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Global Ou utlook – 25 November 2015 2
Emerrging Eu urope – Growth G set to retu urn in 20 016 Peter de Bruin Sen nior Economist Tel:: +31 20 343 5619 9
Folllowing a dee ep contraction, Russia should grow w modestly y next year,… … …w while central European economies e continue c to expand rob bustly Not much scop pe for accele eration in Tu urkey’s econ nomic grow wth
pete er.de.bruinl@nl.ab bnamro.com
action in Rus ssia, but CE EE fared welll Contra Develop pments in emerrging Europe played out quite e differently thaan we had expe ected last year. While we e had thought tthat Russia’s economy e would d stagnate, the deep slide in the t ruble on the e back of a drop in oil priices led to a ba anking crisis at the end of 20114, prompting the t central ban nk to raise rates to a stagg gering 17%. Th he subsequentt recession is liikely to have le ed to a 4% n addition, the Russian-Ukrainian conflict haas had a signifficantly deeper contraction in output. In o the Ukrainia n economy, wiith the latter ex xpected to havee shrunk by about one-tenth this t impact on year. In contrast, centrral European ec conomies did, on balance, sliightly better tha an we had ed a robust rec covery, helped in part by an aaccelerating eu urozone econom my. anticipatted. They stage There were few surprisses in Turkey’s s performance, with average ggrowth likely to o come in at 3% % this yearr, roughly the ssame pace as last year. Still, the developmeents in Russia and a Ukraine dragged the average g growth rate of th he entire region into negativee territory, mark king the first contraction since the g great recession.
First contraction c s since the grea at recession % yoy, Emerging E Europee average GDP
10 8 6 4 2 0 -2 -4 -6 -8 -10 7 07
08
09
10
11
12
13
14
15
Source: Thomson Reuters D conomics Datastream, ABN AMRO Group Ec
Russia a and Ukrain ne are out off recession… … The goo od news is that Russia’s economy is showing tentative signns of stabilising g. The central bank has s lowered ratess to 11%, while e consumers and firms have aadjusted their spending s patte erns to the sp pike in inflation that resulted from f the deep slide s in the rub le. In the third quarter, the economy y shrank by 4.1 1% compared to a year ago, down from a 44.6% contractio on in Q2. Accordin ng to our estim ates, this trans slates into an 0.2% 0 expansionn compared to the second quarter. This implies th hat Russia’s rec cession has en nded. That saidd, despite the lo oosening of the e central bank, b financial conditions rem main tight. The EU/US sanctioons will also continue to weigh h on the econ nomy, as will lo ow oil prices. Finally, the econ nomy is in needd of structural reforms. r Growtth in 2016 is therefore t expe cted to be very y modest, at be est. In Ukraine,, helped by a cease-fire c in the e East of the t country, the e economy gre ew by 0.7% in third quarter froom the second quarter, implyiing that the recession ende ed here too. Ho owever, the ou utlook for Ukrai ne remains dim m as well.
…while e economie s in Centrall Europe sho ould continu ue to propel ahead… Meanwh hile, closer to h ome, the economies in Centrral Europe, succh as Poland, the t Czech Republic c and Hungary , should contin nue to propel ah head. These ecconomies are benefiting from ma
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Global Ou utlook – 25 November 2015 2
modestly y accelerating recovery in the e eurozone, the eir main tradingg partner. In ad ddition, consump ption is being u underpinned by y an improving labour markett, which has sta arted to drive up u wages. A solid econom mic backdrop is s also prompting companies to invest. As a result, third quarter GDP G results we ere upbeat. Th he Polish econo omy grew by 3..4% yoy, while the Czech economy y, partly helped d by special cirrcumstances, expanded e by ann impressive 4.3%. 4 Growth in n Hungary y though was m modestly softer, at 2.3%. Generally, the perfformance of CE EE economies was rela atively strong th his year. This im mplies that we are likely to seee some payba ack next year. This T holds pa articularly for th he Czech Repu ublic, where gro owth should retturn to a more normal level.
…and growth in T urkey move es sideways Finally, growth g in Turke ey is expected to move sidew ways at around 3% next year. Third quarter GDP figu ures have not yyet been releas sed, but develo opments over tthe year as a whole w are in line e with an average a expan nsion of around d 3%. While suc ch a growth ratte is something g most develop ped economies can only drream of, it is no ot strong enoug gh for Turkey too absorb its gro owing labour s a result, the u unemploymentt rate has rema ained on an upw ward trend. Ev ven though we force. As expect world w economicc growth to be modestly stron nger next year, the many structural flaws in Turkey’s s economy are likely to prevent the economy from accelera rating too much h. If the governm ment wants to ssee a stronger economic perfo ormance, it shoould implemen nt structural reforms. In particular, i ts savings rate e is too low, the ere is an overreeliance on the low l value adde ed construc ction sector, an nd labour marke et regulation is s too tight.
