ZEW-Erste Bank Sentiment Indicator for Central and Eastern Europe - Economic Expectations for Central and Eastern Europe Stabilise

The economic expectations for Central and Eastern Europe (CEE), which are ascertained monthly by the Centre for European Economic Research (ZEW), Mannheim, supported by Erste Bank der oesterreichischen Sparkassen AG, Vienna, stabilise in August. The CEE sentiment indicator that shows the balance of positive and negative assessments of the economic outlook in the next six months improves slightly by 0.1 points to currently minus 31.3 points.

The indicator for Austria even gains 6.2 points and stands now at minus 28.6 points. For the CEE-region as a whole as well as for Austria nearly 48.0 percent of the respondents anticipate an unchanged business cycle within the next six months. By contrast, the majority of the financial market experts (48.9 percent) predict an economic downturn in the Eurozone. Despite an increase by 10.6 points in August, the respective balance is still clearly negative (minus 40.4 points), indicating worse economic forecasts for the Eurozone than for all analysed CEE countries.

In line with the results of the previous months, Hungary is characterised by the best business prospects among the states covered in the survey. Having reached 0.0 points in July, the corresponding indicator gains 10.3 points this month. Due to a sharp decline by 17.1 to minus 26.0 points, Croatia loses its good position gained last month to Romania. In spite of losing 4.0 points to minus 18.7 points, the Romanian indicator performs second best after Hungary in comparison with the other CEE countries.

As in the previous months, the experts look favourably upon the current economic situation in Central and Eastern Europe. The balance for the current situation in the CEE-region drops slightly by 2.4 points to 16.6 points. Thereby, 70.8 percent of the respondents consider the economic conditions to be "normal". With 80.5 percent (plus 12.3 points compared to the previous month) the dominance of the analysts making this assessment is even more distinct in Austria. The balance of the positive and negative valuations for Austria decreases marginally by 3.5 to 14.7 points. For all other analysed countries the neutral answers prevail as well. Slovakia achieves the highest balance for the current economic situation in August (42.5 points), followed by the Czech Republic (37.5 points). As in the previous months, the analysts view the conditions in Hungary (minus 20.8 points) most sceptically.

The experts’ forecasts for the short-term interest rate in the Eurozone within the next six months have dropped markedly in August, now standing at minus 31.3 points (minus 36.9 points compared to last month’s survey). These results can be traced back to the fact that a clearly larger share of the participants expects the ECB to cut the key interest rate (37.5 percent) than to increase it (6.2 percent).Most probably, the falling oil price is responsible for the experts’ changing view. Accordingly, the respondents are much more optimistic with regard to the predicted inflation rate. A clear majority of the financial analysts, namely 67.3 percent (plus 37.1 percentage points), predict a declining inflation rate in the Eurozone within the next six months. Only 16.4 percent (minus 30.8 percentage points) expect the inflation rate to rise. This development is characteristic for all CEE countries within the August survey. Due to a shift of the expectations in favour of falling inflation rates all balances reach highly negative values.

For the CEE region as a whole the analysts forecast a lower inflation risk during the next six months. The corresponding indicator drops 62.3 points, now standing at minus 52.1 points, and the balance for Austria declines by 54.7 to minus 46.1 points. Due to more anti-inflationary exchange rate developments and domestic factors the Czech National Bank lowered its inflation forecasts for 2009 and 2010 in its latest "Inflation Report". After the marked appreciation of the Koruna until the middle of July and a slight downswing thereafter, the majority of the questioned financial experts now anticipate a depreciation of the Czech currency within the next six months. The respective balance loses 39.2 points, closing at minus 41.2 points. Furthermore, falling interest rates until the end of 2008 and a stable interest rate level in 2009 are to be expected. Accordingly, 44.2 percent of the participating analysts forecast declining and only 9.3 percent rising short-term interest rates. The corresponding indicator decreases by 55.7 to minus 34.9 points, which is the largest reduction in this category.

The situation in the Czech Republic resembles much the one in Hungary. By reducing import costs, the strong Hungarian currency (Forint) contributes to a slowdown of inflation. The balance for the expected inflation rate in Hungary reaches minus 66.7 points, the lowest value among all analysed CEE countries. The same holds for the balance of the short-term interest rates (minus 41.0 points). Hence, the majority of the financial market experts share the view that the National Bank of Hungary has abandoned its restrictive monetary policy and anticipate a cut of the key interest rate.

With regard to the Hungarian currency, depreciation is predicted, too. The respective balance loses 26.8 points to currently minus 14.8 points.

After the Council of the European Union has taken the decision on setting the conversion rate for the Slovak Koruna at 30.126 Koruna per EUR, the respective question was omitted from the questionnaire.

Apart from the inflation forecasts, the experts’ assessments

on the development of the stock markets within the coming six months have changed most significantly. All balances for the analysed CEE countries soar by double-digits. The indicator for the Euro Stoxx 50, however, increases only marginally by 5.6 up to 36.3 points. Mostly more than 60 percent of the financial market experts anticipate an upward trend for the coming six months of the stock indices in the CEE countries.

The balance for the CEE stock index (NTX) gains 22.1 reaching 46.5 points and the balance for the Austrian stock index (ATX) rises by 22.6 to 47.5 points. Still, the financial analysts link the highest future potential to the Croatian stock index CROBEX, as the corresponding indicator augments by 12.1 to 56.5 points.

The special question in August covers the topic "Renewable Energy in the CEE countries", especially against the background of the proposal of the European Commission in January 2008 on a new EU Directive. Accordingly, every member state is supposed to increase its share in renewable energies, for instance solar, wind and water power, to a binding target level. Thus, the share in renewable energies shall be raised to 20 percent and the proportion of biofuels to 10 percent EU-wide until 2020.

At first, the financial experts were asked to evaluate the chances of the CEE countries to reach the above mentioned goals, compared to the perspectives of the countries in the Eurozone. 43.0 percent believe that the perspectives for the Middle- and Eastern European region are worse, followed by 40.0 percent who consider the prospects to be equal. 17.0 percent of the analysts even observe better preconditions in the CEE region for accomplishing the environmental EU targets. The majority of the participants, namely 59.0 percent, share the view that an increased share in renewable energies will have an impact on the energy prices in the CEE area. 92.6 percent of this group of respondents count on rising prices.

Within the CEE region, the financial experts attach the highest future potential to wind and hydroelectric power (28.0 and 24.0 percent), followed by biomass and geothermal energy (in each case 15.0 percent).

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.

For further information please contact

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