ZEW-Erste Bank Sentiment Indicator for Central and - Eastern Europe Economic Expectations for Central and Eastern Europe Resume Downward Trend

In October, the results of the survey among financial market experts conducted by the ZEW, the Centre for European Economic Research, Mannheim, supported by Erste Bank der oesterreichischen Sparkassen, Vienna, indicate a resumed downward trend of economic expectations for the CEE region after interruption in the previous month. The Sentiment Indicator CEE drops 19.7 points and now stands at -11.4 points. The rating of the current economic situation in the CEE countries has improved, however. For Austria, the pessimistic expectations for economic development also prevail combined with a positive assessment of the current situation.

The ZEW-Erste Bank Sentiment Indicator CEE that gives the balance of positive and negative assessments for the economic development in CEE countries within the next six months declined markedly this month. The drop of the balance by 19.7 points overcompensates the interim increase of the September survey. Now the share of experts expecting a worsening of the economic development outweighs the share of experts forecasting an improvement, and the balance now stands at -11.4 points. However, a considerable majority of 69.8 percent of respondents projects no change in the economic development of the Central and Eastern European region for the following six months. The assessment of the current economic situation for the CEE countries has improved slightly compared to the previous month's survey, and the majority of financial market experts evaluates it as "good".

For Austria, too, experts state pessimistic economic expectations on balance; the value of the indicator is still negative with -6.8 points. However, the balance does not exhibit a downward trend anymore. On the contrary, the value has increased by 4.8 points compared to the September survey. The experts have not changed their assessment of the economic situation in Austria much (+3.8 points); the balance now shows 65.2 points.

A comparison of both economic regions shows the same qualitative picture. For Austria as well as for the CEE region, financial market experts assess the current situation as good while their economic expectations are rather pessimistic. The difference in balance levels has diminished for the expectations part of the assessment.

Inflation expectations for Austria have increased markedly this month. The share of experts expecting rising inflation rates over the next six months outweighs the share assuming increasing rates by 40.1 points. The balance for the CEE countries also shows 46 points in October. However, this value is lower compared to the previous survey. The inflation expectations for Croatia have increased considerably, whereas the respective balances for Romania and the Czech Republic did not change by a large amount.

The experts' interest rate expectations are relatively heterogenous. The respondents forecast decreasing short-term rates for Hungary. The balance for the long-term rates also indicates decreasing rates, just as for Croatia. For all other countries, the share of experts projecting higher interest rates outweighs the share of experts forecasting lower rates at the long end and at the short end of the term structure.

The experts' stock market expectations are considerably more optimistic for the NTX than for the ATX. The projections lead to a balance of 61.9 points for the CEE-Index whereas the balance for the Austrian stock market index shows 37.5 points. Comparing the balances with their previous month's value, there is an increasing difference between the expert's assessments of the stock market developments.

Again, this month's special questions deals with the effects of the US subprime crisis. The questions target the assessment of financial market experts with regard to the distribution of effects within the financial sector as well as the possible time horizon of the effects. The respondents expect rather strong effects on mortgage and investment banks and more contained effects on commercial banks, insurance companies and pension funds. They forecast that effects on the financial system will most probably last for the next 6 months up to one year. The financial market experts assess the crisis management of the Fed mostly as "good" and that of the ECB as "good" to "satisfying". The Bank of England and the Bank of Japan mostly receive a "satisfying" for their crisis management from the experts.

Survey Procedure

The Financial Market Survey CEE is a survey carried out by ZEW Mannheim and Erste Bank der oesterreichischen Sparkassen AG Vienna, among financial market experts and has been conducted monthly since May 2007. It offers insights into the experts' assessment of the current economic situation and their expectations for Central and Eastern Europe, Austria and the Eurozone for the next six months concerning the general economic situation, inflation rates, interest rates, exchange rates and stock market indices. The CEE region observed in the survey consists of Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia and Slovenia.

The indicators reflect the difference between the percentage of analysts who are optimistic and the percentage of analysts who are pessimistic. The possible outcome of the balance lies between -100 and +100 points. Positive values of the balance indicate that the number of participants expecting a rise in the respective variable outweighs the number of participants with negative expectations.

Contact

Dr. Katrin Ullrich, E-Mail: ullrich@zew.de

Dr. Michael Schröder, Phone: +49/621/1235-140, E-Mail: schroeder@zew.de