In countries such as Romania (but also Germany) Q2 had a sobering effect on strong (possibly excessive) optimism built up here. In other CEE markets, incl. Hungary, Slovakia and Russia, Q2 GDP data are not yet indicating a soft patch for H2 2014.
That said, risks to the economic sentiment and performance are on the rise. This holds especially true for the Russian economy and it is probable that up to now the impact of the escalation in terms of tit-for-tat sanctions between Russia and the West only had a very limited effect on H1 2014 data.
In a similar context, it has to be stressed that the Russian banking market showed a fairly decent performance in H1 2014, although downsides are clearly on the rise here. In contrast balance sheet growth and asset quality data for H1 2014 in several key CE are drawing a more positive picture. For instance in CE banking markets, loan growth increased to 6% yoy in June 2014, up from levels around 2–3% in December 2013.
Given low inflation in CE economies (we expect average inflation in CE to be around 0.5–1.5% in 2014), lending growth of roughly 5–6% should have a meaningful economic impact in terms of net new lending. For more details on H1 2014 banking sector trends in CEE see also our Focus on section on pp. 2-4. Next week inflation data are likely to be in the market focus as fears of deflation are on the rise on the back of downward pressure on food prices in Europe due to the Russian import ban. Weaker data from the real economy in Poland may foster market bets on a (surprise) rate cut in September.
