EME Macro/Strategy: Recovery – part one in place, three more to go

This is the good news: the January industrial sector surveys confirmed that an improvement is on its way. However, several caveats come with this statement. First, while there was an improving pattern in January in Germany and in the Eurozone overall, central Europe saw a worsening pretty much across countries and indicators in the industrial sector. Labour markets are softening everywhere – not by very much, but we expect this phase to last at least through the first half of 2020E. Thirdly, inflationary pressures measured by CPI have stabilised at a relatively high level, while housing related inflation is reaccelerating. This, coupled with a softening of the labour market and limited credit growth improvements, means that consumer demand is likely to slow, unless the credit channel becomes looser. Where does this leave us? There is some downside to our real GDP growth projections for central Europe, and 1Q20E is likely to prove weak as the turnaround in the industrial sector is nascent and the recent outbreak of coronavirus in China could delay this process. At this juncture, we opt to keep our forecasts unchanged, but we underscore that the GDP growth print may stay high this year, but held up by wider net exports this year, rather than internal demand growth.