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The UniCredit Economics Chartbook – May 2014

The latest UniCredit Economics Chartbook, where some of our GDP forecasts are fine-tuned.

Monthly recap

■  EMU: GDP rose by only 0.2% qoq in 1Q14, falling short of our 0.4% forecast. Part of this negative surprise was probably due to a temporary factor, which may reverse in 2Q14. However, the negative statistical overhang stemming from the weak start to the year  pushes us to lower our 2014 GDP estimate to 1.4% from 1.5%. Importantly, we leave the path for sequential growth beyond 1Q14 largely unchanged as soft indicators continue to support our long-held view of accelerating and broadening economic recovery. The ECB is “seriously concerned” about the strong currency and increasingly frustrated by prospects of low inflation for a prolonged period of time. We expect Mario Draghi to announce a package of measures at the June ECB meeting, including, at least, a 10-15bp cut in both the refi and the deposit rate and the extension of full allotment until mid-2016. We also see a good chance that the ECB will announce a long-term liquidity provision to banks conditional on lending activity, while any purchase program (involving private assets) would be very limited if it is going to be up and running from day one. Govie purchases remain off the ECB’s radar screen.

■  US: The US economy most likely contracted in the first quarter of the year (we anticipate a downward revision to 1Q14 GDP growth to around -0.5%, seasonally adjusted annualized). As the weather-related setback has turned out to be larger than we had anticipated, we are raising our growth forecasts for the current and the following two quarters by one quarter of a percentage point each. The new projections are 3.8%, 2.8% and 2.6% (seasonally adjusted, annualized), respectively. Our forecast for 2014 as a whole still declines to 2.4% from 2.8%, reflecting our view that about half of the weakness at the beginning of the year represents a payback from the exaggerated strength in 2H13. The Federal Reserve will continue to taper its asset purchases at a moderate pace in the coming months. The first rate hike is expected to occur in mid-2015.

■  CEE: Following the events of recent months, we are marking down our forecasts for Russia once again this year and now expect a full-year contraction in GDP combined with a further, albeit more moderate, foreign exchange loss. Risks to our GDP forecast in Turkey are increasingly to the upside, and the CBRT decided to cut its benchmark repo rate by 50bp, leveraging on healthy investor appetite and a stronger TRY. In our opinion, the central bank should use more favorable funding conditions to accumulate much-needed FX reserves. Within Central Europe, the recovery is turning ever more convincing. In contrast, we are marking our inflation forecasts down once again.

■  China: April did not bring the stabilization of growth hoped for following the selective pro-growth measures initiated after the weak start to the year. Whereas sentiment figures stayed at pretty low levels (despite some improvement), activity data weakened further across the board. We, therefore, expect more selective fiscal measures (including an easing of real estate restrictions) and continued fine-tuning of China’s monetary policy. However, this should not prevent the GDP expansion rate from falling further towards the 7% pain threshold later this year. But slower growth is just the “price” of China’s need to rebalance and deleverage its economy at the same time.

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