ZEW-Erste Group Bank Sentiment Indicator for Central and Eastern Europe (CEE) - Economic expectations for the CEE region diminish in the maelstrom of the financial crisis

The intensified crisis of confidence and the concerns about possible implications for the real economy have a negative impact on the economic expectations for the CEE-region. The CEE sentiment indicator, which is calculated monthly by the Centre for European Economic Research (ZEW), Mannheim, supported by the Erste Group Bank AG, Vienna, drops by 20.5 points to minus 51.1 points in the current survey.

The surveyed financial market experts perceive higher downside risks for the economic growth in the CEE-region. However, the resolved governments’ financial rescue plans as well as the relative high stability of the CEE domestic financial systems should restore normality to markets and sentiments.

In the current survey the majority of the questioned experts expect the economic activity to worsen in all analysed countries within the next six months. The indicator for Austria, reflecting the assessment for the economic development on a six months horizon, notices the slightest loss. The indicator drops by 5.5 points to minus 42.0 points in October. The Croatian balance falls by 34.8 points reaching minus 47.3 points, which is the highest reduction in this category. The economic expectations for Hungary, having been the only ones to exhibit positive values in the past, worsen by 25.7 to minus 25.6 points. The indicator for the future economic conditions in the Czech Republic shows the lowest value, standing at minus 58.5 points, followed by the balance for the Eurozone (minus 56.8 points). In the Eurozone the negative sentiment of the previous months took a slightly positive turn increasing by 5.2 points.

The current economic situation in Central and Eastern Europe is predominantly regarded as "acceptable".A clear majority of 81.4 percent of the financial experts render this judgement on the momentous conditions within the CEE countries in this month’s survey. 13.9 percent of the analysts characterise the situation as "good" and only 4.7 percent as "bad". Accordingly, mainly a shift of the evaluation on the present economic circumstances from "good" to "neutral" takes place for all analysed countries and the CEE-region as a whole in October. With the exception of Hungary and Romania the optimistic answers still outweigh the pessimistic ones and the corresponding balances remain positive.

The balance for the current economic situation in Slovakia drops to 25.0 points, however, it still represents the highest value among all analysed countries, The respective balance for Hungary features the lowest value in this category (minus 25.7 points).

The assessment of the current economic situation in Austria has changed least, decreasing marginally by 4.0 points to 5.3 points. In line with the results of the previous months, the present state of the business activity in the Eurozone is viewed increasingly critically, as the corresponding balance declines to minus 28.8 points.

For the next six months the experts anticipate a further mitigation of the inflationary pressure in the CEE region. The respective indicator drops by 2.3 points reaching minus 61.4 points. More than 70 percent of the survey participants expect further decreases of the inflation rates in the Czech Republic, Hungary and Poland. Thus, the inflation risk is considered to be the lowest in these three countries.

According to the financial market analysts, upside inflationary risks in the Eurozone have recently decreased further. The respective balance falls 20.0 points, now standing at minus 65.1 points.

After the cut of the main refinancing rate by the ECB less experts expect further reductions. The balance for the short-term interest rates in the Eurozone rises slightly by 3.9 points. Nonetheless, 63.4 percent of the financial experts anticipate a further downward change of the ECB key interest rate within the next six months.

The forecast of the analysts with respect to the CEE countries indicate also decreasing short-term interest rates within the coming six months. With the exception of Croatia, where the majority of the respondents anticipates an unchanged level of interest rates, all indicators are clearly negative.

Despite the turmoil on the international financial markets the expectations of the experts concerning the development of the stock indices in the CEE countries have changed insignificantly. In line with the results of the previous months, a large majority of the survey participants predict rising share prices in the region. The respective balance for the CEE index (NTX) drops slightly by 4.9 to 38.9 points. The balance for the Austrian index (ATX) stands at 38.9 points after a moderate decrease by 1.1 points.

The expectations of the financial experts regarding the exchange rates are mixed in October. The majority of the respondents (53.8 percent) anticipate a depreciation of the Czech Koruna. The corresponding balance reaches the lowest value, namely minus 40.9 points, among all analysed currencies. With regard to the Polish Zloty, an appreciation is considered to be probable. The respective balance gains 14.4 points to currently 16.7 points. The analysts’ outlook for Hungary and Romania is heterogeneous with a large share of participants forecasting unchanged exchange rates.

Within the scope of this month’s special question, the financial experts assessed potential measures to overcome the financial crisis. The majority of the respondents (83 percent) regard the governmental rescue packages as "good" or "very good" solutions against the liquidity and confidence crunch within the banking sector. 68 percent of the experts believe that an increased regulation of the financial industry may be an effective method to stabilise the situation. An equally large share of the participants shares the view that particularly risky assets should be removed from the capital markets. Still, 56 percent of the analysts disapprove of generally banning short-selling. With regard to the consequences for the banking sector, the majority of the experts anticipate further concentration as a result of the credit crisis. 91 percent of the analysts describe the probability of future mergers between US financial institutions with likely or very likely, whereas the corresponding shares of the respondents amount to 86 and 50 percent respectively in the cases of European and CEE banks.

Survey Procedure

The Financial Market Survey CEE is a survey carried out by ZEW Mannheim and Erste Group Bank 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