Central and Eastern Europe

Central and Eastern Europe

CEE currencies

EUR/HUF (light blue):

  1. 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.
  2. Markets doubts economic sustainability of Turkey and massively sell the Turkish lira. Hungarian forint (and Czech koruna) suffers collateral damage.
  3. Despite strong economic data, Hungarian forint slips because of pressure on emerging countries (Turkey, Russia, etc.).
  4. 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.
  5. 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.
  6. The forint rallies as markets expect the central bank to start policy normalisation. The central bank indeed raised interest rates in March but said it would be a one-off rather than the start of a hiking cycle. She went even further and announced more monetary stimulus. The Hungarian forint lost all earlier gains

EUR/CZK (dark blue):

  1. 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.
  2. ‘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.
  3. 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.
  4. 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.
  5. 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.
  6. The Czech koruna slips after a poor print of business confidence in Germany, a crucial trade partner of the Czech Republic. The currency recovered soon after before losing ground again in May as a broad risk-off wave flushes markets.

Latest updates on economic growth in the region

Economic performance throughout the Central and Eastern European region remains impressive. However, the strong GDP growth in the Q1 2019 is somewhat surprising given the more pessimistic economic outlook for the global economy, particularly in the European and German economies. Domestic factors are bolstering growth in the region, but moreover the region appears to be strongly resilient to international factors. Domestic factors are expected to develop favourably in the near future. In particular, the tightness of regional labour markets will continue to give a boost to domestic consumption as wage growth remains high and employment grows (also see Box 3). Investments remain strong, as they partly compensate for the lack of labour and aim to increase future capacity. Moreover, the construction sector is booming, reacting to favourable real estate price developments as well as to policy interventions. 

Nevertheless, development in the international context will ultimately become an important determinant of economic evolutions in Central and Eastern Europe. There are clear signs that the outlook for industrial output is less optimistic. The expected recovery in the German and European economy is hopeful news for the region. But the continued uncertainty and possibly extremely distorting impact of a hard Brexit and a US-EU trade conflict is causing substantial risks to the region. For now, this is only visible in soft indicators like business sentiment surveys. However, it remains to be seen whether the domestic factors are strong enough to continue to offset the negative international factors.

Box 3 – Tight, but different labour markets in the region

The sustained trend of falling unemployment remains the most striking feature accompanying a long period of economic growth in the Central and Eastern European region. Despite some recent slowing down in economic activity, labour markets continue to be extremely tight. Between June 2018 to March 2019, all EU member states in the region hit a 10-year low in their monthly unemployment rate: Poland in June 2018, Romania and Croatia in September 2018, Lithuania and Latvia in October 2018, Bulgaria and Slovenia in November 2018, Estonia in December 2018, Czech Republic in February 2019, and, finally, Slovakia and Hungary in March 2019.

Rising tensions on the labour market caused significant wage acceleration. Compared to the period 2009-2013, wage growth has been exceptionally high. From a corporate perspective this is sometimes perceived as a potential risk to international competitiveness, but from a domestic economic perspective, this trend had a clear positive impact on economic development in the region. A comparison of hourly labour cost across the EU highlights the region´s comparative advantage as relatively cheap labour has been maintained despite recent wage increases.

Employers have been signalling that the scarcity of labour is currently causing a slowdown in production as orders cannot be accepted. However, companies seek a variety of solutions or the lack of suitable labour. In order to avoid increasing production costs due to higher labour costs, companies have invested in new labour saving technologies. However, substituting people with machines is expensive and only possible to some degree. Firms have been relying more on foreign workers too, but there are clear natural (language, suitable skill sets…) and administrative/legal barriers to this solution.

At first glance, all countries in the region seem to be confronted by the same labour market issues. However, there appear to be substantial differences within the region in terms of labour market features. A more detailed look reveals some interesting features. First, despite low unemployment rates throughout the region, there is substantial variation in the deviations from the long-term average trend (figure B3). In the Czech Republic, the seasonally adjusted total harmonised unemployment rate reached 2.0% in March 2019, the lowest level in the EU. Hungary, Poland and Romania reported a HUR between 3.4% and 3.9%. Estonia, Slovenia and Bulgaria followed with figures between 4.1% and 4.6%. Slovakia and Lithuania (5.7% and 6.0 %), Latvia (6.4 %) and Croatia (7.4 %) also showed a lower HUR than the euro area (7.7 %). If one compares these March figures with the long-term averages (period January 2000 till March 2019), it is clear that all countries in the region benefit from exceptionally low unemployment figures at this moment.

However, the extent to which current figures are exceptional differs substantially across the region. In Slovakia and Poland the gap between the current and long-term average figure equals 8 percentage points, in Bulgaria and Croatia 6 percentage points, in Latvia, Estonia and Lithuania 5 percentage points, in Czech Republic and Hungary 4 percentage points, and in Romania and Slovenia 3 percentage points. For comparison, in the euro area as a whole, the difference is only 1.7 percentage points.

Secondly, countries also differ in terms of the unemployment rate of males versus females. In descending order, in Croatia, Slovenia, Slovakia, Czech Republic, Hungary, Estonia and Poland have a higher unemployment rate for females than for males. In Bulgaria, Lithuania, Romania and Latvia, the unemployment rate for females is lower than for males. This striking differences can be explained by different economic specializations in the region, but in particular by substantial emigration of males in some countries.

Finally, youth unemployment (persons aged 15-24 years) differs across the region. Looking at the previous 12-month average figure, youth unemployment is higher than total unemployment in all countries. Compared the euro area, where youth unemployment exceeds total unemployment by 8.6 percentage points, the difference is smaller in most Central and Eastern European countries. It is smallest in Slovenia (3 percentage points), followed by Czech Republic and Lithuania (4 percentage points), Estonia (6 percentage points), Hungary and Slovakia (7 percentage points), and Poland and Bulgaria (8 percentage points). Clearly, the tight labour markets in the region is good news for the job prospects for young people too. Only in Romania (13 percentage points) and Croatia (14 percentage points) the difference between youth unemployment and total unemployment is substantially larger than the euro area average.

Figure B3 – CEE unemployment rates significantly below long-term averages (harmonised unemployment rate, in %)

Source: KBC Economics based on Eurostat

Latest updates on economic growth in individual countries

Bulgaria - Economic update June 2019

201906 Bulgaria - Economic update

Slovakia - Economic update June 2019

201906 Slovakia - Economic update

Czech Republic - Economic update June 2019

201906 Czech Republic - Economic update

Hungary - Economic update June 2019

201906 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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