CHART OF THE WEEK WEEK ON THE MARKETS HIGHLIGHTS OF THE WEEK 10/2015. GDP and its structure (YoY) English translation by an external party

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1 English translation by an external party HIGHLIGHTS OF THE WEEK 10/2015 > Chart of the Week: Economy in 4Q dragged up by domestic demand, both consumer and investment > Labour Market Remains Positive Unemployment falls down, wages continue to grow > January retail sales a disappointment 1,13 1,12 1,11 1,10 1,09 1, ,735 0,730 0,725 0,720 0,715 27,60 27,50 27,40 27,30 27,20 0,5 0,3 0,1-0,1 WEEK ON THE MARKETS 1,123 1,117 USD/EUR 1,112 1,107 1, ,47 133,74 JPY/EUR 133,15 133,10 131, ,729 0,728 0,726 0,725 0, ,49 27,45 GBP/EUR CZK/EUR 27,46 27,42 27, Interest rates curves EURIBOR 0,00-0,01 0,04 0,04 0,12 0,11 0,24 0,23 1M 3M 6M 12M 9th week 10th week CHART OF THE WEEK 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% GDP and its structure (YoY) 2,7% 2,9% 2,1% 3,2% 2,5% 2,1% 1,7% 0,3% 0,9% 1,3% 1,5% 2,0% 2,3% 2,6% 2,4% 2,4% Net export Domestic demand GDP On Friday, the Statistical Office confirmed growth of Slovak economy in the last quarter of the past year at the level of +0.6% qoq (seasonally adjusted) and 2.4% yoy. Last year s economy growth accelerated on average from 1.4% in 2013 to 2.4%. The published economy growth structure of the last quarter did not bring any substantial surprises when talking about demand. Economy was driven up by the domestic demand mainly; all of its basic components consumption of households, the government, and fixed investments showed a relatively strong growth. Variation in stocks was the only domestic demand component that fell down; last year s decrease in stocks was more noticeable by the end of the year compared to the year before (when it deepened from -3.0% to -4.4% of GDP). Drop in stocks (despite otherwise strong domestic demand) is also most probably behind the decreasing imports (by -0.2% yoy). So, even with the stagnating export (+0.2% yoy) temporarily influenced by the so essential car industry (production cycle new model launching + lower demand from Russia) the contribution of the net export to the GDP growth returned to moderate plus and was responsible for approximately one sixth of the economy growth in the last quarter of the past year (5/6 of the growth attributable to the domestic demand). Favourable situation in the labour market, dynamic growth of wages emphasized by the absence of inflation, low interest in economy, and improving consumer confidence boosted further increase in household consumption that grew by 2.2% yoy in the last quarter of the past year and the same growth dynamics was also typical of the whole year of Positive trend should continue this year as well. However, the year end saw strong growth (by 6.8% yoy) in fixed investments that were subsidized by the municipalities elections. This is also evidenced by the structure of the fixed investment growth a strong year-on-year (even the quarter-on-quarter seasonally > 1

2 adjusted) growth could be observed especially in public investments that grew by the considerable 20.4% yoy; the growth dynamics of fixed investments of non-finance business showed moderate drop on a quarter-on-quarter basis (season taken into consideration) and the dynamics of its year-on-year growth slowed down from 9.4% in 3Q to 3.7% in 4Q. Taking a look at the investments by asset types also insinuates strong electoral investments most of the growth could be seen in constructional investments other than buildings. Recovery of investment activity is expected to continue this year, but the focus should move from public investments to the private ones when the growing domestic and foreign (European) demand, low interest, and recovering business sentiment is expected to encourage domestic businesses in making new or deferred investments. The supply side has taken us by surprise after all. Although industrial