Coronavirus weighs on economic outlook
Spread of virus to Europe resulted in drastic reaction of markets and made major central banks react. In response to series of downward revision of global growth, we put our CEE growth forecast under revision as well and see it around 0.3pp lower on average with country-specific revisions going to as much as 0.5% (Romania) or even above (Croatia). The risks remain skewed to the downside.
The dynamic spread of SARS-CoV-2 globally will result in a more negative impact than earlier anticipated when the virus was assumed to be contained in China. Among others, the OECD cut this year’s forecast for global growth by 0.5pp to 2.4% and by 0.3pp to 0.8% for the Euro Area. The weaker global demand will take its economic toll on CEE economies, especially the most open ones. The presence of SARS-CoV-2 in Europe will certainly have its impact on domestic demand in CEE through lower investments, denting consumer confidence and potential quarantine measures, primarily hitting the sector of services. The final economic costs of the Coronavirus will strongly depend on how quickly countries manage to contain the spread of the virus and reduce the fear factor. If it is not contained in the foreseeable future, we could see further decreases in global economic activity that could translate into an even bigger slowdown of the growth in CEE.
Markets started reacting very drastically to SARS-CoV-2 fears after evident signs that it is spreading in multiple places outside of China. In the final week of February and early March, stock markets were hit strongly, and the VIX index went up. As interest rate expectations lowered globally, regional rate outlooks followed, especially in Czechia and Poland. Despite the jitters, local currencies performed rather well in the emerging market universe.
As for yields, we already cut our 10Y forecast for Poland after the recent declines. We see downward risks in Czech yields, too. In Hungary, as the HUF bond supply was rather strong at the beginning of the year to refinance FX debt, yields could not decline as much as in Poland. Nonetheless, if major market yields fail to recover, downward pressure on Hungarian yields could start to mount, too. In Romania, the uncertain fiscal outlook makes it difficult to cut the yield forecast.