Economic and Capital Market Outlook for 2011 - CEE Countries Recover Quickly, USA in Stagnation

Three years after the onset of the crisis, “normality” has yet to return. The effects of the crisis on the real economy – but also on financial markets – are still very visible. Moreover, the events in Japan, the high oil price and the sustained debt crisis in the euro zone have aggravated the situation even more. In the euro zone, export growth has continued at a surprisingly robust pace not only in typical exporting nations like Germany but also in countries that traditionally run current account deficits such as Spain.

- We remain optimistic for the exports dynamics, even if a slight slowdown seems likely, but expect net exports to contribute to overall growth by 35% or +0.4% to a total GDP growth of 2% in 2011 - said Gudrun Egger, manager of the research team for instruments with fixed revenue at Erste Group.

In this context, further developments in emerging markets (China) will be of particular importance. Domestic demand has also picked up in the faster-growing core countries of the euro zone. Investment activity has perked up considerably thanks to catch-up effects and consumption has been supported by the continuing improvement of the labour market. While inflation may climb further in the short term (driven by higher commodity prices and VAT hikes), it should return to below 2% in the medium term. In the opinion of experts from Erste Group, the ECB is expected to proactively fight potential second-round effects until about the end of the year to defend its credibility and interest rate hikes are expected in July and in November. This should be followed by a longer break at around 2% due to the outlook of moderate economic growth.

Therefore, increases in the yield of the euro zone benchmark should also be limited (unless the economy and inflation surprise significantly on the upside). Furthermore, the debt crisis – to which no end is in sight any time soon – will be supportive of safe havens. The ample supply of liquidity could keep asset prices high in general (especially government bonds in combination with Basel III). For this reason, slightly higher yields are expected at the short end of the maturity curve until the end of the year but a more or less sideways movement at the long end. The risk factors mentioned above will probably keep volatility high.



Slow Growth in the USA

The US economy is currently undergoing another bout of sluggishness. While slow growth in the first quarter was still explained by extraordinary factors, the weak economic data in the second quarter came as a surprise. In the view of Erste Group experts, the recent slowdown in growth is likely to be temporary and probably attributable to the after-effects of the high oil price and the earthquake in Japan. They also expect to see improvement in the second half of the year even though the post-recession recovery should progress only slowly in historical comparison. The underlying cause of this is the housing market, in which the oversupply is not expected to be absorbed before 2013.

- At this moment we do not see any inflationary pressures in the USA and, therefore, we expect an average inflation rate of 2.6% for 2011, the same as in the Eurozone - said Rainer Singer from the Erste Group research team for instruments with fixed revenues.

Nonetheless, the US economy is recovering and an end to the extremely expansive monetary policy is on the horizon. The first interest rate hike is expected in the first quarter of 2012. In the view of people at Erste Group, the bond market is currently overvalued. Not only because they expect economic data to improve in the second half-year, but also because the risks from US fiscal policy are not priced in at present. Unless the political parties reach agreement to lift the debt ceiling by the beginning of August, we will be seeing a sovereign default in the US that may also affect its debt servicing. Therefore, US Treasuries are viewed as unattractive investments for the time being.

CEE Countries Exceed the Eurozone Growth Rate

CEE countries show a similar pattern of economic recovery as the euro area. The recovery has so far been export-led as continuing fiscal consolidation still keeps a break on the stronger rebound of domestic demand in many countries. As inflation, which is mainly cost-driven through higher commodity prices, increases in indirect taxes and regulated prices, is going to moderate, no strong monetary tightening is expected in the second half of this year.

On the EUR corporate bond market, cost-cutting and efficiency gains as well as improved liquidity and credit quality are factors that make companies appear more resilient to crises today. Even though external factors (esp. the problem of sovereign debt) are causing continuing uncertainty in the financial markets, no significant widening of spreads among corporate bonds is expected. From a fundamental perspective, the future development of risk premiums will depend on the continuation of the economic recovery.

Erste Bank a.d. Novi Sad

ERSTE BANK-AUSTRIJA

Eurozone

Gudrun Egger

Erste Bank

Erste

Erste Group

Rainer Singer

reference credit rate

inflation