Carmelina Carluzzo of UniCredit -
Preliminary GDP data for the first quarter have been released by the statistical offices of Slovakia, Czech Republic, Hungary and the Baltic countries last week, anticipating, from one side, and confirming, from the other, our original prediction of a slowdown in economic growth in the Central and Eastern Europe (CEE) region as a whole in 2008. However, as indicated by recently released GDP data of some Western Europe countries - particularly Germany and France, which recorded better-than-expected economic growth in the quarter - the CEE region also is maintaining sound economic growth, proving to be not yet directly influenced by the US slowdown.
It is worthwhile, however, to make a distinction among countries. If on the one hand Central Europe countries - Slovakia, Czech Republic and Hungary - surprised on the upside, with GDP growth in the first quarter proving to be higher than the market's and/or our expectations, on the other hand the Baltic economies, in particular Estonia and Latvia, recorded a marked slowdown.
The Slovak economy turned out to be the fastest growing economy, not only among the CEE countries, but also in the EU, expanding by 8.7 % on year (which was above the market expectation of 8.5 % and our original forecast of 7.5 %). The Statistical Office will publish the structure of growth on June 3. In addition to the usual positive contribution from net exports, however, households consumption is assumed to have been the key driver of this dynamic (also taking into account the record growth in retail sales in the first quarter). GDP figures on the Czech Republic also beat our expectations. The economy slowed from 6.6 % in the fourth quarter 2007 to 5.4 % (above our original prediction of 4.3 % and in line with the market consensus of 5.5 %). No figures for individual components have been released yet, but we assume that the main reason behind the slowdown was weaker growth in household consumption, affected by higher indirect taxes and the inflation spike.
Hungary is in a different shape, as despite remaining among the EU countries with the lowest growth rates, it recorded an acceleration of GDP growth in January-March to 1.6 %, from 0.8 % on year in the previous quarter. It looks as if a recovery in the Hungarian economy is taking place this year, after touching the bottom in 2007 following the government's implementation of an austerity package. Although for this country as well, the structure of growth will be available at the beginning of June, the private sector is assumed to have played a positive role on the output side.
In contrast to Central Europe countries, which despite decelerating, still show a resilient economic growth, the Baltic countries - following years of overheating - are now facing a pronounced slowdown in economic activity as a consequence of tight credit conditions, high inflation and high interest rates.
In particular, Estonia, with a GDP expansion of only 0.4 % o year in the first quarter emerged as the slowest growing economy in the EU, while Latvia's growth decelerated to 3.6 % from 8 % in the fourth quarter. A slightly better outcome was recorded by Lithuania, whose GDP growth decelerated to 6.4 % on year from 8 % in the previous quarter. However, given the marked slowdown of the two other Baltic countries (toward which 20 % of Lithuania exports are directed) a further cooling of Lithuanian growth can be expected in the next quarters. These preliminary GDP numbers lead us to revise downward our GDP forecasts for Latvia and Lithuania by around 1.2 and 1.5 points, respectively for full-year 2008. We therefore now expect GDP growth in 2008 of 2.6 % in Estonia, 3.2% in Latvia and 5.3 % in Lithuania.
Kazakhstan is a different story. The stronger-than-expected economic growth in January-March - 6.0 % on year versus the Economy Ministry's forecast of 5.3 % - was mainly determined by the extremely positive performance of the construction sector, a trend which we do not expect to continue, given the burst of the bubble in the residential real estate and the stalling credit growth. Therefore, we keep our forecast of a GDP growth at 4.5 % for the whole year 2008.
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