CEE Economic Outlook
Zoltan Arokszallasi
FX and Rate Strategist, CEE
Erste Bank Hungary
GARP, Budapest Chapter
27 February 2020
CEE economic outlook – still faster than the
Euro Area
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
CEE EurozoneSource: Erste Group Research
Real GDP growth (percent)
3
Source: Bloomberg
CEE economic outlook – external demand
outlook looks challenging
40
42
44
46
48
50
52
54
56
58
60
Jan-19 Apr-19 Jul-19 Oct-19 Jan-20
Czechia Hungary Poland
36
38
40
42
44
46
48
50
52
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
Jan-19 Apr-19 Jul-19 Oct-19 Jan-20
German industrial orders (y/y, lhs) German Manuf PMI
German industrial outlook is bleakPMIs in CEE seem to stabilize or
improve
CEE economic outlook – retail sales mostly
better than industry
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
CZ HR HU PL RO SK SI RS
2019-Aug 2019-Sep 2019-Oct 2019-Nov 2019-Dec
-8
-6
-4
-2
0
2
4
6
8
10
CZ HR HU PL RO SK SI
2019-Aug 2019-Sep 2019-Oct 2019-Nov 2019-Dec
Source: Bloomberg
Industrial output (y/y, percent) Retail sales (y/y, percent)
5
CEE economic outlook – key role of domestic
demand to remain
-4
-2
0
2
4
6
8
2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020
Croatia Czechia Hungary Poland Romania Slovakia Slovenia Serbia
Household consumption Investments External balance Real GDP
Source: Erste Group Research
GDP growth contributions
(percentage point)
Services help the external balance in CEE –
and its not just tourism
Change of goods, services balances
and the current account (% of GDP,
2010-2018)
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Czechia Slovakia Hungary SloveniaRomania Poland Croatia
Goods Services Current account
Source: Eurostat
Export of telecommunications,
computer and information services
(% of total services export)
0
5
10
15
20
25
CZ HR HU AT PL RO SI SK RS
2013 2018
Unit labor costs are still relatively low
Source: Eurostat
ULC in manufacturing relative to
Germany (%, 2018 vs 2008-dots)Labor costs and productivity in
manufacturing (2018)
105%
50%
60%
70%
80%
90%
100%
Ge
rma
ny
Cze
chia
Cro
atia
Hu
ng
ary
Po
lan
d
Ro
ma
nia
Slo
ve
nia
Slo
va
kia
Sp
ain
Po
rtu
ga
l
0%
20%
40%
60%
80%
100%
0
5
10
15
20
25
30
Ge
rma
ny
Cze
chia
Cro
atia
Hu
ng
ary
Po
land
Ro
ma
nia
Slo
ve
nia
Slo
va
kia
Gre
ece
Sp
ain
Po
rtu
ga
l
Labor cost per person (EUR per hour)Labor productivity per hour (rhs, % of Germany)
Private indebtedness still at low levels in CEE
0
50
100
150
200
250
300
350
400
450
500R
om
ania
Lithu
ania
Pola
nd
Slo
ven
ia
Latv
ia
Hung
ary
Gre
ece
Slo
vakia
Cze
ch R
ep
ub
lic
Germ
any
Italy
Esto
nia
Austr
ia
Cro
atia
Bulg
aria
Spa
in
Euro
are
a 1
9
Fin
land
Port
ug
al
United
Kin
gd
om
De
nm
ark
Fra
nce
Belg
ium
Sw
ede
n
Ma
lta
Ne
the
rla
nds
Ire
land
Luxe
mb
ou
rg
Households debt, % of GDP Non-financial corporations debt, % of GDP
Source: ECB Data Warehouse, Erste Group Research
Public debt ratios are set to decline in all CEE
countries but Romania
9
Public debt/GDP (2024F) Public debt/GDP (2030F)
Source: European Commission
Rating developments were mostly favorable,
outlook is also positive in many cases
Source: Bloomberg, Erste Group Research
Car sector in CEE – ongoing disruption by
electric sales
0.2% 0.3% 0.5% 0.7% 1.0%2.0%
20.9%31.2%42.4%
2.4%5.4%
13.9%
4.0% 4.6% 6.5% 5.1% 6.7% 8.9%
31.4%29.0%25.9%
5.1% 6.3% 7.7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2017 2018 2019 2017 2018 2019 2017 2018 2019 2017 2018 2019
CEE* Rest of EU Norway Netherlands
Petrol Diesel BEV Other alternative
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
201720182019201720182019 201720182019201720182019
CEE* Rest of EU Norway Netherlands
Petrol Diesel BEV Other alternative
Source: acea.be
* CEE is Czechia, Hungary, Poland, Romania, Slovakia and Slovenia
Number and share of new car registrations
by fuel type
Car sector in CEE – producers and
comsumers have to adapt to new regulations
Falling demand for diesel cars (-17% y/y in 1H2019)
EU cities restricting access of older diesels into city
zones
- 24 European cities, with inhabitants of 62m people,
are banning diesels over the next decade
- Tightening of restrictions until 2025 (Zero Emission
Zones)
- 12 cities have committed to ban entering the city with
a fossil fuel car by 2030
Ban on sales of petrol and diesel cars
2025 – Norway
2030 – Denmark, Ireland, Iceland, Netherlands, Sweden
2040 – France, UK (Scotland: 2032)
Coronavirus – spreading outside of Mainland
China gained speed
Source: Coronavirus COVID-19 Global Cases by Johns Hopkins CSSE, Erste Group Research. Only for illustration purposes – simulated paths are NOT the forecasts of Erste Group!
