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2022/09/15 / Erste Group Research
CEE | Winter is coming

Winter is coming

Weakening external environment, market sentiment pointing to contraction in the industry sector, plummeting consumer confidence to levels last seen during the 2012 recession bring growing concerns that part of the region will face technical recession in the second half of the year. Recent economic developments force also a major downward revision of 2023 GDP growth across the region, with the CEE8 average growth dropping to 1.3% next year, from the previously expected 3%. Distress over the gas supply during the coming winter only adds to the already high level of uncertainty and concern. Although the level of gas storage seems reassuring at this point, the price for energy security is high; there are non-negligible risks of a stagflation scenario in Europe.

Compared to the beginning of the year, the inflation rate is up 5 percentage points in Serbia and as much as 7 percentage points or more in Romania, Czechia and Hungary. The peak of inflation is still ahead in many CEE countries, however, as costs of housing are expected to rise substantially, with higher electricity prices fully hitting households and businesses only over the coming quarters. Governments intervened with different forms of the anti-inflationary programs. Introduced policies protect the most vulnerable, but they remain pro-inflationary in their nature, wiping off some of the effects of monetary tightening.

Skyrocketing inflation, with its risks of wider second-round effects and concerns around de-anchored inflation expectations, keeps the central banks busy. Whereas the Czech central bank seems to have reached the peak of its tightening cycle at 7%, and Polish central bank is close to the end of interest rate increases, other central banks are likely to continue hiking rates in the near term. Apart from interest rate increases, the HUngarian central bank decided to introduce additional measures to reduce interbank liquidity and increase the effectiveness of its transmission mechanism.

Volatility has been the name of the game for free-floating CEE currencies in 3Q22 as well. Although the movements were not as pronounced as earlier in the year when the war in Ukraine broke out, the forint and zloty have weakened by around 14% and 4% compared to the end of June, respectively. On the other hand, the koruna and leu have seen mild appreciation – though both have benefitted from central bank interventions, especially the former. Going forward, external developments will likely dominate and weigh on CEE currencies in the near term. However, as these subside, the fundamentals point to a gradual appreciation of most of them.

Although government bond yields on major markets continued to head north during the summer, on rising expectations of earlier and bolder actions needed from both the FED and ECB, yields on LCY bonds corrected in all CEE countries except for Hungary.

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General information

AuthorErste Group Research
Product typemonthly/ quarterly
Product nameCEE Country Macro Outlook
Topic in focusFX, Macro/ Fixed income
Market cap-
AvailabilityAll [1]

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