Czech GDP, Turkish inflation and lira, Russian ruble - Capital Economics
Emerging Europe Economics

Czech GDP, Turkish inflation and lira, Russian ruble

Emerging Europe Economics Weekly
Written by Jason Tuvey
Czech Q2 GDP figures released on Friday support our view that Central Europe will recover more quickly from the coronavirus crisis than most other EM regions. Elsewhere, the Turkish central bank’s latest Inflation Report put the nail in the coffin for further monetary easing and, if recent falls in the lira intensify, policymakers may be forced to hike interest rates. The Russian ruble has fallen even further than the lira this week on the back of the threat of further US sanctions.

Czech economy one of Europe’s most resilient in Q2

Preliminary Q2 GDP figures released by the Czech Republic on Friday support our view that Central Europe will recover more quickly from the coronavirus crisis than most other EM regions.

The Czech economy contracted by 8.4% q/q in Q2, a far better outturn than the 10.1% decline predicted by the consensus. The performance compared favourably with other parts of Europe. The euro-zone as a whole contracted by 12.1% q/q in Q2, with Germany getting away relatively lightly with a decline in output of 10.1%. (See here.)

The fact that the Czech economy held up relatively well is not a major surprise given that the authorities got on top of the virus quickly, enabling the lockdown to be eased from April and much faster than elsewhere in Europe. This has supported a quick recovery – retail sales in June were higher than a year ago. And while case numbers have risen recently, localised restrictions seem to be the order of the day.

Figures from other parts of Central Europe to be released in the coming weeks are likely to show slightly steeper falls in GDP in Poland, Hungary and Slovakia in Q2. Looking ahead, weak external demand will remain a key headwind but with the virus under control in most places, macro vulnerabilities limited and policymakers delivering large stimulus, we expect Central Europe to record a robust recovery over the coming quarters. (See here.)

CBRT calls time on monetary easing as lira sells off

The Turkish central bank’s (CBRT’s) latest Inflation Report put the nail in the coffin for further monetary easing and, if recent falls in the lira intensify, policymakers may be forced to hike interest rates.

The CBRT raised its forecast for year-end inflation from 7.4% y/y in its April Inflation Report to 8.9% y/y. This comes on the back of a rise in inflation in recent months, to 12.6% y/y in June. (See here.) Data next week are likely to show inflation eased but stayed high at 12.2% y/y in July. Of course, the CBRT has a poor track record when it comes to forecasting inflation. Even so, after keeping rates unchanged at the past two MPC meetings, this dashes any remaining hopes for more monetary stimulus.

As it happens, the recent falls in the lira have quickly shifted the debate towards rate hikes. It was only last week we warned that the lira’s de facto peg looked unsustainable. (See here.) This week, as pressure on the lira proved too much for the central bank, the currency has fallen by 1.8% against the dollar.

Further falls in the lira lie in store – we expect it to weaken to 7.50/$ by end-2020. (See here.) But it will be a bumpy path and periodic sell-offs will put the spotlight on the CBRT to hike interest rates. Political pressure would probably prevent an immediate response, causing pressure on the lira to intensify and raising the risk of another currency crisis.

Sanctions threat weighs on ruble

The Russian ruble has fallen even further than the lira in the last few days – indeed it’s been the worst performing major EM currency this week. The move in the ruble itself isn’t particularly large, but it’s notable given that oil prices – usually the key driver of the currency– have been broadly flat. The most likely explanation is growing fears of further sanctions which, most recently, stems from the Libya Stabilization Act in the US House of Representatives.

Overall, the sanctions threat isn’t having a particularly large impact on Russia’s financial markets, nor on overall financial conditions. But it’s likely to create periods of turbulence for local markets and may prompt pauses in the central bank’s easing cycle from meeting to meeting.


The week ahead

Consumer price data are likely to show that inflation eased in Turkey and was unchanged in Russia. Meanwhile, we expect the Czech central bank to keep interest rates unchanged at 0.25% on Thursday.

Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (BST)

Previous*

Median*

CE Forecasts*

3rd Aug

Rus

Markit Manufacturing PMI (Jul)

(07.00)

49.4

Hun

Markit Manufacturing PMI (Jul)

(08.00)

47.0

Pol

Markit Manufacturing PMI (Jul)

(08.00)

47.2

50.0

Cze

Markit Manufacturing PMI (Jul)

(08.30)

44.9

49.4

Lat

Industrial Production (Jun)

(11.00)

-4.9%(-6.4%)

Cze

Budget Balance (Jul, CZK)

(13.00)

-195.2 b

Slk

Budget Balance (Jul, YTD, EUR)

-3,910m

4th Aug

Tur

Manufacturing PMI (Jul)

(08.00)

53.9

Tur

CPI (Jul)

(08.00)

+1.1%(+12.6%)

+0.9%(+12.1%)

+1.0%(+12.2%)

5th Aug

Rus

Markit Services PMI (Jul)

(07.00)

47.8

Rom

Retail Sales (Jun)

(07.00)

+20.2%(-1.2%)

Slk

Retail Sales (Jun)

(08.00)

(-8.9%)

Cze

Retail Sales (Jun)

(08.00)

(-12.2%)

Hun

Retail Sales (Jun)

(08.00)

(-2.1%)

(+0.3%)

Hun

MNB Monetary Policy Committee Minutes

(13.00)

Rus

CPI (Jul)

(17.00)

+0.2%(+3.2%)

+0.4%(+3.4%)

+0.3%(+3.2%)

6th Aug

Cze

Industrial Production (Jun)

(08.00)

(-29.4%)

(-9.1%)

(-8.5%)

Hun

Industrial Production (Jun)

(08.00)

+15.6%(-27.6%)

(-12.8%)

(-12.5%)

Cze

Interest Rate Announcement

(13.30)

0.25%

0.25%

0.25%

7th Aug

Est

CPI (Jul)

(06.00)

+0.9%(-1.0%)

Lit

Unemployment Rate (Q2)

(07.00)

7.1%

Hun

Budget Balance (Jul., YTD, HUF)

(10.00)

-1,837.0bn

Also expected during this period:

7th – 13th

Lat

Unemployment Rate (Jul)

8.6%

Selected future data releases and events

11th Aug

Hun

CPI (Jul)

(08.00)

+0.4%(+2.9%)

Rus

GDP (Q2, Adv.,q/q(y/y))

(17.00)

(+1.6%)

(-9.2%)

13th Aug

Cze

CPI (Jul)

(08.00)

+0.6%(+3.3%)

14th Aug

Rom

GDP (Q2, Adv., q/q(y/y))

(07.00)

+0.3%(2.4%)

Slk

GDP (Q2, Prov., q/q(y/y))

(08.00)

(-3.7%)

Hun

GDP (Q2, Prov., q/q(y/y)

(08.00)

-0.4%(+2.2%)

Pol

GDP (Q2, Prov., q/q(y/y))

(09.00)

-0.4%(+2.0%)

Pol

CPI (Jul)

(09.00)

Bul

GDP (Q2, Prov., q/q(y/y))

(09.00)

+0.3%(+2.4%)

Also expected during this period:

12th – 17th

Rus

Budget Balance (Jul, YTD, RUB)

-955.9bn

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics


Main Economic and Market Forecasts

Table 1: GDP & Consumer Prices (% y/y)

Share of

2008-17

GDP

Consumer Prices

World (1)

Ave.

