Czechia and Hungary suffer from unbalanced recovery

On the radar

• In Slovenia, industrial production grew marginally by 0.3% y/y in July.

• In Croatia, tourism arrivals declined by -2.0% y/y in July.

• In Romania, August’s inflation eased to 5.1% y/y.

• In the afternoon, the Hungarian central bank will publish minutes from the last rate setting meeting.

Economic developments

In most of the CEE countries, the post-pandemic recovery has been balanced, i.e. both consumption and investment grew compared to 4Q19. Czechia and Hungary are the two exceptions, however. In Czechia, private consumption is roughly 5% lower compared to the pre-pandemic level, as Czechia experienced the biggest loss of purchasing power over the last couple of years. In other words, since 2019, cumulative growth of compensation was much lower compared to the inflation change in Czechia. In Hungary, on the other hand, investment growth lagged behind (what we also touched upon in Tuesday’s CEE Daily), roughly 15% lower compared to 4Q19. In other CEE countries, both consumption and investment growth were positive. Slovakia posted the lowest dynamics of both, while Romania leads. Croatia also posted very dynamic growth of consumption (higher than Romania).

Market developments

The Hungarian central bank will publish minutes from the last rate setting meeting. In August, the key interest rate was kept stable. The August’s inflation eased however 3.4% that should support further monetary easing. We expect key policy rate to be lowered to 6.25% at the end of the year (that is another 50 basis points). In Czechia, the central banker Zamrazilova said she sees no reason to stop monetary easing, but the Board needs to remain cautious and avoid bigger moves. On the bond market we see yields moving south ahead of the ECB meeting (and the FOMC meeting scheduled for September 18th). On the FX market, the Polish zloty has been slightly stronger against the euro this week, while the Czech koruna and the Hungarian forint on the contrary.

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