Brexit leaves Visegrad economies in the dark

Brexit leaves Visegrad economies in the dark
Visegrad leaders are struggling to predict where Brexit is leading their economies
By Will Conroy in Prague June 29, 2016

Amid the Brexit upheaval, governments, central banks and analysts in the Visegrad region are starting to publicly map out what they think they can see of the macro road ahead. However, such is the enduring uncertainty, it's tempting to ask: 'Is that a map or a maze?'

In short, no one really knows anything. Will the UK actually leave the EU is an increasingly common question in recent days. Will London secure a trade deal if it does? Will it be forced to accept the continued free movement of labour in return? The questions are manifold; the answers unavailable. That leaves forecasters working in the dark.

That hasn't stopped them trying though. The National Bank of Hungary (NBH) has boldly stated that it does not plan to revise its growth outlook in the wake of the UK vote on June 23 to leave the EU. Deputy Governor Marton Nagy insists changes are not justified for the time being.

 “If we look at the structure of domestic growth, we can see right now that our economy relies more on domestic demand factors,” he told Hungarian news agency MTI. Prior to the Brexit referendum, Economy Minister Mihaly Varga had anticipated a maximum of 0.4 of a percentage point would be clipped from GDP growth by a UK withdrawal.

The National Bank of Poland has made similar noises. It sought to calm investor nerves by predicting that over the long run the country's strong fundamentals – well-balanced growth, low inflation and a low budget deficit – will outweigh the negatives. Deputy Prime Minister Mateusz Morawiecki said the government has no plans to cut spending, but conceded Brexit could hit GDP growth by 0.5-1%. “Even the lower figure means a huge impact on the economy,” he admits.

Slovakia's central bank calculates that Brexit will shave just 0.34% off annual GDP growth by 2020. The big fear is that the country could feel a second wave of Brexit impact via Germany. While direct trade with the UK remains limited for all of the countries in the region, they are hugely dependent on export demand out of Germany, and Germany is the second largest trading partner of the UK.

The Czech National Bank (CNB), meanwhile, appears to have decided forecasters are on a hiding to nothing. It has yet to offer any predictions for the fallout from Brexit for the country. In a global economic outlook released by its monetary division on June 24 - the day the referendum result was declared - Brexit merited just two lines over 25 pages.

Prime Minister Bohuslav Sobotka noted on June 28 only that until Britain leaves the EU, it will retain both the same rights and the same responsabilities as other EU member states. The UK will continue to contribute to the EU budget, and Czechs will enjoy the right to stay and work in the country.

Solid uncertainty

However, there are palpable potential hits lurking. Amongst the biggest dangers regionally is a Brexit-driven drop in car sales. Analysts at LMC Automotive predict new car sales in Great Britain will drop by 120,000 this year, and 400,000 over the next two years, as consumer confidence wanes.

All four Visegrad states are heavily reliant on the auto sector, and build many cars for western European markets. The UK, for instance, is Skoda Auto’s fourth biggest market, representing 7% of total sales. Czechia's biggest exporter sold 74,000 units in the UK in 2015, suggesting that both the company and the wider economy are exposed to an unsightly dent.

More widely, however, analysts are struggling to find any solid ground at all. At Wood & Co, Raffaella Tenconi notes that forecasters must try to “strike a balance between the negative drag on the financial markets and investment decisions within a complex political landscape against the persistently loose monetary policy stance globally, and the modest fiscal easing that the EU Commission is likely to allow for next year, given the circumstances”.

The reliability of forecasting, she adds, will depend on how quickly the UK and the EU come to an agreement on the structure of their future relationship.

Indeed, the macro front can rarely have been so opaque, and is hardly helped by the clouding provided by market sentiment. The risk appetite required for robust growth will mount or diminish in line with available clarity on the prospects for a friendly or ugly divorce between Brussels and Westminster.

The former is only too well aware that “if the EU decides to set an example with the UK to dissuade other countries from following [with their own exits], it would risk plunging the entire region into a recession” says Per Hammarlund, chief emerging markets strategist at Swedish financial group SEB.

“Hurting the UK would hurt European businesses too. The most likely political strategy is instead ‘damage control,’” he concludes. One country that could have an outsized voice in the struggle for a way forward over the next six months is Slovakia. On July 1, Bratislava takes on the rotating presidency of the council of the European Union.