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Monthly Forecasts

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Slovakia: August 2009

Thu, Aug 6 2009, 09:30 GMT
by Mária Valachyová, Michal Musâk

Erste Bank der oesterreichischen Sparkassen AG

Price development

Inflation will likely continue in a decelerating trend also in July. Disinflationary process, caused by generally lower prices of food and industrial goods, owes to crises, lower demand and lower prices of agricultural products (which is amplified by seasonality in summer). Substantially lower prices of oil than a year ago helped to ease pressure on energy prices as well. At the moment, there is uncertainty regarding the size and timing of a cut in energy prices. The regulatory body is currently considering request of the gas supplier to lower gas prices for households up to 5% since autumn. Regulatory body is, however, trying to postpone the decision until the beginning of 2010 and is pushing for a bigger price cut (move seen by some observers as an electioneering step ahead of 2010 parliamentary elections). Should gas and heat prices decline by e.g. 4%, annual harmonized inflation would be reduced by 0.2pp.

Real economy

Sentiment in industry improved significantly in the last two months, which shall translate also into the improvement of industrial production volume (we expect annual decline to narrow from -24 % y/y in May to -18 % in June but after significant improvement seen in the June Czech industrial data, risks are skewed to the positive side). Next week will bring also flash estimate of the 2Q09 real GDP growth. On a seasonally adjusted quarterly basis we expect mild growth, mostly due to improvement in industry. Nevertheless, on an annual basis, the GDP decline might deepen. We expect the headline figure at around -6.3% y/y.

Monetary policy of ECB

The ECB is likely to keep interest rates unchanged at the beginning of August, while the bank does not seem to be ready for any further non-standard measures. Withdrawal of monetary stimulus in the form of rate hikes is not expected earlier than in the mid-2010.

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Published on  Thu, Aug 6 2009, 09:30 GMT

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Slovakia: July 2009

Wed, Jul 8 2009, 08:12 GMT
by Mária Valachyová, Michal Musâk

Erste Bank der oesterreichischen Sparkassen AG

Price development

We expect annual consumer inflation to continue slowly declining in June, from 2.2% seen in May to 2.1% in June. On the month, we assume price growth by 0.2%, due to higher prices of gasoline and services. We expect prices of food to stay unchanged as compared to May. Harmonized inflation is likewise to decline, we expect it to shrink to below 1% y/y.

Real economy

Industrial production figure kicks out the monthly data package today. We expect slight improvement on an annual basis from April's -25% to around -21% in May due to base effect. July might bring some improvement on the monthly s.a. basis, as car plant KIA resumes back to standard 8-hour-working shifts since mid-July. In addition, US steel Kosice resumes its production back to full 5-day working week in July. Decline in industrial production can narrow to around 15% y/y during autumn in our view.

Monetary policy of ECB

The European Central Bank kept interest rates unchanged at the beginning of July. We keep our call that interest rates will remain unchanged at least until the end of 2009. At the moment, the ECB does not seem to be ready for any further non-standard measures (purchases of EUR 60bn covered bonds started at the beginning of July).

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Published on  Wed, Jul 8 2009, 08:12 GMT

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Slovakia: May 2009

Thu, May 7 2009, 16:56 GMT
by Mária Valachyová, Michal Musâk

Erste Bank der oesterreichischen Sparkassen AG

Price development

Low demand pressures and still favorable commodity prices will likely allow inflation to decline further in April. Harmonized inflation should decline to 1.7% y/y and national headline inflation could stagnate at 2.6% y/y, in our view. Depreciation of neighboring currencies, putting pressure on Slovak retail margins is a downward risk to our inflation estimates (anecdotal evidence suggests that some food retail chains have adjusted their prices after Slovaks increased their cross-border purchases).

