Research Dept. News
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Monthly Report, num 348 - July-August 2011
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European union - Emerging Europe
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Emerging Europe: resisting the ravages of slowdown, inflation and financial contagion
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For the moment, emerging Europe is managing to elude a growing phase of economic and financial uncertainty. When we look at three vital issues - the scope of the global slowdown in growth, the degree of financial contagion from the Greek sovereign debt crisis and the inflationary trend - in all three cases we end up concluding that this region has avoided an openly negative impact so far. Let us look individually at these three fronts in the global economic situation.
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With regard to the slowdown in activity, the figures point to a moderate and probably temporary effect on the countries of central and eastern Europe. One initial element in their favour within this sphere has been the excellent rate of growth in GDP for these economies in the first quarter, exceeding the forecasts given, in themselves positive. Specifically, the five states we usually monitor in this report (Poland, Hungary, the Czech Republic, Slovakia and Romania) have posted higher growth figures compared with the fourth quarter of 2010. The main support for this expansion, in general terms, comes from strong exports.
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Little evidence of financial contagion by Greek debt, in any case limited to Romania and Hungary.
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Going forward in time, we should ask ourselves whether the second quarter can maintain this upswing in activity. Indicators of economic sentiment, highly sensitive to cyclical changes, suggest that, up to May, activity has remained along the same lines as the first quarter. Slovakia and Romania have recorded advances in these indicators, while in Poland, Hungary and the Czech Republic the average levels for April and May point to a very restrained slowdown in activity. Adding these trends to the forecasts we have for the euro area, and particularly Germany, which point to a clearly expansionary 2011, we believe that the main scenario for emerging Europe will remain the same as for the last few months: it will be a positive year with growth speeding up in all economies and, in some cases, such as Poland and Slovakia, reaching notable figures, above 4%.
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The second of the points demanding attention at the moment refers to developments in the Greek sovereign debt crisis and its repercussions on the financial markets of emerging Europe. Looking at the values of national currencies and Credit Default Swaps for sovereign debt (which measure the cost of insuring a hypothetical default on these bonds), there is no evidence of contagion in the case of Poland, Slovakia and the Czech Republic, and any effect is small in the case of Romania and Hungary.
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Although inflation is still high, close to 5% in May, it is expected to ease over the coming months...
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In these last two countries, the markets are probably concerned about two very different sources of contagion. In Romania there is a direct channel whereby it could be affected by the financial crisis, as approximately 20% of the country's banking market is dominated by subsidiaries of Greek credit institutions. Given this fact, there is the concern that any possible harm to the balances of these banks' parent companies due to the hypothetical rescheduling of public debt might end up affecting the subsidiaries' capitalization. Hungary, however, continues to be burdened by the perception that the government has yet to fully regain its fiscal credibility after a 2010 with excessive ups and downs in this sphere. We repeat, however, that both countries are facing a situation of contained financial repercussions, far from what is being experienced by other nations.
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Lastly, the third of the aspects we mentioned previously, namely inflation, might be on the brink of being redirected, although we cannot say it has been resolved. And although the latest figures available are far from encouraging (in May, the average harmonized inflation in the five economies in question stood at 4.6% year-on-year, the highest since mid-2008), the forecasts suggest we might be close to the start of a gradual slowdown in prices. The downward trend in food commodity prices over the last few months will help the food component in the consumer price index (CPI) to ease back. This is a significant development, especially as it is precisely this component that is being more expansionary (this aggregate reached 9.1% of the year-on-year increase in May).
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...which, added to the absence of signs of overheating, mean that monetary policy can gradually get back to normal.
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Beyond expectations of an imminent improvement in the CPI, this inflationary episode is occurring within a context that reduces the situation's significance. In contrast with other emerging economies, the ones mentioned here are showing few signs of economic overheating. With the exception of Poland, the recovery in domestic demand has hardly started. Neither does there seem to be a problem of scarce resources in the factor markets, as the labour market continues to have relatively high levels of unemployment while the degree of available production capacity utilization is still extensive. The absence of tension in terms of sharp appreciations in national currencies completes our diagnosis of a lack of economic overheating. This should mean that monetary policy can get back to normal gradually, without the demands being forced upon other emerging economies.
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