Central and Eastern Europe

Central and Eastern Europe

CEE currencies

EUR/HUF (light blue):

1 April 2018: President Orban is re-elected. Political uncertainty launches an upward trend in EUR/HUF. The pair leaves the 305/315 sideways trading band.

2 The currencies of both the Czech Republic and Hungary often show inverse correlation with the US dollar. The strong performance of the USD since April/May leads to a weakening of the krona and forint.

3 Markets doubts economic sustainability of Turkey and massively sell the Turkish lira. Hungarian forint (and Czech koruna) suffers collateral damage.

4 Despite strong economic data, Hungarian forint slips because of pressure on emerging countries (Turkey, Russia, etc.).

5 The European Union activates the sanctions procedure (the infamous Article 7) against Hungary, which may ultimately end in the deprivation of voting rights. The effective implementation is highly uncertain because every EU member has a veto. The forint hardly reacts.

6 During a speech, the vice governor of Hungary’s central bank Marton Nagy flags the start of monetary tightening by the central bank. The central bank kept that option on the table when it held its policy meeting just a few days later, further supporting the recent foriny rally.

EUR/CZK (dark blue):

1 Unfortunate combination of pressure on the emerging countries, temporarily reduced liquidity in the run-up to a few holidays and the news regarding a possible reduction in European funding for some Central European countries affects the Czech koruna in the middle of the year.

2 A tough confrontation between Italy's brand new populist government (Lega, 5SM) and Europe seems inevitable. The negative risk climate leads to a collapse of Italian assets and drags along central European currencies, including the krona (and the forint).

3 The currencies of both the Czech Republic and Hungary often show inverse correlation with the US dollar. The strong performance of the USD since April/May leads to a weakening of the krona and forint.

4 ‘Buy the rumor, sell the news': In September, the Czech koruna strongly anticipated more central bank interest rate hikes. The central bank put its money where its mouth is, but the krona no longer benefited from it.

5 Despite multiple rate hikes, the Czech koruna remains under pressure as growth slowed down more than anticipated. Political uncertainty (vote of no confidence) keeps the currency in the defensive also. Meanwhile, prime minister Andres Babis’ government survived the vote.

6 The Czech koruna’s rally amid a constructive risk climate and on prospects of a new rate hike in February by the Czech National Bank, stalls. The recently sworn in CNB governor Holub casts doubt on a February hike after world leading central banks (a.o. the ECB) staged a dovish turn just recently.

7  The Czech koruna strenghtens following better than expected growth (1.0% QoQ) in the fourth quarter of 2018, bolstering the case for more rate hikes from the Czech national bank.

Latest updates on economic growth in the region

Growth surprises on the upside

GDP growth in Eastern Europe surprised to the upside in Q1 2019 according to recently published (preliminary) data, in line with positive growth surprises in the euro area. Still, the growth divergence between Central and Western Europe appears to remain. A general regional slowdown in Central and Eastern Europe, which was expected based on weak business sentiment indicators (PMIs, most prominently) at the beginning of this year, has not been confirmed by the new data.

Real growth accelerated in more than half of the Central and Eastern EU-members that have reported their GDP growth figures so far. Only the Czech Republic, Latvia and Lithuania reported a growth deceleration in quarter-on-quarter terms. Moreover, despite the quarterly slowdown, the Czech economy was still able to grow 2.5% yoy, which is significantly better than, for example, German year-on-year growth of 0.7% in Q1. Although in the past preliminary GDP figures have been subject to later revisions, the basic message looks robust enough to withstand future adjustments: growth remains relatively strong throughout the Central and Eastern European region.

The first quarter´s top economic performer in Eastern Europe was Hungary, which saw real GDP grow by an impressive 5.3% yoy and 1.5% qoq (figure CEE). But other economies in the region (including Bulgaria, Romania and Poland) have also been able to grow faster than 1.0% qoq or 4.0% in annualised terms.

Figure CEE – Real GDP in Central and Eastern European economies (% change quarter-on-quarter)

Source: KBC Economics based on national sources

Although detailed data on the composition of Q1 GDP in Central and Eastern Europe aren’t available yet, we can safely assume that the solid regional economic performance was primarily driven by robust growth in domestic demand. Both the Czech and the Bulgarian statistical offices have suggested that net exports also made a positive contribution to GDP growth. In Hungary, the regional economic tiger, there are also clear indications that growth was boosted by strong household consumption and investments. In this respect, we note one figure in particular: the exceptinoal 48% yoy jump in real construction output in the first quarter, which sends a clear signal of very strong domestic investment activity.

Considering additional macroeconomic indicators like real wage growth or the unemployment rate, it now becomes very hard to deny that the Hungarian economy is showing signs of overheating. As a result, the already existing pressures on the National Bank of Hungary to tighten its monetary policy may intensify. In our opinion, though, policymakers will not immediately give in to the various external pressures at their May meeting. Rather, the central bank is more likely to deliver the next interest rate hike in June.

All in all, fresh GDP readings from Central and Eastern Europe surprised on the upside. From a longer-term perspective, the region clearly outperforms compared to the sluggish growth trend in the euro area. For the rest of this year, we expect sustained solid economic growth in the region with GDP being driven primarily by strong domestic demand. This demand will be fed by robust wage growth, policy stimulus (e.g., the Polish fiscal expansion) and strong investment activity (supported by the ongoing inflow of EU funds).

Latest updates on economic growth in individual countries

Bulgaria - Economic update May 2019

201905 Bulgaria - Economic update

Slovakia - Economic update May 2019

201905 Slovakia - Economic update

Czech Republic - Economic update May 2019

201905 Czech Republic - Economic update

Hungary - Economic update May 2019

201905 Hungary - Economic update

Forecasts for the Central and Eastern European countries in numbers:

In-depth credit reviews

In depth review: Slovakia

MR20181218 In depth review: Slovakia

Most recent publications on Central and Eastern Europe:

Hard Brexit will make Central European economies bleed

EO20190328 Hard Brexit will make Central European economies bleed

EU funding for Central and Eastern European regions remains essential

EU-fondsen voor Centraal- en Oost-Europese regio’s blijven noodzakelijk

Diversity in European income trends...but education pays off everywhere

Geen eenheid maar diversiteit in Europese inkomenstrends
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