Real economy

Scrap subsidy (especially the one launched on the key export markets, such as in Germany) might have supported industrial production figures in March. In line with that, we expect some improvement of production and export figures; however, industrial production will likely remain deep in red. Later in the month, flash GDP figure for the first quarter of 2009 will be released. With estimate of 0.3% y/y we belong to the optimistic side of the range. We expect the first quarter to show the steepest quarterly decline (q/q s.a.), which should given the base and one-off effects (such as prestocking with cigarettes) yield the highest y/y figure among the 2009 quarters. For the full year we expect contraction of around 1.2%.

Monetary policy of ECB

The European Central Bank lowered the interest rates by 25 basis points to 1.0% today (the overnight deposit rate stayed at 0.25% and marginal lending rate was lowered by 50bp to 1.75%). At the same time, in order to increase liquidity the central bank increased the maturities of refinancing operations to 12 months. The ECB also decided to purchase covered bonds in the volume of 60bn EUR but declined to give further details of this non-standard measure (they will be given only in June). It is likely that interest rates will remain unchanged in the coming months as ECB governor J. C. Trichet indicated that current level of interest rates are appropriate for the economy and incorporate also possible downward revision of the ECB outlook on Euro area performance.

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Published on  Thu, May 7 2009, 16:56 GMT

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Slovakia: April 2009

Thu, Apr 16 2009, 09:08 GMT
by Mária Valachyová, Michal Musâk

Erste Bank der oesterreichischen Sparkassen AG

Price development

Consumer inflation likely continued in deceleration trend also in March, in an absence of demand pressures and in environment of low commodity prices. We expect prices of services to push consumer price index slightly up as compared to the month ago. Nevertheless, annual inflation rate should slightly decline, from 3.1% in February to 3.0% in March. Like-wise, harmonized inflation decelerated in our view to 2.2% y/y. In the course of the year we expect inflation to decline further, to below 2%, owing to favorable base effects and absence of both cost and demand inflationary pressures.

Real economy

Industrial production has likely posted another strong annual decline, albeit milder than in January, as in February the natural gas supply resumed back to normal levels. Nevertheless, foreign demand stayed weak, as suggested steeply falling industrial orders. We forecast the fall of industrial production at around 18% y/y. In line with falling production, merchandise foreign trade will end with a deficit of around EUR 170mln in our view, which is sharp deterioration as compared to the almost balanced trade in the same month year ago. Sentiment in retail and services fell significantly in March, pointing to the fact that recession starts to affect these economic sectors as well. Indeed, retail sales fell in February by 10% y/y, which could be ascribed to several factors, including lower appetite for spending on durable goods due to fear of unemployment and/or lower future income. Technical effect (high base from last year) as well as depreciation of the neighboring currencies, which made purchases abroad cheaper, could have caused lower sales of Slovak retail. It will be interesting to watch for the extent of slowdown of household consumption in the months ahead, as we expect final consumption (of households and government) to be the key positive contributor to the GDP growth in 2009.

Monetary policy of ECB

The European Central Bank lowered the interest rates by "measured" 25 basis points to 1.25% in early April, and indicated that it will likely lower headline rates again in May by the same 25 basis points (the deposit overnight rate will likely remain unchanged at 0.25% as it is already very low). The bank will also decide upon non-standard measures to support economy, which ECB President J.C. Trichet denied to specify.

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Published on  Thu, Apr 16 2009, 09:08 GMT

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Slovakia: March 2009

Wed, Mar 4 2009, 17:38 GMT
by Mária Valachyová, Michal Musâk

Erste Bank der oesterreichischen Sparkassen AG

Price development

We expect consumer price index to have increased by 0.3% on the month in February, owing to increase in prices of seasonal vegetables, services and imputed rents. This should be partially offset by declining prices of fuels and heat. We expect harmonized inflation to increase in lesser extent, by 0.1-0.2% on the month because imputed rents, equivalent of home owners rent, which we expect to increase are included only in CPI index and not in harmonized inflation. On annual basis, consumer inflation likely decelerated to 3.6% from 3.7% seen in January. Like-wise, harmonized inflation decelerated in our view to 2.5% y/y.