Russian cen ntral bank to continue loos sening policy y…
…but … Turkey’s s central ban nk will keep policy p tight %, % policy rates and d interbank rate
%, policy rate
18
14 4
16
12 2 10 0
14
8
12
6
10
4 2
8
0 6
10
4 04
05
06
07
08
0 09
Source: S Thomson R Reuters Datastrea am
10
11
1 12
13
14
11 12 13 14 4 15 Overnig ght borrowing ratee Overnight leending rate One week repo rate
15
One week in nterbank rate
Sou urce: Thomson Re euters Datastream m
Russia an central ba ank to contiinue loosening policy Turning to the outlook for monetary policy, p we think that further moonetary easing g is on the card ds in n year. Gran nted, the Russiian central bank (CBR) refrainned from loose ening policy in Russia next past mee etings as inflattion, which stoo od at 15.5% in October, remaained stubbornly high. But inflation should soon sttart to fall more e convincingly as the effects oof the past ruble weakness fa all parison, and the economic we eakness weighhs on prices. As s a result, we th hink out of the annual comp ound 8% at the e end of next ye ear, roughly briinging it back to t a level we sa aw inflation will drop to aro he eruption of tthe financial crrisis at the end of 2014. Againnst this backgro ound, the CBR R before th should continue c to loossen monetary policy. p
CE-3 central c bank ks to remain on hold forr the foreseeeable future e Meanwh hile, central ban nks in central European E countries are likely to remain on hold h for the foreseea able future. Desspite the susta ained upswing, CE-3 economiies are barely experiencing e a any price pre essures at the m moment. Inflation is currently y deeply negativve in Poland, while w just positiive in the Cz zech Republic and Hungary. To a large exte ent, this reflects ts the softness in oil prices, which ha as dragged dow wn energy costs. But, with the e exception of Hungary, core e inflation has also a
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Global Ou utlook – 25 November 2015 2
been mu uted. The low in nflation environ nment masks the fact that in aall CE-3 econo omies, wage pressure es have gradua ally started to build. b This shou uld translate to a modest increase in inflationa ary pressures iin 2016, particu ularly as the drrag from lower energy prices unwinds. However, given the low w starting pointt, we do not think that inflationnary pressures s will be sufficiently pronounced d to trigger a ce entral bank res sponse. We theerefore expect that the Polish central bank b will only m move to a tighte ening bias in th he beginning off 2017. Meanw while, the Czech h Central Bank B (CNB) ha as not only cut rates to almos st zero, but hass also weakene ed the koruna to CHZ 27 against the eu uro in order to support s trade. During D its latesst meeting, the CNB said it t stop using th he koruna as a policy tool aro ound the end of 2016. A next step would be a intends to gradual increase in pollicy rates, whic ch we think will start in 2017. H However, given the more pronounced path of co ore inflation in Hungary, H total inflationary preessures are like ely to be higherr next yea ar than in Polan nd and the Cze ech Republic. This T suggests tthat of all CE-3 3 banks, the Hungaria an central bankk will probably tighten first, po ossibly alreadyy at the end of 2016. 2
Turkey y’s central b bank to keep p monetary policy p tight Finally, Turkey’s T mone etary policy is expected e to rem main tight in 20 16. Inflation ha as remained stubborn nly high, and – at 7.6% in Octtober – well above the centraal bank’s target of 5%. In addition,, the significantt weakening off the lira we have seen over thhe past months suggests tha at upward pressure on co onsumer prices s will likely conttinue to persistt. What is more e, we anticipate e that the Fed will start n normalising its monetary polic cy in Decemberr, with the fede eral funds rate ear-end 2016. All A this suggests that Turkey’ss central bank (CBT) should heading to 1.25% at ye event the lira fro om depreciating even more w when the Fed normalises n keep policy tight to pre explains why th he CBT has continued to pus h interbank rattes against the monetarry policy. This e upper bo ound of its inte rest rate corrid dor. And next ye ear, in line withh the CBT’s intention to simpllify its mone etary policy fram mework, we als so expect to se ee increases inn the one-week k repo rate.
Economic growth % yoy
155Q1
15 5Q2
15Q3
20 15
201 16
Czech Re epublic
4.1
4.6 4
4.3 4
44.0
3.0
2017 3.0 0
Hungary
3.5
2.7 2
2.3 2
33.0
2.5
2.5 5
Poland
3.7
3.3 3
3.4 3
33.5
3.5
3.5 5 3.5 5
4.3
3.4 3
3.6 3
33.5
3.5
Russia
--2.2
-4 4.6
-4 4.1
-44.0
0.5
1.5 5
Turkey
2.5
3.8 3
33.0
3.0
3.5 5
-1 7.2
-14 4.6
-100.0
1.0
3.0 0
--0.5
-1.4
-1 .0
1.7
2.4 4
Romania
Ukraine Regional average
-7 7.0
Source: ABN AMRO, EIU, T Thomson Reuters s Datastream
Geopo olitics and Fe ed present main m risks to t the outloo ok Looking at the main rissks to the outlo ook, the currentt low level of oiil prices means s the risk of another sharp drop in o oil prices has diminished. d This has reduced the risk of ano other financial c in the East of Ukrainne, geopolitical concerns have e crisis in Russia. Given the cautious ceasefire sed slightly, tho ough geopolitic cal developmen nts remain key risks to our gro owth outlook. As A also eas we menttioned above, T Turkey is expected to pursue a tight monetaary policy stanc ce during the tiime that the Fed normalise es its monetary policy. Still, a sharper pace oof tightening in the US could gnificantly adve erse effects on Turkey’s economy. This is beecause the cou untry’s current have sig account deficit is expeccted to amountt to 5% of GDP P next year, nottwithstanding the t recent on, the country y must also serrvice a lot of deebt repayments s. Together with improvement. In additio ements are exppected to reach 13% of GDP. All its current account defiicit, Turkey’s financing require dent on the capital of foreign investors, mak king it susceptible this implies that the co untry is depend entiment. to swings in investor se