ZEW-Erste Bank Sentiment Indicator for Central and Eastern Europe - Downward Movement of the Economic Expectations for the CEE Region Slows Down

The downward trend of the sentiment indicator for Central and Eastern Europe (CEE), which is calculated monthly by the Centre for European Economic Research (ZEW), Mannheim, supported by the Erste Bank der oesterreichischen Sparkassen AG, Vienna, flattens in July. The economic expectations of the financial market experts for the CEE region worsen by 2.7 points to currently minus 31.4 points. In contrast to this rather moderate decline, the outlook for the Eurozone dropped 14.7 points to an all-time low of minus 51.0 points in July.

Thus, the financial market experts assess the economic development in the CEE region within the next six months much less critically than those of the Eurozone. While the indicators for Austria and Hungary lose 4.0 and 3.4 points respectively, the expectations for all other analysed countries improve this month. The sentiment indicator for Croatia increases most strongly by 18.3 points to minus 8.9 points and achieves the second highest value after Hungary. In Hungary the indicator amounts to 0.0 points after a slight decrease in July.

Slovakia and Poland follow with increases by 6.0 and 3.4 points to minus 25.5 and minus 28.0 points respectively.

The current situation in the CEE region is assessed by 66.0 percent of the financial experts as "normal" and 26.5 percent of the participants consider the current economic conditions in the CEE region to be "good" (minus 8.0 points compared to the previous month). In contrast, 7.5 percent of the analysts are more pessimistic and evaluate the current situation as "bad", even though not a single expert had made such a negative statement in June. As a consequence, the balance of the positive and negative answers decreases by 15.5 points. However, the indicator remains positive, now standing at 19.0 points, which means that the proportion of the optimistic valuations still outweighs the pessimistic ones.

When asked to appraise the current economic situation in the Eurozone, the financial experts are again more critical than in the case of the CEE region. The balance for the Eurozone turned negative, declining by 15.6 points to minus 3.8 points. Despite a drop of 19.0 points, the indicator for Austria remains positive and amounts to 18.2 points.

As in the previous months, the majority of financial market experts look favourably at the current economic situation in Slovakia (with a balance of 43.3 points), the Czech Republic (with a balance of 40.5 points) and Poland (with a balance of 36.7 points) in July. By contrast, the current situation in Hungary (with a balance of minus 30.7 points) and Romania (with a balance of minus 10.5 points) is viewed more sceptically.

The sharp rise of the inflation rates in the surveyed CEE countries forecasted by the analysts in June did not continue this month. The balance for the CEE region decreases by 4.4 points to 10.2 points in July.

The share of the experts expecting falling inflation rates increases for all analysed countries, except for Poland. Consequently, the indicators for the anticipated inflation rates decline and some even turn negative. The Austrian balance recedes by 7.4 points to 8.6 points. For Croatia the view of the financial market experts changes significantly towards falling inflation rates. 41.5 percent of the participants believe that the inflation rate will fall within the next six months. Accordingly the balance drops by 21.0 points to minus 0.1 points.

After the raise of the prime interest rate in Romania, this month’s results are dominated by the share of respondents anticipating a decline of the inflation rate. The indicator declines by 9.7 points to minus 4.3 points. A vast majority of survey participants expect further hikes of the key interest rate in Romania in the following six months. The corresponding balance for the short-term interest rates rises markedly by 25.9 points to 38.7 points, which is the highest value among the analysed countries. According to the assessment of the respondents, a further increase of the interest rate in Poland seems probable, too. The indicator gains 26.0 points reaching 34.8 points.

As already expected, the European Central Bank raised the key interest rate by 25 basis points to 4.25 percent in July. However, this decision did not seem to have much impact on the experts’ forecast. The balance for the inflation rate in the Eurozone remains unchanged at 17.0 points and the balance for the short-term interested rate increases marginally by 1.8 points to 5.6 points.

With regard to the development of the stock markets, the financial experts expect the highest potential for Croatia. The balance for the Croatian stock-index CROBEX increases by 16.4 points to 44.4 points. Nonetheless, the prospects for the other stock markets remain also clearly positive.

The analysts’ expectations concerning the exchange rates change most strongly in case of the Czech Republic. The Czech National Bank had left the key interest rate unchanged aiming to avoid a further appreciation of the Czech Koruna. In spite of this, the share of experts anticipating an appreciation of the currency compared to the Euro increases by 10.4 percentage points. Consequently, the corresponding balance climbs considerably by 19.6 points but remains still negative (minus 2.0 points).

The majority of the financial analysts (50.0 percent) also expect an appreciation of the Romanian Leu due to the recent rise of the interest rate in Romania. The balance increases by 8.0 points to 29.5 points.

The special question in July focuses on the assessment of the analysts concerning the current stage of the financial market crisis and the impact it had and may still have on the economy. More than half of the respondents believe that the crisis has already achieved its later stage. 27.4 percent think that the credit crisis has just reached its peak and 11.0 percent of the experts fear that most of the negative effects are yet to come.

Furthermore, the financial market experts were asked to compare their current assessment of the influence of the crisis on the business cycle in the CEE region to their estimation in autumn 2007. The majority of participants (39.7 percent) state that the current effect of the credit crisis equals their former anticipations. 30.1 percent take the view that the impact of the financial crunch on the real economies is larger than initially expected, followed by a slightly smaller proportion of the experts (23.2 percent) being positively surprised that the influence on the CEE countries was less pronounced than suspected last year.

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. Mariela Borell, Phone: +49/621/1235-144, E-mail: borell@zew.de