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Central European Weekly

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Surprisingly strong industrial output helps the zloty

Mon, Oct 26 2009, 13:41 GMT
by KBC Market Research Desk

KBC Bank

Czech Republic

Parliament passes the state budget for 2010 in its first reading.

Hungary

Very weak retail sales point to slow recovery

Poland

Surprisingly strong industrial output helps the zloty

The Week Ahead

Polish central bank is returning to a neutral mode

Overview

Bullish market sentiment contrasts with the bleak real economy

Last week, the trend on Central European bond and forex markets in place since the beginning of this month continued. With the exception of the Czech koruna, Central European currencies are still faring well and government bonds are performing even better, with prices sharply higher. The governments of all of the Central European countries used this favourable constellation to patch their budget deficits and quickly subscribe quite significant amounts of government bonds in both domestic and foreign currencies.

The bullish sentiment in most Central European markets contrasts with the macroeconomic developments in the region. While the industrial output in Central Europe has improved slightly over the last two months, it is far from the recovery witnessed in regions like South-East Asia or Latin America. We see two possible explanations for this phenomenon. First, Central Europe, unlike the above-mentioned emerging markets, neither benefits from the growth generated by the Chinese ‘engine’, nor profits from the restored improvement in commodity demand. Secondly, numerous Eastern European economies (including Central European ones) have experienced a rapid credit boom in recent years, which fuelled private consumption. However, the rise in loans across the region has dramatically decelerated (in some cases, it is even negative), and this continues to affect the development of private consumption and consequently of economic growth.

Hence, if Central Europe were to approach its previous growth rate, in the short term, it would only be foreign (i.e., Western European) demand that would again set the engine of Central European economies in motion.

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Published on  Tue, Oct 27 2009, 06:54 GMT