production as well as exports indicated weaker industry figures by the year-end, it was not observed in the value added and industry sector showed the fastest growth in economy at last; moreover, continuing growth was also observed in most service sectors. On the contrary, the value added created by agriculture suffered a year-on-year decrease; decrease was also observed in the sectors of real estates, construction, or art, recreation and entertainment. As we already pre-announced at time of flash GDP release, we increase our estimate of economy growth in this year from the original 2.5% to 2.9%. Low oil prices, weaker euro as a result of QE in the eurozone, or long-lasting low interest rates should have a positive impact on the economy. Risks are seen predominantly in the geopolitics conflict in the Ukraine and the EU vs. Russia crisis, or escalation of financial issues in Greece. This year s economy should continue to be driven mainly by the recovering domestic demand (consumer as well as investment) that should also drive the growth in most of other EU economies. Gradual recovery is also expected in the export performance of economy that should positively react to the increasing growth of European economies (and particularly of Germany). (lk) ECONOMIC CALENDAR Week Indicator Period State budget (March 2) Retail sales (March 4) GDP and its structure (March 6) Real wage (March 6) Employment by LFS (March 6) Unemployment by LFS (March 6) Foreign trade (March 11) Industrial production (March 12) Construction production (March 12) Consumer prices (March 12) Market Consensus UniCredit Bank Estimate Reality February mil. EUR -680 mil. EUR January - 3.5% yoy 0.0% yoy 4Q 2.4% yoy 2.4% yoy 2.4% yoy 4Q - 4.4% yoy 3.5% yoy 4Q - 2.0% yoy 2.7% yoy 4Q % 12.6% January 372 mil. EUR 349 mil. EUR - January - 1.3% yoy - January % yoy - February -0.3% yoy -0.1% mom -0.4% yoy Source: Bloomberg, Reuters, NBS, SOSR, UPSVaR, MinFin SR, UniCredit Bank Slovakia - ECONOMY WAGES Nominal gross average monthly wage reached EUR 918 in the fourth quarter of the past year; dynamics of its growth slowed down from 4.2% to 3.5% yoy. With no inflation, the same growth was also observed for real wages. The average monthly wage increased to EUR 858 in the past year, with the dynamics of its growth accelerating from 2.4% to 4.1%, or in real figures with inflation taken into consideration from 1.0% to 4.2%. Real wages thus grew fastest from the pre-crisis year of 2007 and during the past 10 years we could see stronger growth two times > 2

3 Strong growth in wages continues; moderate slowing of their growth observed by the year-end only (in 2005 and 2007). We have observed a relatively strange situation for Slovak economy in recent quarters when the wage growth dynamics significantly exceeded the dynamics of labour productivity growth. Dynamic growth of wages creates good preconditions for growth of household consumption. On the other side, dynamic growth of unit costs of labour could make the Slovak economy less competitive, but similar trend is currently seen in most of other CEE countries. Wage growth across sectors was relatively uneven again. Wages decreased in five sectors most noticeable decrease suffered the real estate sector (-3.1% yoy), but moderate drop is also observed in professional, scientific and technical activities (- 0.8%), water supplies (-0.5%), IT and communication (by -0.3%), and art, entertainment and recreation (-0.1%). Growth in wages close to zero was also reported in the construction industry (by 0.3% yoy). On the contrary, the fastest increase in wages could be observed in the manufacturing (by 6.2% yoy), education (by 6.0%), and agriculture, forestry and fishery, and health service and social service (both by 5.4%). When it comes to regions, the fastest growth of wages was observed in the Nitra Region (by 4.7% yoy). The Bratislava Region continues to report the highest average wage (EUR 1,158), Prešov