Real economy

Thursday will bring detailed 4Q08 GDP breakdown and revised GDP data for the third quarter. The economic activity slowed down sharply (according to flash estimate to 2.7% y/y in 4Q) due to weak foreign demand and likely due to lower investment activity. Industrial production declined sharply in January due to gas supply outage (we expect the volume of industrial production to be by 30-40% lower than in the same month year ago).

Monetary policy of ECB

After taking a pause in early February, the ECB is likely to deliver another rate cut (we expect 50bp reduction) in early March, when new prognosis of the ECB stuff will be available. Economic outlook remains weak and very low inflation (in February inflation was at 1.2% y/y), provides space for further monetary easing. We see the bottom of rate cutting cycle at 1.00-1.25%.

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Published on  Wed, Mar 4 2009, 17:38 GMT

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Slovakia: February 2009

Mon, Feb 9 2009, 10:00 GMT
by Mária Valachyová, Michal Musâk

Erste Bank der oesterreichischen Sparkassen AG

Price development

In January, consumer inflation should continue in a declining trajectory. We expect annual inflation to have declined to 3.5% from 4.4% in December. We assume that consumer prices increased in January on monthly basis by 0.5%, on the back of rising prices of food, services and imputed rents. This should be somewhat compensated by the declining prices of heat energy and fuels. Producers and service providers usually re-price their products at the beginning of the year, which makes uncertainty about January inflation figure bigger. The euro adoption and round up effect might have added around 0.3pp to inflation, in our view. Nevertheless, inflation will likely continue gradually declining to below 3% during summer.

Real economy

Weak foreign demand will show up also in December industrial production figures. An annual decline could easily be double-digit as employees of car factories stayed home on a prolonged Christmas break. Production of car related sectors (such as machinery, metals and plastics) will likely decline as well. Later in the week, a 4Q flash GDP will be released. We expect a sharp decline from 7% y/y in the third quarter to around 3.5% in the final quarter of the year. Huge pre-stocking of cigarettes back in 4Q07 means a negative comparative base for an annual 4Q08 growth. Adjusted for this one-off factor, we expect significant slowdown in economic activity, especially in industry and investment activity due to recession in the Euro area and causes of financial crises. Household and into some extent government consumption provided support to the economic growth, in our view.

Monetary policy of ECB

After taking a pause in early February, the ECB is likely to deliver another rate cut (we expect 50bp reduction) in early March, when new prognosis of the ECB stuff will be available. Economic outlook remains weak and falling inflation (in January inflation fell to 1.1% y/y), provides space for further albeit limited monetary easing. We see the bottom of rate cutting cycle at 1.25-1.50%.

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Published on  Mon, Feb 9 2009, 10:00 GMT

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Slovakia: January 2009

Fri, Jan 9 2009, 09:33 GMT
by Mária Valachyová

Erste Bank der oesterreichischen Sparkassen AG

Price development and

Annual inflation likely decelerated in December; we expect CPI inflation to dip a notch from 4.9% in November to 4.8% in December. Likewise, harmonised inflation, which does not include imputed rents (equivalent of homeowners' rent), should decline to 3.8% in December according to our estimate. Structure-wise, we will likely see another increase in prices of tobacco, and possibly seasonal increase in food. On the other hand, prices of fuel declined by around 9% m/m in December. In the coming months inflation will likely gradually decline further due to high base from year ago (the prices of food increased last year). We expect harmonized inflation to decline below 3.5% over the course of 2009 and CPI below 4.0% by mid-year.

Real economy

Industry was negatively hit by weak foreign demand as the year closed. After stagnation of industrial production in October, industry might decline on annual basis in November and even more in December, when the car factories prolonged Christmas break for their employees due to lower car sales in Europe. Decline in exports y/y will be likely compensated also with lower imports.

