CEE under the sway of weak net exports and fiscal consolidation

During recent months, little has changed in terms of the fundamental economic situation. While most of the countries in Central Europe (CE) and Southeastern Europe (SEE) are now suffering from the contraction in production as anticipated, the CIS countries are still posting positive growth rates. Nevertheless, growth in these countries has also slowed to levels well below the long-term potential rates.

Economy will bottom out in H1


  • Fiscal consolidation is proceeding
  • Corporate Eurobonds: strong issuance from Russia
  • High liquidity available for equity investments
  • Equal stock and bond weightings


As in the previous quarter, the recession in large parts of the Eurozone is dragging net exports deep into negative territory. Since Q4 2012, GDP growth rates in CEE have also slipped into the red, aside from a few exceptions, as the widespread budget consolidation efforts and the modest increases in real income have hampered domestic demand for quite some time. The available indicators suggest that economic performance will bottom out in the first half of 2013. Consequently, a more significant pick-up in growth throughout Eastern Europe will probably only start during the second half of the year. Growth in Russia and Ukraine was also much less dynamic early this year, compared to 12 months ago. In Austria, a mild improvement in growth will also probably only emerge after the spring quarter.


Fiscal consolidation in Central and Southeastern Europe is proceeding at different speeds. Generally speaking, however, it is true that appetite for CEE government bonds – both for LCY paper and Eurobonds – has increased substantially, due to the extremely low yields in the Eurozone. This will also help ease the financing requirements of these countries as 2013 progresses. The declines in inflation seen throughout the region early in the year should continue until the third quarter. This, in turn, will support some improvement in real incomes in the second half of 2013. For Austria, we also estimate that consumer price inflation will drop below 2 % rom the second quarter, leading to headline inflation of 1.9 % for the year as a whole, which is considerably lower than last year’s rate (2.6%).



Impact on monetary policy and exchange rates


The economic slowdown and the favourable course of inflation have significantly boosted the scope for easing monetary policy. For instance, interest rates in Poland have been lowered more than expected, and the new governor of the central bank in Hungary will also push forward with rate cuts. A modest downward trend in interest rates is even taking shape in Russia. The more pronounced declines in interest.


Impact on the bond and equity markets


Strong foreign demand for CEE government bonds has helped to lower yield levels. We believe that most of the more expansive monetary policy has been discounted in prices. Consequently, we project that yields on government bonds throughout the region will remain broadly unchanged until mid-year. By contrast, we see more potential for the CEE equity markets, where we expect to see indices to rise by between 4% and 9% by the end of Q2. In terms of performance Istanbul should take the lead, followed by Bucharest and Vienna.


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