Difficult to model the
spreading of the virus in
the continuously changing
environment:
- Quarantines imposed
- Effectiveness of
measures vary across
areas
- Latency of cases
- Misreporting
(Functional form:
N * exp(-b*exp(-t/c) )
2020.02.10:457 cases (RoW)
2020.02.23: (last obs.)2047 cases (RoW)
0
25,000
50,000
75,000
100,000
2020.01.22 2020.02.11 2020.03.02 2020.03.22 2020.04.11
Mainland China RoW Mainland China - simulated RoW simulations
N = 250K
N = 90K
N = 50K
N = 25K
N = 90K
Coronavirus – oil markets seems to price in
long-term effects (contango disappearing)
0.460.53
0.07
1.03
0.89
0.17
1.23
0.64
0.06
0.0
0.5
1.0
1.5
10 Feb 2020 18 Feb 2020 24 Feb 2020
3M 6M 9M
Forward price premium over the spot price on
the WTI oil market (USD per barrel)
Source: Bloomberg. Prices as of 24 Feb
Coronavirus – CEE did not feel the impact, so
far
Source: OECD TiVa, Trademap, Erste Group Research
Value added in car manufacturing
(2015)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
CZ HU SK PL
Domestic rest of Europe China rest of Asia Others
0%
5%
10%
15%
20%
25%
30%
35%
40%
Czechia Croatia Hungary Poland Romania Slovakia Slovenia Serbia
Electrical machinery and equipment Machinery and mechanical appliances
Iron, steel and articles thereof Copper and articles thereof
Share of imports from China
(% of total imports from the world)
CEE monetary policy – inflation is on the rise,
but base effects play a large role in this
16
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
CZ HU PL RO RS
Core inflation as of Jan-18, Jan-19 and Jan-20
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
CZ HU PL RO RS
Headline inflation as of Jan-18, Jan-19 and Jan-20
Source: Erste Group Research
CEE monetary policy – labor market pressure
seems to be easing in a few countries
17
0
10
20
30
40
50
60
70
80
HR CZ HU PL RO SK SI
2018-Q1 2018-Q2 2018-Q3 2018-Q4 2019-Q1 2019-Q2 2019-Q3 2019-Q4 2020-Q1Source: European Commission
Labor as a factor limiting output in the
manufacturing sector
CEE monetary policy – relative FX moves are
explained well by different rate environments
18
Source: Bloomberg. Prices as of 24 Feb
Depreci-
ation
Appreci-
ation
Relative change vs EUR Interest rates (percent)
0.95
0.96
0.97
0.98
0.99
1
1.01
1.02
1.03
1.04
2020.01.01 2020.01.15 2020.01.29 2020.02.12
CZK HUF PLN RON
0
1
2
3
4
end-2019 24 Feb2020
end-2019 24 Feb2020
end-2019 24 Feb2020
end-2019 24 Feb2020
CZ HU PL RO
3M interbank 3X6 FRA
Croatia has the most credible aspirations for
becoming next Eurozone member
2018
Strategy for joining Euro Area was approved
Croatia complies with Maastricht criteria
2019
Closer cooperation with Banking Union will be set up
2020
Entering Exchange Rate Mechanism-II
2023-2025
Final assessment and becoming member of Eurozone
Macro forecasts
Source: Bloomberg, Erste Group Research
Market forecasts
21
Source: Bloomberg, Erste Group Research. Prices as of 24 Feb
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