contacts

MACRO
Martin Lobotka, mlobotka@csas.cz ; tel: 224 995 192
Real economy is doing well; strong German economy is dragging along also the Czech Republic and other economies tightly linked to
Germany - this is also visible from 3Q/10 GDP data (Czech economy grew by 1.1% q/q, Poland by 1.3% q/q). Also preliminary data
for 4Q/10 does not point to any substantial slowdown – leading indicators remain high (PMI slightly higher in November - at 57.3,
German IFO continues increasing) pointing to a continued recovery and what will likely be a two-digit growth of industry also in 4Q
(and that despite a higher base from 2009). PMI also suggests further growth of employment which is highest since 4Q/07. That,
together with weaker Euro (on continued debt worries) and falling unemployment in Germany, raises hopes that recovery will go on
– in the near future the recovery will still be able to rely on strong German export; after this factor wears out (due to stronger Euro
and weaker dynamics of China on the back of monetary tightening) there will already be revived consumer demand to (at least
partially) step in. We thus expect no dramatic slowdown, not at all another wave of recession. The planned fiscal restriction should
also by far avoid disrupting the ongoing recovery.
Czech National Bank published its new inflation projection and it is almost as pessimistic as that of labor union CMKOS. CNB expects
the economy to grow by 1.2% which is some 0.8pp below the consensus as well as our forecast or that of the MinFin. We find CNB
overly pessimistic (similarly as it was in 2009, when it expected the economy to grow by 1.4% in 2010 vs. our forecast of 2.0%
which will likely undershoot the actual figure by some 0.2-0.3pp). What are the implications for rates? For the central bank,
everything is crystal clear – the economy will grow around 1% y/y, there will be no inflation whatsoever, and thus rates can remain
low for quite some time. We are more concerned – yes, we are more bullish on the real economy but having seen what was going
on last year (economy growing on average by 0.7pp q/q since summer 2009 and koruna giving no reasons to worry and rates still
went down by 50bp), we are more careful. Yes, we think that rates should be some 25-50bp higher than they are at this point, but
the cautiousness on the side of CNB, still not-so-good labor market, and low current inflation will likely keep the central bank from
hiking at least for one quarter’s time. February is probably the earliest possible candidate for a rate hike, as at that point new
inflation prognosis will be ready and CNB will see a confirmation of solid growth in the real data by then. The risks of further delays
because of this cautiousness on the side of CNB are still present, though.
EURCZK is momentarily weaker but that will not be a factor in rate-setting decision. We think that values around 25 are fundamentally
justifiable and therefore neutral for monetary policy. Within the next couple of weeks we expect it to strengthen mildly or, better said,
to oscillate within the region of 24.5-25.0. Levels below 24.5, close to 24, would make sense in the second half of the year. Risks of
further weakening are relatively small – it would require a serious trouble in EMU for koruna to rally above 25.5. Given that Polish
zloty and Hungarian forint have already went through certain correction after the recent sell-off (driven to 4.10 and 285, respectively)
– it is just koruna that remains around its lows – we think that some strengthening (to below 24.70) can be expected.
Long-end swap and bond yields grew last month (by 40 and 25bp, respectively) which was in line with our prognosis (we’ve been
expecting higher yields for quite some time). The main reason was debt crisis and correction from levels that corresponded to
recession expectations. The same factors are affecting other sovereign yields; naturally, yields of structurally unbalanced south
(+Ireland) are some 200bp (and more) above German yields and we also see an upside pressure for the strong core of EMU
(Germany and France). In the coming months we expect slightly higher yields in Germany as well as in CR, but the spread between
the two should contract mildly; from about 100bp to some 75-80bp. If it is debt worries and expected cost to western economies of
rescue package for south that is driving yields up, then the Czech Republic should not be affected that much
- 2 - 7.12.2010