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by Unicredit research
In Central Eastern Europe we expect GDP growth in the region next year of 3.8%, up from 3.6% this year, with every country in our group to show gains for the first time in 4 years. The crisis is not over yet, but signs of recovery begin to show in the area. What to expect for the new year?
Our baseline global macro backdrop is supportive of Central Eastern Europe next year. We expect Central Eastern Europe’s core export markets to continue to perform well. Germany is running on all cylinders and we forecast GDP growth there next year at 2.5%, down from 3.6% this year but still well above its average over 2000-07 (1.6%). Q3 GDP grew by a robust 0.7% QoQ while the manufacturing PMI showed renewed gains over Oct-Nov. With labour markets strengthening and consumer confidence outperforming other EMU economies, the recovery can no longer be attributed just to exports but reflects more broad-based improvement.
We expect growth to be broadly unchanged in France and Italy next year at 1.4% and 1.1% respectively. Demand from Asia also remains robust. China’s manufacturing PMI continued its upward trend over Oct-Nov while the IMF projects GDP growth next year at 9.6%, down very modestly from 10.5% this year. Supported by lose fiscal and monetary policy, we expect the US next year to post gains of 2%, down moderately from 2.7% this year. Decent gains in global demand should in turn support commodity prices at current, if not slightly higher, levels.
Central banks remain keen to support the recovery. Early November saw the Fed announce a further USD600bn in quantitative easing while Bernanke has since refused to rule out an enlargement of the programme. We do not expect any rate hikes from the Fed before H2-12. Meanwhile the European Central Bank is struggling to balance a strong Germany against a weak periphery and as a result will probably only initiate a very gradual hiking cycle towards the end of next year.
That said, the tail risks are plentiful. Financial market tensions in the periphery are back in full swing. IMF programmes in Greece and Ireland are sufficient to allow the sovereign to step away from market issuance for at least a 2 year period but the market remains unconvinced that Portugal and, of much more concern, Spain will continue to be able to ‘go it alone’. Portugal struggled to ‘converge’ during its first decade in EMU despite on average running a double digit current deficit, a reflection of large scale borrowing from abroad at cheap interest rates. To date its C/A deficit has not adjusted while from an external perspective the economy remains the most indebted in the Euro Area.
The real threat is, of course, Spain, given that in the case that it was forced towards an EFSF/IMF programme, the bill could near EUR 400bn. Q1 is likely to remain a testing time for EMU. Any signs of financing stress for sovereigns could push policy makers rapidly towards a solution.
Original title: Central Eastern Europe first quarter 2011 Forecast