EME Strategy 2017: Safer, but not headache-free

Similar to 2016, the year ahead will be packed with important political events that will leave investors and voters on the look-out for big policy shifts. We believe that this period of protracted uncertainty is keeping investment growth at very modest levels, pushing companies into steady, strong hiring. We expect strong wage growth ahead, with both Hungary and Romania in double-digit territory.

Romania should remain the strongest growth performer in 2017, in our view, but Hungary is the one that could surprise on the upside the most, as the government recently approved an aggressive corporate and social security tax cut plan, plus the PAKS nuclear expansion may kick off. The outlook for Poland, on the contrary, may surprise to the downside, as uncertainty surrounding the true fiscal stance, on taxation in particular, of the PiS government may push the private sector to increase savings. Sluggish growth means that Poland is the only country in our space where inflationary pressures should remain virtually non-existent.

We expect the central banks to remain dovish, notwithstanding that inflation has turned the corner and should pick up slowly. Our view is founded on two key convictions. First, even with fast wage growth, inflation rates is poised to reach the central banks’ targets in 2018E, but in most cases not overshoot them. Secondly, the scars of the 2008 financial crisis are still too fresh. Labour markets are improving and poverty rates are falling, but not as much as we would have expected at this stage in the business cycle. As a result, the implicit mantra of all the central banks remains to overheat the economies. When inflation becomes a problem, the central banks are likely to welcome currency adjustments.