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2022/12/02 / Erste Group Research

Is the region heading into stgflation scenario?


Next year, CEE economies are expected to slow visibly, with the annual growth rate averaging 0.7%. At present, we forecast a full-year contraction only in Czechia (-0.5%). Hungary and Poland are likely to stagnate, while other countries in the region are expected to grow between 1% and 2% in 2023. Several CEE countries likely slipped into technical recession already in the third quarter of 2022, as suggested by negative q/q flash GDP estimates and the club could be expanded at the turn of the years 2022 and 2023.There are signs suggesting that inflation may be close to a turning point, but it will remain elevated throughout the whole of 2023. The inflation rate should begin to fall more visibly only in the second half of 2023, however, and before that happens, it will remain double-digit in most of the countries, keeping the 2023 CEE average at 11.6%. The return toward the inflation targets will begin only throughout 2024. No growth in combination with high inflation suggest the stagflation scenario. The last puzzle, however, is the labor market. The stagflation scenario includes high unemployment rates, but this is not what we currently see happening in CEE. The labor market has never been tighter, we thus expect only a meager increase in unemployment rates in the coming quarters.

The main culprit behind the weakening outlook is private consumption. Consumer confidence has been plummeting lately, as high inflation and the interest rate environment have pushed the cost of living up substantially. The evaluation of general economic conditions over the next 12 months has never been so low and the financial situation of households is expected to worsen visibly in a one-year horizon. Soaring energy bills remain a major concern. Further, leading indicators such as the Economic Sentiment Indicator suggest underlying weakness of both the industry and service sectors. The worsening global outlook and weak external demand dampen the prospects for recovery.

The inflation rate should begin to fall more visibly only in the second half of 2023, however, and before that happens, it will remain double-digit in most of the countries, keeping the 2023 CEE average at 11.6%. The return toward the inflation targets will begin only throughout 2024.

We still expect the Serbian central bank to tighten monetary conditions and one extra hike is also possible in Romania, though it is not our baseline scenario. Other central banks have already announced the end of their rate hiking cycle. The Hungarian central bank should keep the one-day deposit rate at 18% as long as the pressure on their currency is maintained. Having the Recovery Plan accepted by the end of the year, even under conditionality, could be a factor helping to begin with rates normalization. At this point, we expect the one-day deposit rate and key interest rate to be merged during the first half of the year. The Czech National Bank could be another CEE central bank to cut interest rates next year and begin with easing in the third quarter of 2023 if the inflation development in the projection horizon is sufficiently encouraging.

The correction on the bond market began at the end of October. At that time, long-term yields began to reverse the hefty (100bp or higher) increases from the beginning of the month. O As for the outlook, signs of easing inflationary pressure on the core markets and expectations for a lower pace of monetary tightening by the Fed and ECB favor a lower level of yields. Finally, the end of monetary tightening in the region should also support a further decline of long-term interest rates in the months ahead.

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General information

AuthorErste Group Research
Date2022/12/02
Languageen
Product nameCEE Country Macro Outlook
Topic in focusFX, Macro/ Fixed income
Economy in focusCEE
Currency in focus-
Sector in focus-
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