2019

2020f

2021f

2022f

2019

2020f

2021f

2022f

Russia

3.1

1.3

1.3

-5.0

4.0

2.3

4.5

3.3

3.3

3.3

Turkey

1.7

5.1

0.9

-5.8

7.8

4.8

15.2

12.3

13.3

11.5

Poland

0.9

3.4

4.1

-3.8

5.5

3.8

2.3

3.3

3.0

2.8

Romania

0.4

2.7

4.1

-4.5

4.8

4.0

3.8

3.0

3.3

3.3

Ukraine

0.3

-1.4

3.2

-4.0

5.0

2.3

7.9

2.5

6.0

7.3

Czech Rep

0.3

1.5

2.4

-6.3

6.3

3.5

2.8

3.3

2.5

2.3

Hungary

0.2

1.1

4.9

-5.0

4.8

3.8

3.4

2.8

3.0

3.0

Slovakia

0.1

2.4

2.4

-7.5

6.8

2.8

3.0

2.0

2.3

2.5

Bulgaria

0.1

1.9

3.4

-5.5

4.3

4.5

3.1

1.8

2.0

2.3

Croatia

0.1

-0.1

2.9

-10.8

5.0

4.0

0.8

0.0

1.5

1.5

Lithuania

0.1

1.5

3.9

-5.0

4.0

3.3

2.2

1.5

2.3

2.0

Latvia

0.04

0.2

2.2

-6.5

4.8

3.3

2.8

0.5

2.0

2.3

Estonia

0.03

0.9

4.3

-6.3

4.8

3.5

2.3

0.3

1.8

2.0

Emerging Europe

7.4

2.6

2.0

-5.2

5.3

3.3

6.5

5.2

5.5

5.1

Sources: Refinitiv, Capital Economics. (1) % of GDP, 2019, PPP terms (IMF estimates).

Table 2: Central Bank Policy Rates

Policy Rate

Latest

(31st Jul.)

Last Change

Next Change

Forecasts

End

2020

End

2021

End

2022

CIS

Russia

1W Repo Rate

4.25

Down 25bp (Jul. 20)

Down 25bp (Sep. 20)

3.75

3.50

3.50

Ukraine

Policy Rate

6.00

Down 200bp (Jun. 20)

Down 50bp (Sep. 20)

5.00

5.00

5.00

Central Europe

Poland

Reference Rate

0.10

Down 40bp (May 20)

Up 25bp (2022)

0.10

0.10

0.50

Czech Rep

2W Repo Rate

0.25

Down 75bp (May 20)

Up 25bp (2022)

0.25

0.25

1.25

Hungary

Base Rate

0.60

Down 15bp (Jul. 20)

Down 15bp (Sep. 20)

0.45

0.45

0.45

3M BUBOR

0.62

0.40

0.40

0.50

South-East Europe

Turkey

1W Repo Rate

8.25

Down 50bp (May 20)

None on horizon

8.25

8.25

8.25

Romania

Reference Rate

1.75

Down 25bp (May 20)

Down 25bp (Sep. 20)

1.50

1.50

1.75

Sources: Refinitiv, Capital Economics

Table 3: Exchange Rates & Equity Markets

Forecasts

Forecasts

Currency

Latest

(31st Jul.)

End
2020

End
2021

End
2022

Equity
Market

Latest

(31st Jul.)

End
2020

End
2021

End
2022

CIS

Russia/$

RUB

74.0

67.0

65.0

63.0

MOEX

2,910

3,150

3,650

4,000

Russia/EUR

RUB

87.7

80.0

78.0

75.5

Ukraine/$

UAH

27.7

28.0

29.0

30.0

PFTS

500

520

535

550

Central Europe

Poland/EUR

PLN

4.40

4.40

4.35

4.30

WIG

51,695

56,000

64,500

71,000

Czech Rep/EUR

CZK

26.2

25.8

25.5

25.0

PSE

884

1,080

1,270

1,400

Hungary/EUR

HUF

345

345

343

343

BUX

34,702

43,500

51,750

57,000

South-East Europe

Turkey/$

TRY

6.97

7.50

8.50

9.25

ISE 100

1,127

1,200

1,400

1,550

Romania/EUR

RON

4.83

4.95

5.00

5.05

BET

8,485

9,500

10,250

11,250

Sources: Bloomberg, Capital Economics


Jason Tuvey, Senior Emerging Markets Economist, jason.tuvey@capitaleconomics.com