Emerging market equity prices continue to rise and even the heightened tensions on the Korean peninsula have so far had almost no significant impact on investors outside the region.
India, against the trend, was the only one to lose slightly among the large emerging markets, while the countries of Central and Eastern Europe recorded an above-average performance. This support for emerging market equities, bonds and currencies continues to come from the solid global economy and rising commodity prices.
However, it should not be forgotten that the increase in inflows so far has been mainly due to portfolio investment, while direct investment (FDI) tends to stagnate. The former give a boost to the prices of shares, bonds and currencies but contribute only to a limited extent to the lasting recovery of the economy in the recipient countries. Unlike direct investments, portfolio investments can also be disinvested quite quickly. There are currently no signs of international investors rethinking, yet these capital inflows tend to be more volatile and less reliable than FDI.
India: Growth down again
Indian economic growth has slowed again, to the surprise of many analysts. In the second quarter, GDP grew by only 5,7% pa, the lowest value for three years. On the one hand, the insecurity and prudence of many companies before the start of the major tax reform should have contributed to this. On the other hand, the negative effects of last year's abrupt currency reform are still being felt. Regarding the latter, the government has missed at least two of its objectives, because about 99% of the old banknotes have been exchanged for new ones. Therefore, the amount of dirty money withdrawn from circulation thanks to the currency reform was small.
Regardless of the temporary problems caused by the tax and currency reform, the Indian government is still plagued by structural problems. Above all, the willingness to invest has been too low for many years. Expected public-private partnerships in infrastructure projects have so far remained well below forecasts. It is unlikely that there will be an improvement in the current fiscal year (by March 2018). Because the government has already used a large part of the available amount for investment in the first two quarters. This could mean rather weak growth data in the coming quarters as well. Weak consumption growth and the concomitant rather low capacity utilization rate also currently offer little incentive for the private economy to invest more.
EC3 countries: Poland, Czech Republic, Hungary
Poland - In the second quarter, the Polish economy again grew strongly, albeit slightly more slowly than at the beginning of the year (+3,9% pa). Inflation rose slightly in July due to the increase in food prices, from 1,5% to 1,7%. Core inflation (excluding food and energy prices) is, however, stable below XNUMX%. However, tensions between Poland and the EU continue.
After the conflict over the planned Polish judicial reform, Poland has now even brought into play new reparations claims against Germany and at the same time opposes the planned EU labor market reforms. The latter should prevent wage dumping better than in the past. Polish resistance does not come from nowhere. According to expert estimates, meanwhile there are around one million Ukrainian workers working in Poland, often receiving much lower wages than the local population.
Czech Republic - In the second quarter, economic growth in the Czech Republic accelerated surprisingly strongly to 4,5% pa Compared to the first quarter, the economic result consequently increased by around 9,5%. This is the highest value since the start of the quarterly data series (1996). Given this conviction and considering the risk of an increase in inflation, for the first time since 2008, the Czech central bank slightly increased its key rate in early August, from 0,05% to 0,25%.
Hungary – In Hungary, economic growth in the second quarter was down against the global trend, but at 3,2% pa it was still very positive. Unemployment fell to just 4,2%, a new record low. Equity markets in the region gained in August, some very sharply. Courses in Warsaw and Budapest increased by more than 6%. With an increase of just over XNUMX percent, Czech equities recorded a less marked rise
