling industrial production and retail sales, ending the full year with real GDP growth of 0.5 % compared to 10.3 % posted in 2007.

Lithuania – Economic growth slowed to 5.3 % in the second quarter of this year, the slowest pace in more than six years, on the combined effect of weaker external demand, high inflation, low consumer confidence and tighter credit conditions. Still, growth remains considerably faster than in neighboring Latvia (0.1 %) and Estonia (–1.1 %). In the meantime, Lithuanian inflation slowed for the second consecutive month in August, to 12 % from 12.2 % in July and 12.5 % in June. Despite a peak probably already having been reached, inflation in Lithuania is still three times faster than that of the EMU area.

Poland – Poland remained one of the fastest growing economies among European Union countries in H1 2008 with GDP growth at 5.9 % yoy. In terms of GDP breakdown, investment showed a substantial increase of 15.2 % yoy. Individual consumption rose by 5.6 % yoy, but growth was flat compared to Q1.We predict GDP will continue its gradual decrease in H2 2008. For full-year 2008 we expect GDP growth of 5.2 % yoy, while in 2009 it will slow to 4.2 % yoy. The economy’s expansion will be mainly driven by investment and private consumption, propelled by a tightening labour market. Inflation is still a significant threat.We expect it to reach the level of 5 % in August due to a base effect and we predict inflation will average 4.4 % in 2008 as a whole. The MPC keeps its tightening bias due to worryingly high inflation rates. Both the headline CPI, well above the NBP’s target 2.5 % +/–1pp, and growing net core CPI are still strong arguments for further monetary tightening. However, in our opinion, the monetary tightening cycle is coming to an end.We think that the October inflation projection will be crucial for the MPC.

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Published on  Thu, Sep 11 2008, 15:46 GMT