CEE Outlook | Slowdown on CEE horizon
We let our imaginations run wild and envisage best of all possible worlds. No protectionism? Final solution to Brexit? No fiscal problems in Romania? However, down-to-earth view shows slowdown on horizon, easing inflation and rate stability everywhere but in Serbia.
What if…or living in best of all possible worlds: US and China make trade deal, ending period of protectionism. As a consequence, the drag on GDP begins to fade. Further, regardless of the election outcome, the final solution to Brexit is delivered, bringing relief to markets.
Global industry and production in automotive sector recover scaling up the output in CEE, benefiting Slovakia, which seems to suffer the most from weak German manufacturing. Romania avoids 40% increase in pensions scheduled for September that would avert further deterioration of public finances and the negative rating action. Serbia is awarded another chapter in its accession negotiations.
In down-to-earth world, however, CEE is set to slow. We expect average CEE8 growth to slow to 3.2% next year, from 3.7% in 2019. Backed by strong private consumption, domestic demand should shield the CEE economies from a major slowdown. Investment activity has been benefiting from the ongoing flow of EU funds.
Spreads of 10Y local currency government bonds over German Bunds have been falling in the region in the fourth quarter this year. There is limited space for further spread compression. In Croatia, some further momentum could be gained by the ERM2 entry and subsequent rating upgrades.
Currency markets in the region, albeit capable of large swings, do not show marked mispricing in our opinion.