What explains the surprisingly high growth in 1Q21 in the CEECs?
This week in EEC
This week, 1Q21 GDP breakdowns will be in the spotlight across the region. Poland should confirm its flash estimate of -1.2% y / y, supported by net exports and government spending. External demand and public investment were probably the main drivers in Hungary, where GDP grew by 1.9% q / q, or -2.3% y / y. Weak domestic demand played a visible role in Czech GDP in 1Q21, which fell 2.1% y / y (-0.3% q / q). The Slovak economy marked a slight expansion of 0.3% y / y at the start of 2021, helped by net exports and industrial production, although it is down from the end of 2020 (-1.8% t / t). Slovenia’s GDP may have stagnated year over year, 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. Additionally, we’ll see retail impressions for April in Hungary, Romania, Serbia, and Slovakia. Last year’s weak base likely pushed retail sales growth in the strong double-digit region, going from 14.2% y / y in Hungary to 37.2% y / y in Romania. Likewise, April industrial production is expected at 15% y / y in Croatia and 31% y / y in Serbia. We’ll also get the first look at May inflation figures for Slovenia and Poland. After accelerating towards the 2% mark in April, Slovenian inflation is expected to remain at a similar level; while the printing of the Polish CPI probably accelerated up to 5% year-on-year due to rising fuel and food prices.
During the second half of May, the EWC recovery index stabilized at a solid level, indicating a continued economic rebound. Mobility trends in the CEEC region were mixed in the week ending May 22, with mobility to grocery stores and retail stores declining slightly, while mobility to the workplace increased. In addition, air pollution has also increased. Due to data availability issues, we are keeping electricity consumption unchanged from the end of April. Overall, 1Q21 GDP growth figures surprised upward in the region, suggesting that CEEC economies have weathered the string of winter restrictions well and are heading for a strong rebound in economic activity. over the next few quarters.
Evolution of the foreign exchange market
The development of inflation and the coming monetary tightening are currently the main currency drivers in the CEEC region. Since the beginning of May, the Hungarian forint and the Czech crown have been among the three best performing currencies in the EMEA zone. The central bank meeting in Hungary was in line with market expectations, as the BNM kept the key rate unchanged and reiterated its desire to tighten monetary conditions. Although the forint has appreciated fairly noticeably recently and moved below 350 against the EUR, we stick to our EURHUF forecast of 355. In the short term, the HUF could be characterized by increased volatility, while that further currency development will depend heavily on the scale pace of monetary tightening. In view of the faster than expected appreciation of the Czech Koruna, we have revised our EURCZK forecast and expect further strengthening to occur in the coming months. As for the Romanian leu, we don’t see much room for further appreciation and the RON should stay above 4.9 against the Euro, in our opinion.
Evolution of the bond market
EEC government bonds have kept pace with major markets and experienced a slight drop in yields over the past week. HGB yields fell most visibly (10-15bp) in the 10-15 year segment, as the MPC meeting brought no 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 outliers, with yields edging up 10bp on the 2-5Y segment. The surprising result of last week’s QE auction, in which the NBP only accepted PLN 2 billion (out of PLN 6.8 billion bids), sparked speculation about a potential reduction. Today, BNP will announce the purchasing schedule for June and it will be important to observe whether the central bank will stick to two operations per month or reduce it to one, which could indicate a potentially earlier end of the month. program that the end of the year (our baseline). This week, the auction schedule will be relatively empty. Czech MinFin will reopen its CZGB 2031, 2032, 2040, Serbia will issue a 4-year bond, and Hungary will sell 3M T-Bills in addition to its regular auctions.