ZEW-Erste Group Bank Sentiment Indicator for Central and Eastern Europe (CEE)- Pessimistic economic expectations but improved assessment of the current situation in the CEE region

The sentiment indicator for Central and Eastern Europe which shows the economic expectations of the financial market experts surveyed by the Centre for European Economic Research (ZEW), Mannheim, supported by the Erste Group Bank AG, Vienna, declines in December by 9.6 points to minus 64.1 points. In contrast the survey participants assess the current economic conditions in the CEE region clearly better than in November. The respective balance increases by 13.5 points to minus 9.5 points this month.

The ZEW-Erste Group Bank survey comprises questions about the CEE region as a whole and about selected CEE countries in detail. In spite of the deterioration of the economic expectations for the CEE region as a whole, the experts predict better prospects for the individual countries within the next six months. Austria and Poland are exceptions to this development. After a decline by 11.7 points the indicator for Austria now stands at minus 50.1 points. The Polish indicator drops slightly by 1.9 points to minus 58.0 points.

For the assessment of the economic prospects for the whole CEE region the experts’ pessimistic expectations for Austria seem to carry more weight than their outlook for the remaining analysed countries.

Regarding the current business conditions, the balances for all surveyed CEE countries improve compared to the previous month. Due to the domination of good evaluations over the bad ones for Slovakia, Poland and the Czech Republic, the respective balances even turn positive.

As in the previous month, the economic expectations for the Eurozone increase slightly in December again. The indicator climbs by 3.9 points to minus 49.2 points. In contrast, the balance for the assessment of the current business conditions drops by 9.1 points to 49.2 points.

About 90 percent of the financial market experts participating in this month’s survey predict a further decline of the inflation in the CEE region as a whole, the individual CEE countries as well as in Austria and the Eurozone. The respective balance for the CEE region decreases by 15.9 points to minus 86.3 points in December. The experts seem to be persuaded that the inflation continues to slow down due to the diminishing prices of fuel and food.

Despite the recent cuts of the key interest rate by the ECB – the last reduction by 75 basis points was the strongest in the ECB’s 10 year history – and in spite of the interest rates cuts by some CEE national banks, an increasing majority of the respondents see further rate reductions within the next six months in the Eurozone as well as in all analysed CEE countries. The experts believe a downward movement of the short-term interest rate in Hungary to be most probable. The base interest rate in Hungary has been recently reduced twice, at the end of November and at the beginning of December.

The experts’ view on the development of the stock indices in the surveyed CEE countries with the exception of Croatia and Austria within the next six months improves by double-digit points in December. Though, the balance for the Croatian stock index Crobex rises by only 2.2 points and the balance for the Austrian index ATX increases by 8.1 points, the Crobex and the ATX achieve with balances of 42.2 points and 45.6 points respectively the best assessments among the analysed indices. The balance for the CEE stock index NTX climbs by 11.7 points to 40.9 points. In the current survey the balance for the Romanian stock index BET achieves the highest growth with 24.9 points and now stands at 33.3 points.

The expectations of the analysts for the development of the exchange rates of the CEE currencies to the Euro continue to be very heterogeneous. Above 40 percent of the survey participants predict a depreciation of the Romanian currency Leu and 60 percent expect no change in the exchange rate of the Croatian Kuna to the Euro. The forecast for the Czech Koruna achieves the strongest change compared to the November survey. The balance increases by 32.0 points and turns with 2.0 points slightly positive. Thus, the analysts seem to expect an appreciation of the Czech currency.

In comparison to the six months view on the CEE currencies which we document monthly, we asked the experts within this month’s special question to share their expectations for the exchange rates on a one-year basis. The results show a tendency to a slight appreciation of the CEE currencies until the end of 2009. The experts see an appreciation of the Polish and the Czech currency as most probable. In contrast the exchange rate of the Bulgarian Lev against the Euro should stay unchanged. The Bulgarian government decided to keep the currency board arrangement under which the Bulgarian Lev is pegged to the Euro with a fixed exchange rate until it joins the Eurozone. The expectations of the experts concerning the exchange rates are mainly driven by investors’ judgement on the individual CEE countries, followed by the GDP growth of each country. The majority of the financial market experts do not expect the development of the exchange rates to lead to a relocation of production in 2009.

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