ZEW-Erste Group Bank Sentiment Indicator for Central and Eastern Europe (CEE) - Positive economic development in the CEE region expected

The financial market experts surveyed monthly by the Centre for European Economic Research (ZEW), Mannheim, supported by the Erste Group Bank AG, Vienna, are considerably more optimistic about the economic development in Central and Eastern Europe (CEE) at the beginning of the new year than in December 2008. The CEE indicator reflecting the analysts’ economic expectations on a six month time horizon increases significantly by 15.0 to minus 49.1 points in January 2009. Hence, the economic prospects have improved for the first time since the aggravation of the financial crisis in September 2008.

Except for Hungary and Romania the six months forecasts for all analysed CEE countries have improved. The sentiment indicator for Austria increases by 9.6 points to minus 40.5 points and the indicator for the Eurozone rises by 7.2 points to minus 42.0 points.

In contrast, the assessment of the current economic situation worsens in January. Not a single financial expert considers the current economic situation in the CEE region to be "good". Instead, 57.4 percent of the survey participants appraise the present circumstances in CEE as "bad". Regarding the Eurozone, the picture is quite similar. Nearly 65 percent of the analysts assess the current economic situation in the Eurozone to be "bad".

In the wake of the current recession and diminished price risks many CEE National Banks as well as the European Central Bank (ECB) were cutting interest rates. In line with the outcome of the December-survey, a clear majority counts on a further ease of the pricing pressure in Europe. Consequently, the survey participants expect further reductions of the interest rates in the CEE countries as well as in the Eurozone.

With regard to the CEE region as a whole, more than 90 percent of the analysts anticipate a decline of the inflation rate. Nonetheless, fewer experts than in December expect falling interest rates in the individual countries. In the case of some states, as for Romania and Hungary, the share of the participants assuming a higher inflation rate even grows. While in Romania 2.1 percent of the analysts expected an increasing inflation rate in December, this share rises to 10.2 percent in January. For Hungary it increases from 3.9 percent in December to 7.5 percent in January.

The proportion of the experts considering a decline of the inflation rate most probable recedes by 8.5 percentage points for Austria. Thus, according to the respondents, the expected recovery of the CEE business cycle in the second half year is connected to an increasing pricing pressure.

The experts’ view on the development of the stock market indices within the CEE countries on a six month time horizon remains positive in January. Solely the balance for the Romanian stock index BET turns slightly negative in January (minus 2.4 points). As to the CEE stock index (NTX), 47.7 percent of the analysts forecast an ascent for the coming half year. The results for the Austrian stock index ATX are quite alike, 47.8 percent of the analysts counting on an increase of the corresponding share prices.

The respondents’ expectations for the exchange rates of the CEE currencies compared to the Euro are still heterogeneous. Consistent with the December survey, approximately 40 percent of the participants anticipate a depreciation of the Romanian Leu. By contrast, nearly 45 percent consider an upward revaluation of the Polish Zloty to be most probable. While 19.1 percent of the experts forecast an appreciation of the Croatian currency 33.3 percent expect a depreciation of the Kuna compared to the Euro.

This month’s special question deals with the financial experts’ assessments concerning the effectiveness of the EU stimulus package and necessary measures to overcome the economic downturn in Central and Eastern Europe.More than 90 percent of the participants judge the prospects of the stimulus programme as "low" or "medium", both with regard to the CEE region and the Eurozone. Still, 73 percent of the analysts hold the view that the individual CEE governments should support the real economies by launching economic stimulus packages. For this purpose, they recommend increased public spending on infrastructure and tax reductions. However, subsidising household spending on specific goods is not advisable according to the majority of the financial experts. With respect to the importance of National Banks for supporting the CEE real economies, the analysts’ valuations are mixed. The majority of the financial experts hold the view that the scope of monetary policy is of "medium size".

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