ZEW-Erste Group Bank Sentiment Indicator for Central and Eastern Europe (CEE): CEE Indicator Declines – Economic Sentiment Remains Positive

The upward trend of the economic sentiment indicator for Central and Eastern Europe (CEE) is interrupted for the time being. The indicator that reflects the economic expectation within a six month time horizon for the CEE region drops 20.0 points. However, the indicator remains positive at 30.9 points. The sentiment indicator is calculated monthly by the Centre for European Economic Research (ZEW), Mannheim, with support from the Erste Group Bank, Vienna.

The sharp decrease of the CEE indicator can be put into perspective considering that 47.3 percent of the survey participants expect that the economic development in the CEE region will remain unchanged. Furthermore, the assessment of the current economic situation in the CEE region improves. The respective indicator climbs 8.5 points to minus 48.1 points in November. The economic expectations for Austria and the Eurozone as a whole undergo a downward adjustment in November as well. The sentiment indicator for Austria decreases 3.3 points to 47.8 points. The indicator for the entire Eurozone looses 8.3 points and low equals 48.3 points.

Similar to the evaluation for the CEE region the assessment of the current economic situation for Austria and the Eurozone improves. The Austrian balance gains 10.2 points reaching minus 23.9 points. The respective balance for the Eurozone slightly increases by 0.8 points to minus 42.6 points.

The inflation expectations of the financial market experts for the CEE region, Austria and the Eurozone develop similarly in November. The respective indicators increase for the second month in a row by double digit percentage points. The majority of analysts expect constant inflation rates for the CEE region as a whole and increasing inflation rates for Austria and the Eurozone.

50.9 percent of the polled experts predict unchanged short term interest rates in the Eurozone.

The expectations for the stock market development remain optimistic. More than 40 percent of the analysts forecast that the stock indexes for the CEE region (NTX), Austria (ATX) and the Eurostoxx 50 will develop positively within the next six months.

Croatia

After the positive development in the last months the business outlook for Croatia deteriorates in November. The indicator falls 18.9 points to 12.8 points and reaches the lowest value in country comparison. In contrast, the evaluation of the current economic situation improves. The respective indicator gains 10.2 points to minus 51.1 points.

The forecasts of the analysts for the development of the Croatian stock market are the most positive in the current survey. The respective indicator decreases indeed. However, with 18.6 points it still represents the best value among the analysed countries. The expectation that the Croatian currency will depreciate against the Euro strengthens in November.

Poland

Poland maintains its leading position with regard to both economic expectations and evaluation of the current economic situation. The economic sentiment indicator decreases slightly by 1.0 point and equals now 45.0 points. The balance that reflects the assessment of the present state of the economy increases significantly by 13.0 points. With minus 9.4 points it represents the best value in country comparison.

A clear majority of the polled experts (56.9 percent) still assigned the Polish currency the highest appreciation potential.

Romania

The economic expectations for Romania drop 3.5 points to 22.0 points in November. Although this is the second lowest value in country comparison, 50.0 percent of the survey respondents expect an improvement of the economic situation in Romania within the next six months. Nevertheless, the current economic situation is assessed the most cautious among the analysed countries. The corresponding balance falls 5.2 points to minus 76.0 points.

62.8 percent of the analysts predict a reduction of the short term interest rates by the Romanian national bank within the next half year.

Slovakia

The business outlook indicator for Slovakia decreases 6.1 points in November and now equals 30.0 points. However, the assessment of the current economic conditions improves considerably by 20.1 points to minus 41.2 points.

The survey participants evaluate the perspectives of the Slovakian stock market index SAX rather carefully. The according indicator remains nearly unchanged at a level of 2.4 points.

Czech Republic

The economic expectations for the Czech Republic decrease in the November survey by 2.8 points. With a value of 38.4 points the indicator still belongs to the highest in this category. The assessment regarding the current economic situation ameliorates by 4.6 points and reaches minus 32.7 points. That is also one of the highest values among the analysed economies.

53.0 percent of the polled analysts expect an increase of the inflation rate in the Czech Republic with regard to the next six months. The corresponding balance climbs 26.1 points reaching 44.8 points, which is the highest value in this category.

The majority of the survey participants expect this month again that the Czech currency will appreciate against the Euro within the next six months.

Hungary

The upswing of the economic expectations for Hungary is interrupted in November. The sentiment indicator drops slightly 2.0 points to 34.6 points. The assessment of the current economic situation remains generally unchanged. The respective indicator ranges at minus 69.6 points. Contrary to the other analysed countries the majority of experts predict a decreasing inflation rate in Hungary within the next six months. The respective indicator falls 14.4 points to minus 28.4 points.

After the last cut of the key interest rate by the Hungarian national bank on October 20, 77.1 percent of the survey participants still expect further interest rate reduction.

Special Question

Within the scope of the special question the financial experts have been asked for their assessment of the effectiveness of different instruments to counteract the budget deficits expected for 2009 in the CEE countries.

Spending cuts by the government are evaluated especially effective. In contrast, the majority of experts assess an increase of the value added tax (VAT) as neutral in its effect. Privatisations are seen as rather ineffective by the experts. The majority of survey participants expects the Czech government to succeed in reducing the budget deficit by end of 2010 compared to 2009. On the contrary the experts assess the prospects of the Croatian government rather sceptically.

Survey Procedure and Methodology

The Financial Market Survey CEE is a survey carried out by ZEW Mannheim and the Erste Group Bank AG Vienna, among financial market experts and has been conducted monthly since May 2007. The target of this survey is to develop indicators describing the economic conditions in Central and Eastern Europe (CEE) as well as in Austria.

The CEE region observed in the survey consists of Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia and Slovenia.

The financial experts are questioned on their evaluations of the current business situation, the medium-term prospects of the respective economies and their expectations as to the development of the inflation rate, the short- and long-term interest rates, the exchange rates and share prices on a six month time horizon.

The analysts' assessments reflect the qualitative direction of the estimated changes.

Among the analysed economies are the CEE region, the Eurozone as well as the Czech Republic, Poland, Hungary, Slovakia, Croatia, Romania and Austria.

The monthly "Financial Market Report CEE" contains the results for every Central and Eastern European country in detail.

For further information please contact

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