Monetary policy of ECB

The ECB is likely to continue in its cutting cycle due to gloomy economic outlook and falling inflation (consumer inflation in the Euro area fell in December to 1.6% y/y, well below the ECB target defined as "below but close to 2%"). We therefore expect the ECB to cut rates further by 50bp to 2.0%.

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Published on  Fri, Jan 9 2009, 09:33 GMT

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Slovakia: December 2008

Wed, Dec 3 2008, 15:24 GMT
by Mária Valachyová

Erste Bank der oesterreichischen Sparkassen AG

Price development and real economy

Annual inflation will continue in its declining tendency through November, in our view. On the monthly basis, expected increase in prices of tobacco and food will be into large extent compensated by the cheaper prices of fuel. We expect gradual decline in inflation over coming months as the pressure on energy prices eased with the steep decline in oil prices. As usually, there is higher uncertainty about January inflation figures, as some services are re-priced at the beginning of each year. We expect euro-changeover effect to be contained, at 0.3pp respectively. Harmonized inflation should thus stay below 4 % in 2009 and CPI below 4.5%.

Industrial production increased by solid 5.5% y/y in September. Due to weaker foreign demand we expect slowdown in the growth rate in October to 4.4% y/y, which - if confirmed, would be given circumstances a good figure. Trade balance will in our view again finish in surplus, thanks to lower prices of oil and high import dependency of the key Slovak industries. On Thursday we will see a detailed structure of 3Q GDP growth, which stood at 7.1% y/y. We expect domestic demand to be main driver.

Koruna and monetary policy

The Slovak central bank followed the ECB step and cut its key rate by 50bp to 3.25 % ahead of its regular end-ofmonth session. The ECB is expected to cut rates by another 50bp on December 4, and the NBS is likely to repeat the step again ahead of its regular session, probably already next Tuesday (the regular session is scheduled on December 19th). The koruna witnessed higher volatility in past month; although far smaller than neighboring currencies in the region thanks to euro adoption shield (the koruna will reach the level of conversion rate 30.1260 SKK/EUR by the end of the year).

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Published on  Wed, Dec 3 2008, 15:24 GMT

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Slovakia: October 2008

Wed, Oct 8 2008, 08:30 GMT
by Mária Valachyová

Erste Bank der oesterreichischen Sparkassen AG

Price development and real economy

After following an upward trend for the past eight months, the inflation rate will likely decline in September to an annual rate of 4.8%, down from 5.0% in August. The seasonally lower prices of vegetables and lower prices of oil should help to contain growth in cigarette prices in September. Outlook for the final quarter of the year depends on whether the regulatory body okays the hike in energy prices for households (demanded by the gas distributor) or not. Although the oil price development justifies a hike (the gas prices have not been changed since January 2007) the political preference for zero growth in energy prices for households might win. In later case, the inflation rate would gradually decline to 4.6% at the year-end. In former case, which remains our main call (gas +10%, heat +6% before the yearend), the inflation would increase to 5.1% in December.

August industrial production will be interesting to watch for any signs of slowing external demand in hard data. After slow growth in June, which was into large extent caused by unfavorable base effect, we expect the industry to pick up in August and grow by solid 7 % y/y. In line with that we assume relatively small trade deficit in August, at SKK -1.6bn.

Koruna and monetary policy

The koruna stayed near the level of 30.35 SKK/EUR during September and will gradually converge towards its predefined conversion rate of 30.1260 SKK/EUR by the end of the year. Monetary policy takes direction from the ECB steps now. In the light of slowing growth in the Eurozone and declining inflation risks (due to lower oil prices) the ECB might cut its key interest rates earlier than we expected before, at the end of this year or at the beginning of 2009. That would not necessarily mean lower market rates in Slovakia as the Slovak money market rates will have to converge to the European rates by the year-end. Currently, the Slovak rates are well below the European rates due to liquidity strains in Europe (3M Bribor stands at 4.3% while European 3M Euribor at 5.4%).

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Published on  Wed, Oct 8 2008, 08:30 GMT