Region reports the lowest one (EUR 744). OUTLOOK New wage bargaining is expected to more reflect the absent inflation in economy; wage growth will copy labour productivity growth to a greater extent in the next year and will range around 2%. Since inflation will part with zero figures very slowly, growth of real wages should equally range around 2% in the next year and continue to support household consumption. (lk) 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Chart 1: Nominal wages vs. labour productivity Labour productivity Nominal wages 16% 15% 14% 13% 12% Chart 2: Employment and unemployment Unemployment - LFS Employment - LFS, yoy, rx 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% Positive figures in the labour market growth of employment, drop in unemployment EMPLOYMENT AND UNEMPLOYMENT Employment in the Labour Force Survey (LFS) of the Statistical Office of the Slovak Republic grew in the last quarter of the previous year by 1.0% qoq, i.e. 24 thousand individuals (seasonally adjusted, calculation made by the Statistical Office); while it was 2.7% yoy (i.e thousand). Unlike in the preceding two quarters, the last quarter s growth of employment was supported by the outflow of workers abroad. Number of workers working abroad on a short-term basis (up to 1 year) has grown by 1.5% yoy to thousand individuals, majority of them still leaving for the neighbouring countries Czech Republic (29%) and Austria (28%). Nevertheless, domestic economy continues to be the main workhorse of employment number of workers in domestic economy increased in the last quarter by 2.8% yoy (i.e thousand individuals). When it comes to regions, fastest growth of employment reported particularly the Košice (by 4.3% yoy) and Banská Bystrica regions (by 4.0%). Employment grew on average by 1.5% to 2,363 thousand in the past year, while employment in the domestic economy grew by 1.7% and number of individuals working abroad on a short-term basis decreased by -1.8%. The unemployment rate calculated by the LFS methodology reached 12.6% in the last quarter of the preceding year and was, compared to the same period of the preceding year, lower by 1.6 pp. Unemployment dropped on average by 1.0 pp to 13.2% in the last year. > 3

4 OUTLOOK Economy growth is expected to continue to create conditions for employment growth, or decrease in unemployment. Since there is lack of more significant innovations in economy, further growth of economy through labour productivity is difficult. Growth of economy is not possible without increase in employment rate. Therefore, the nearly axiomatic and frequent pre-crisis assertion that spoke of at least 3% growth of economy required to increase employment rate is past. Half the economy growth was enough to do the same job in the past 5 years. And this trend does not seem to be a short-time deviation only that used to be explained by the correction of crisis years in past but, on the contrary, it seems to be long-term. Therefore, we expect the relatively strong employment growth (and decrease in unemployment) to continue this year as well. Unemployment could drop down to the level close to 12%. On one hand, this is good news for Slovak unemployed and domestic consumer demand. However, on the other hand, experience of employers shows that the available qualified work force thins down rapidly despite double-digit unemployment rate. (lk) January sales a disappointment RETAIL SALES Retail sales in January were a disappointment when, based on data of the Statistical Office, they dropped by the considerable -1.6% qoq (seasonally adjusted) and remained unchanged compared to January of the previous year. The last time that the retail sales did not grow was in October So it seems that this year s after- Christmas sales were a disappointment. Nevertheless, it doesn t have to be so. At the turn of the year, currencies of neighbouring countries weakened against euro for a short time, which