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2019/03/14 / Erste Group Research

What is up in CEE? 1Q2019

Domestic demand should soften the slowdown in GDP growth this year. Not all CEE countries have managed to build sufficient fiscal space. Czech and Hungarian central banks will likely tighten monetary conditions this year.

Signs of a considerable economic slowdown were undoubtedly coming in the last few months from the Euro Area. Such a development is negative for small, open and export-oriented economies such as CEE countries. So far, it has been reflected in the weakening market sentiment, as PMI in the Czech Republic and Poland went below 50. Hungary seems to be resilient to this trend.

Despite this, economic growth remained strong in 4Q18. The first monthly indicators of the year point to a relatively good start to 2019. Retail sales rebounded substantially in many CEE countries in January and industrial output also performed well (apart from Romania, where industry fell 1.6% m/m and barely managed to stay above zero in annual terms in January). Does this mean that sentiment indicators are not reliable predictors of economic performance?

While leading indicators, such as PMI, or the Economic Sentiment Indicator (ESI), can be useful in early detection of a trend change, they are among many factors determining the performance of the economy. Having said that, a simple prediction of GDP growth based on sentiment indicators suggests that, according to PMI only, the growth dynamics should already be much lower. In other words, there seems to be much more pessimism in accessing the economic situation using the PMI index compared to how the economy is really doing. On the other hand, ESI seems to overestimate the GDP growth. Looking country by country, PMI and ESI in industry seems to show the GDP trend quite accurately in the Czech Republic and underestimating it in Poland and Hungary, while ESI proves to have quite accurate estimates in the case of Hungarian GDP, while being too optimistic in the cases of the Czech Republic and Poland. All in all, sentiment indicators are worth watching as signs of possible change, but should be treated with caution.

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General information

AuthorErste Group Research
Product nameCEE Economies Special Report
Topic in focusFX, Macro/ Fixed income
Economy in focusCroatia, Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia, Slovenia
Currency in focusCroatian Kuna, Czech Koruna, Euro, Hungarian Forint, Polish Zloty, Romanian Leu, Serbian dinar
Sector in focus-


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