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EMEA Weekly: Hungary At Risk Of Deflation

Published 02/06/2014, 05:38 AM
Updated 05/14/2017, 06:45 AM
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Next week will be rich week in terms of economic data in the CEE region. Besides inflation data for January, the preliminary release of Q4 13 GDP data for Poland, Hungry, Czech Republic and Romania are due. Hence, we will get a clearer picture on whether the recovery strengthened at the end of 2013.

While looking at the development in consumer prices in the CEE, the overall picture remains the same – deflationary pressures in most of the economies remain intact. The biggest risk of deflation remains in Hungary. Even though the risk of outright deflation reduces the recent sell-off in the forint somewhat, nonetheless our inflation model clearly points to deflation perhaps later in the year. Inflation in January, which is due for release next week, is likely to have dropped as low as to 0.2% y/y – down from December’s 0.4% y/y. Also, in Poland inflation is set to inch lower from December’s 0.7% y/y, to 0.5% y/y in January, according to our forecast. Probably the sharpest drop in headline inflation will be seen in the Czech Republic, where falling regulated prices will be behind the sharp drop, while at the same time, demand inflation pressures remain totally absent.

Amid non-existent inflation from the supply side of the economies, subdued inflation also comes from the demand side of the economies as private consumption remains poor within CEE countries. This will still be visible in Q4 GDP, due for release next week in Poland, Hungary, Czech Republic and Romania. While we expect the Czech economy to remain in the red, it should show some improvement and have contracted 0.2% y/y in Q4 13, up from a contraction of 1.2% y/y in Q3 13. We expect Polish Q4 13 GDP growth of 1.8% y/y, slightly down from 1.9% y/y in Q3 13. The biggest improvement in growth is expected in Hungary, where we expect the Q4 GDP to rise 2.5% y/y in Q4 13, up from 1.8% y/y in Q3 13.

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To sum up, the CEE economies remain weak and we expect them to operate below potential for at least the coming two years. Also, inflation in the region is likely to remain below official inflation targets going forward.

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