The worst financial market crisis in several decades swept across the Central and Eastern European region this summer, but the region held up very well for the most part, says an analysis by Peter Brezinschek, head of economics, Raiffeisen Zentral bank.
Growth forecasts were even revised upwards for Russia and Ukraine. Nonetheless, it is clear that the pace of economic growth slowed somewhat in the second quarter, and it is expected to to see considerably weaker GDP growth rates in 2008. Only Romania and Hungary should see growth rates increase further.
Inflation in most countries has been fuelled by the robust pace of economic activity and the weather conditions. As a result, inflation targets from Russia to Romania and Bulgaria have been exceeded and consumer prices will also be on the rise in 2008 in Poland and the Czech Republic.
Amidst these conditions, the CEE central banks will move in line with the ECB in raising their interest rates through the spring of 2008, with only Hungary moving on a different trend. As the EUR continues to appreciate, most of the CEE currencies should also keep strengthening vis a vis the EUR. Nevertheless, the global liquidity crisis may trigger corrections in some countries marked by current account deficits.
The confidence crisis that is affecting the banking sector and the tight conditions on the overnight fund markets are only affecting countries that borrow abroad. In the CEE, the earnings outlook continues to be good thanks to the robust economic situation, with earnings growth forecast in the double-digit range in many cases. As a result, the stock market indices suffered less than in the spring of 2006. The rebound on the stock market which should continue into the New Year will be favourable for the financial, energy and telecoms sectors.