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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