EME Macro/Strategy: New Year, same optimism

Economic sentiment continues to surge to multi-year highs, as shown by the survey data for December. The indicator rose by 1.6 points in the EU (to 115.9), reaching the highest level since August 2000. The indicator for the Eurozone rose similarly, by 1.4 points (to 116.0), the highest since October 2000. We are optimistic on the 2018E Eurozone growth and see it averaging at 2.7% yoy, over half a percentage point above the consensus projections. Forward-looking surveys on pricing power confirm a steady build-up of inflationary pressures across countries, bar Russia. Monetary policies are beginning to be tightened: Romania lifted the policy rate this month; the Czech Republic is mid-way through its rate adjustment; and Poland is likely to begin tightening by the summer, in our view.
Poland: rates on hold? NBP governor Adam Glapinksi indicated in December that rates could remain on hold throughout 2018E, a view that has been echoed publicly by four other council members (out of 10). He has said that the MPC would act if inflation neared the 3.5% upper end of its tolerance band. The latest inflation data for December seems to support Glapinksi’s argument for now: it fell to + 2.0% yoy in December; however; inflation is likely to reaccelerate and overshoot 3% around the summer time due to unfavourable base effects and strong growth.
Czech Republic: presidential elections looming. While incumbent Milos Zeman looks set to win the first round vote, he faces a tight battle in the likely event that his second round opponent is Jiri Drahos. Meanwhile, Babis’ position as Prime Minister looks safe for now – Zeman has said he will reappoint him if he loses the first vote of confidence. Should he lose a second vote of confidence, the speaker of the lower house, Ano’s Radek Vondracek, has the right to make the third attempt to find a prime minister.
Hungary: new easing programme coming into effect. The MNB has been keeping the key rate on hold at 0.90% and expects the inflation target to be achieved in a sustainable manner by mid-2019E. It sees maintaining the loose monetary conditions for an extended period as necessary to achieve the inflation target. On 22 December, it also released the details of its easing programme, first announced in November.
Romania: surprise rate hike. The NBR surprised with a 25bps rate hike at its January meeting. It justified the decision with its latest assessment on inflation outlook, which it sees as picking up further in the months ahead, due mainly to supply-side factors, as well to rising pressure from fundamentals. The (infamous) 2018 budget has been fully approved, and we expect to see a slowdown in consumption in the near term. The EC is expected to issue a negative assessment of this in the coming months.
Greece: bumpily ahead. The December data proved to be a mixed bag, with industrial hiring intentions improving, but expected orders softening. The construction sector is stable at a low level, with real estate prices falling mildly on a yoy basis. We expect the Troika review to be finalised by the end of 1Q and Greece to resume regular bond market access this year, helped by the favourable global environment and modest funding needs.
Russia: oil prices boost budget. Consistently higher Urals oil prices compared to past years should provide some positive surprise for GDP growth this quarter and sustain, in our view. That said, the latest data confirms negative disposable income growth, but modest positive retail sales growth. Inflation remains on a modest trend, around 2.5%, which should keep the CBR on a major easing bias.