made the shopping tourism more attractive. The monthly decrease was particularly observed in the food segment that is less sensitive to effective demand. What is more, this segment has shown moderate year-on-year decrease in sales for the first time since February Most significant drop in sales was suffered by the non-specialised stores selling mostly food (various supermarkets and suchlike). On the contrary, small specialised food stores experienced something like renaissance in sales in January when they reported the fastest year-on-year growth of sales (by 9.3%) since February 2008 and only the second one from the onset of crisis by the end of The long-lasting decreasing trend in this segment was most probably averted thanks to entrance of smaller stores selling traditional domestic food. Non-food segment reported moderate month-on-month as well as year-on-year growth of sales. Moreover, inflation had already insinuated earlier decrease in seasonal prices in such segments as clothing and footwear, which could have been a sign of earlier beginning of after-christmas sales and, therefore, transfer of a part of sales in this segment from January to December. When it comes to non-food segment, revenues in the segment of information technology in specialised stores were a great disappointment, for they reported a -15.5% yoy slump (possible shift towards online shops) Chart 3: Retail sales (SA, December 2008 = 100) Retail sales Retail sales - trend Chart 4: Retail sales (SA, December 2008 = 100) Food Other OUTLOOK We expect the January interruption of sales growth to be of temporary nature only. Low interest rates and particularly the improving consumer confidence that reacts to the absent inflation, and continued growth of wages and employment should gradually push the saving rate down and support growth of sales of merchants. The cross-border shopping tourism should be less attractive than at the beginning of the year; after the beginning of QE in the eurozone had been announced the currencies in the neighbouring countries returned back to the original stronger levels. (lk) > 4

5 ECONOMIC OUTLOOK Slovakia F 2016F Real GDP grow th 4,8 2,7 1,6 1,4 2,4 2,9 3,2 GDP per capita Household consumption 0,1-0,7-0,5-0,8 2,2 2,8 2,5 Government consumption 1,7-2,1-2,0 2,4 4,4 1,9 1,3 Gross investments 18,8 7,6-14,0-0,1 3,8 3,1 3,9 Exports 15,7 12,0 9,3 5,2 4,6 5,9 5,9 Imports 14,7 9,7 2,6 3,8 5,0 5,8 5,5 Industrial Production 18,9 6,9 13,4 5,3 3,4 4,5 6,0 Construction -4,6-1,7-12,5-5,3-4,2 2,0 4,9 Retail Sales -2,2-2,8-1,0 0,1 3,6 2,9 3,0 CPI (average) 1,0 3,9 3,6 1,4-0,1 0,1 1,7 CPI (Dec.) 1,3 4,4 3,2 0,4-0,1 1,0 1,8 Real Estate inflation -3,9-3,0-1,1-0,9-0,9-0,4 2,3 Average Wage level Nominal Wage grow th 3,2 2,2 2,4 2,4 4,1 2,2 2,9 Real Wage grow th 2,3-1,6-1,2 1,0 4,2 2,1 1,3 Employment grow th (LFS) -2,2 1,5-1,0 0,0 1,5 1,2 1,0 Unemployment (average, LFS) 14,4 13,5 14,0 14,2 13,2 12,1 11,2 Fiscal deficit (% of GDP) -7,5-4,1-4,2-2,6-2,9-2,5-1,5 Public Debt (% of GDP) 41,1 43,5 52,1 54,6 54,0 54,8 54,3 Foreign Direct investment (EURbn) 2,0 3,6 3,2 0,6 0,7 1,5 1,9 ECB Refi rate (%, Dec.) 1,00 1,00 0,75 0,25 0,05 0,05 0,05 3M EURIBOR (%, Dec.) 1,0 1,2 0,2 0,3 0,1 0,1 0,1 3Y SK gov't bonds(%,dec.) 1,0 1,1 0,3 0,7 0,5 0,2 0,7 10Y SK gov't bonds(%,dec.) 2,9 4,8 2,2 2,6 1,3 1,3 2,5 Abroad F 2016F Eurozone GDP 1,7 1,5-0,6-0,4 0,9 1,4 1,8 German GDP 3,6 3,1 0,9 0,5 1,6 2,0 2,1 Czech R GDP 2,7 1,7-1,0-0,9 2,0 2,4 2,8 USA GDP 3,0 1,7 2,8 1,9 2,4 3,0 2,6 Eurozone Inflation 1,6 2,7 2,5 1,3 0,4-0,1 1,2 EUR/USD (average) 1,33 1,39 1,28 1,33 1,33 1,09 1,13 EUR/USD (Dec) 1,32 1,32 1,31 1,37 1,21 1,08 1,16 EUR/CZK (Dec) 25,1 25,8 25,1 27,5 27,7 27,5 26,5 EUR/HUF (Dec) 277,6 304,2 285,8 300,2 315,5 320,0 325,0 EUR/PLN (Dec) 4,0 4,5 4,1 4,2 4,3 4,3 4,2 Source: NBS. SOSR. ÚPSVaR. MinFin SR. Eurostat. ECB Forecasts: UniCredit Bank Slovakia Slovakia. Eurozone. USA (EURIBOR. USDLIBOR. Brent. USD/EUR); UniCredit Group (CEE Economic Research. CIB) Eurozone. USA > 5

