What was behind surprisingly high 1Q21 growth in CEE?

This week in CEE

This week, 1Q21 GDP breakdowns will be in the spotlight across the region. Poland should confirm its flash estimate at -1.2% y/y, supported by net exports and government expenditure. External demand and state investments were probably the key drivers in Hungary, where GDP rose by 1.9% q/q, translating to -2.3% y/y. Subdued domestic demand played a visible role in the 1Q21 Czech GDP, which fell by 2.1% y/y (-0.3% q/q). Slovak economy marked a mild expansion of 0.3% y/y in early 2021, aided by net exports and industrial production, although it was down compared to late 2020 (-1.8% q/q). Slovenian GDP may have stagnated on a year-on-year basis, helped by the easing of some containment measures towards the end of the quarter. Serbian GDP should confirm its 1Q21 flash estimate of 1.2% y/y. Moreover, we will see retail sales prints for April in Hungary, Romania, Serbia and Slovakia. Last year’s low base likely pushed retail sales growth into the strong double-digit region, ranging from 14.2% y/y in Hungary to 37.2% y/y in Romania. Similarly, April industrial production is expected at 15% y/y in Croatia and 31% y/y in Serbia. We will also see the first glimpse of May inflation figures in Slovenia and Poland. After accelerating towards the 2% mark in April, Slovenian inflation is expected to remain at a similar level; whereas Polish CPI print likely sped up to 5% y/y on the back of rising fuel and food prices.

In the second half of May, the CEE Recovery Index stabilized at a solid level, indicating an ongoing economic rebound. Mobility trends across the CEE region were mixed in the week ending with May 22, as mobility to grocery and retail stores went down slightly, while mobility to the workplace increased. Furthermore, air pollution went up as well. Due to data availability issues, we keep electricity consumption at an unchanged level from the end of April. All in all, 1Q21 GDP growth figures surprised to the upside across the region, suggesting that CEE economies weathered the winter round of restrictions well and are heading toward a strong rebound of economic activity in the coming quarters.

FX market developments

Inflation developments and upcoming monetary tightening are currently the main currency drivers in the CEE region. Since the beginning of May, the Hungarian forint and Czech koruna were among the top three best performing EMEA currencies. The central bank meeting in Hungary was in line with market expectations, as the MNB kept the policy rate unchanged and reiterated its readiness to tighten monetary conditions. Although the forint appreciated quite visibly recently and moved below 350 vs. the EUR, we stick to our EURHUF forecast at 355. In the short term, the HUF might be characterized by increased volatility, while further FX development will strongly depend on the pace and scale of monetary tightening. Given the faster than earlier anticipated appreciation of the Czech koruna, we put our EURCZK forecast under revision and we expect some further strengthening to occur in the coming months. As far as the Romanian leu is concerned, we do not see much space left for further appreciation and the RON should stay above 4.9 vs. the EUR, in our view.

Bond market developments

CEE government bonds followed the development on major markets and experienced a slight drop in yields last week. HGBs yields dropped the most visibly (10-15bp) on the 10-15Y segment, as the MPC meeting did not bring any surprises; we still expect the key rate and 1-week deposit rate to be merged at 0.9% at the June meeting. POLGBs were the only outlier, with yields edging up 10bp on the 2-5Y segment. The surprising result of last week’s QE auction, in which the NBP accepted only PLN 2bn (out of PLN 6.8bn in bids), sparked speculation on potential tapering. Today, the NBP will announce the schedule of purchases for June and it will be important to observe whether the central bank will stick to two operations per month or scale it down to only one, which could indicate a potentially earlier end of the program than the year-end (our baseline). This week, the auction calendar will be relatively empty. The Czech MinFin will reopen its CZGBs 2031, 2032, 2040, Serbia will issue a 4Y bond and Hungary will sell 3M T-bills on top of its regular auctions.

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