Czech Republic
The discussions over next year’s budget are gaining momentum
Hungary
Pass-through from the VAT hike into inflation lower-than-expected due too recession
Poland
Poland’s GDP is surprisingly resilient thanks to households and construction
The week ahead
Czech Government 10Y Bond auction could be the only market mover in Central Europe this time
Overview
Central Europe looks like a fragmented peloton
In Central Europe, just like the rest of the world, the hope of the coming recovery is spreading. However, rather than advancing together, the small group of economies looks like a fragmented peloton. It is led by Poland, which, owing to its larger domestic market and surprisingly stable household consumption, is the only European country to keep growing. It is also being encouraged by government consumption, which will involve a more than 5% government deficit this year. Furthermore, in the second half of the year, Poland may profit from the recovery of net exports and the replenishment of depleted inventories. We primarily see the risk for the sustainability of the current recovery in Western Europe as lying in another rise in unemployment and in the hazardous increase in public debt. Nevertheless, none of those risks should threaten Poland’s recovery within the next six months and therefore we anticipate unchanged Polish policy rates and a further appreciation of the zloty.
The Czech Republic’s situation is more complicated. Its economy is smaller, more open, and more susceptible to the swings in the global climate. The key cyclical export- oriented industries, except for the automotive industry, still find themselves in a highly difficult situation. After all, this was evident from the leading indicator, in the form of July’s industrial output, which, after a promising June, showed another acceleration of its decline last week. The weight of domestic consumption in the GDP is much smaller and thus cannot counterbalance the frozen foreign trade. Nonetheless, with the recovery in the west of the Czech Republic, the situation in this country is also going to improve in the second half of the year, though with a delay. Therefore rates should also remain stable, with the koruna to lag behind the zloty slightly.
Hungary remains a special phenomenon as it combines the disadvantage of high openness and the concurrent tough domestic austerity, ordered by the International Monetary Fund. Thus Hungary’s decline is logically the greatest. As the tension in global markets and the speculative attacks at the forint have eased, the country can afford to cut rates as late as now,