6 FOREIGN EXCHANGE 1,40 1,35 1,30 USD/EUR 0,85 0,80 GBP/EUR 1,25 1,20 1,15 0,75 1,10 1,05 0, JPY/EUR 1,30 CHF/EUR 1, ,10 1, ,90 SEK/EUR 9,8 9,6 9,4 9,2 9,0 8,8 8,6 NOK/EUR 9,6 9,4 9,2 9,0 8,8 8,6 8,4 8,2 8,0 29,0 CZK/EUR 4,4 PLN/EUR 28,0 4,3 4,2 27,0 4,1 26,0 4,0 330 HUF/EUR 100,0 RUB/EUR MONEY MARKET ,0 80, , ,0 50, ,0 > 6

7 Interest rates curves EURIBOR 0,5 MONEY MARKET 0,3 0,1 0,00 0,04 0,12 0,11 0,24 0,23-0,1-0,01 0,04 1M 3M 6M 12M 9th week 10th week Dow Jones Industrial S&P 500 EQUITY Source: Bloomberg Source: Bloomberg EURO STOXX Source: Bloomberg NIKKEI Source: Bloomberg > 7

8 UniCredit Bank Weekly N.o.t.e.s has been prepared by Macroeconomic Analysis Ľubomír Koršňák, ; Lubomir.Korsnak@unicreditgroup.sk CONTACTS: Jaroslav Habo, Large Corporates and Multinationals ; Jaroslav.Habo@unicreditgroup.sk František Doležal, MID Corporates ; Frantisek.Dolezal@unicreditgroup.sk Raymond Kopka, Retail and SB ; Raymond.Kopka@unicreditgroup.sk Roman Hajduk, Private ; Roman.Hajduk@unicreditgroup.sk The present material was elaborated by UniCredit Bank Czech Republic and Slovakia, a.s. and can be reproduced only with its prior written consent. The document contains opinions of authors, which do not necessarily have to correspond with the opinion of UniCredit Bank Czech Republic and Slovakia, a.s.. Information and opinions contained herein were obtained from sources, which were deemed as reliable, however. UniCredit Bank Czech Republic and Slovakia, a.s. does not provide any guarantee for their correctness and completeness. UniCredit Bank Czech Republic and Slovakia, a.s. bears no responsibility for possible damage or other detriment, which can be suffered by third parties if they decide to use information contained herein. The present document cannot be deemed as a replacement for provision of individual investment consultancy. Investors have to make their own assessment of suitability and adequacy of investment in any financial instrument mentioned herein and that based on the substance of and risks connected with the relevant financial instrument, their own investment strategy and their own conditions and financial situation. The present document is not an investment recommendation or direct personal advice, neither this document nor any part hereof is a basis for conclusion of any contract or agreement upon obligation of whatsoever kind, and one cannot rely on the present document in connection with conclusion of any contract or agreement upon any obligation and it is not meant to be used as persuasion or recommendation for conclusion of any contract or agreement upon any obligation of any kind. We strongly recommend investors to contact their own investment consultants in order to receive the required explanations and individual investment consultancy. The present material is only for information purposes and (i) it does not represent any offer for sale or subscription or call to file proposals for purchase or subscription of any financial instruments or securities (ii) it does not represent whatsoever propagation thereof. Investment opportunities mentioned herein do not have to be suitable and adequate for certain particular investors, namely depending on their specific investment objectives and time horizon of investment or in connection with their overall financial situation. Investments in financial instruments are connected with risk and value of the investment and revenue on the investment can grow or fall, and that also as a consequence of currency fluctuations. Performance in the past is not a reliable indicator of future performances. No predictions of performance in the future are a reliable indicator of performance in the future. One cannot rely on this document as on an explanation of all risks connected with investing in financial instruments, instruments of the money market, investment instruments or securities referred to herein. > 8