Research Dept. News
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Monthly Report, num 356 - April 2012
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European union - Emerging Europe
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Emerging Europe: a recovery in the making
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If we are to highlight the sources of uncertainty that have presided over the recent situation in emerging Europe, we should mention the financial repercussions of the euro area's sovereign debt crisis, Hungary's situation and the extent of the weak phase in activity. The financial tension front is apparently starting to be redressed, as shown by the appreciable relaxation in the risk premium of the sovereign bonds in emerging Europe and the successful sovereign debt issuances in foreign currency in Poland and Romania during the first quarter of the year. This is a change induced by developments outside the region but with important positive consequences, given these economies' dependence on external financing.
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Hungary's situation is still one of waiting, with the government forced to make a move in terms of economic policy.
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With regard to Hungary, public attention has been notoriously attracted by the decision of the European Union not to pay a third of the cohesion fund in 2013 if additional measures are not announced to cut structural expenditure before June. In spite of the media coverage, this is another step forward in the so-called excessive deficit procedure and had already been predicted by most analysts. The fundamental element that still dominates economic discussion concerns the need for financial aid from the International Monetary Fund (IMF) and the EU, and the likelihood of this happening soon. There is little news in this area but both the improvement in the international financial environment and the expectations that external credit will end up arriving have helped to reduce the interest rate charged on the government's debt.
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With the financial storms temporarily abated and Hungary waiting expectantly, in the last few weeks attention has been focused on the strictly macroeconomic front. In particular, the main question is whether the slowdown in the economy has touched bottom or whether activity is likely to decline even further. Indicators that reflect cyclic nuances more finely, such as economic sentiment, seem to suggest that the first of these scenarios is the one that is actually happening.
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Activity seems to have touched bottom in the last part of 2011.
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In December 2011, the average economic sentiment for the five economies we usually cover in these pages (Poland, Romania, the Czech Republic, Hungary and Slovakia) posted its lowest value since December 2009. It arrived at this level after eight consecutive months of falls. Since then, the index has picked up over the last two months, outlining what looks like becoming a recovering trend. Different elements reinforce this conclusion. Firstly, several leading indicators (such as the one published by the Organization for Economic Cooperation and Development) point to the recovery in activity spreading over the next few months. Nonetheless, this same information shows that the pace of this recovery will be contained, for the time being, and will affect Poland more than the other economies in the region.
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Leading indicators point to the incipient recovery becoming consolidated.
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A second aspect that helps to substantiate the scenario of recovery is that this development goes beyond the strictly temporary and local framework. For the last few weeks, a process of moderate revision has been glimpsed in expectations for global activity. After several months of better than expected activity indicators in key countries such as the United States and Germany, it is starting to be debated whether the contained growth forecasts employed since the end of 2011 are being surpassed, in a positive sense, by reality. For the time being, one example of this perception are the recent statements made by Christine Largarde, Director of the International Monetary Fund, affirming that the situation was slightly better than a few months ago and, even more significantly, that she believed the decisions taken in the last part of 2011 were having an effect. This is a valuable opinion that can be considered as increasingly widespread.
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When are we likely to see this change in scenario confirmed? In emerging Europe, at the level of national accounts, a clear sign will be detected with the growth figures for the second quarter. We should remember that the latest figures available, referring to the fourth quarter of 2011, still showed the region's activity to be in decline. Given that monthly indicators are improving very gradually, in the first quarter we will most likely see positive but minimal quarter-on-quarter growth in most countries.
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Inflation picks up thanks to energy but monetary policy is not going to shift.
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Although this recovery is still at a tentative stage, some people have wondered whether monetary policy is going to change its orientation soon. The answer is necessarily in the negative, as such a shift would be premature. No increase is expected in the official interest rate in 2012 in Poland, the Czech Republic, Slovakia or Romania. In the Hungarian case, there might even be a reduction in the official rate, which could go from the current 7% to levels of 6.5%-6.25% at the end of year, if international financial aid is finally confirmed. This is in spite of the fact that, in February, inflation was above the threshold of 4% year-on-year in most countries due to higher energy tensions (a component that grew in the order of 10% year-on-year, as an average for the region).
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