Economic sentiment deteriorates in July

On the radar

The Czech National Bank lowered the key interest rate by 25 basis points to 4.5%.

Manufacturing PMI indices declined in Romania and Czechia, while in Hungary and Poland the PMI indices increased in July.

Producer prices in Romania arrived at 1.1% y/y in June.

Economic developments

The beginning of the third quarter of 2024 shows signs of weakness. In July, the Economic Sentiment Indicator (ESI) declined in all CEE countries, and consumers lost some confidence as well. Looking across sectors, we also see deterioration in market sentiment. In the retail sector, the drop is quite visible since July's average value of the indicator in CEE8 is the lowest compared to quarterly averages since the beginning of 2023. The services sector also lost momentum that could be observed at the beginning of the year. The sentiment indicator in the industry has been rather flat since the beginning of the year. Additionally, according to PMI indices, the manufacturing sector is in the contraction zone region-wide as July's footprints are below the threshold of 50 in every CEE country that published the PMI index. Moreover, in Romania, it declined to 47.8 in July, following three consecutive months at or above the 50 no-change mark, and in Czechia to 43.8 as output and new orders declined. On the other hand, in Poland, the PMI index increased to 47.3 from 45 in June, and in Hungary, the increase was rather marginal to 49.2 from revised June's footprint at 49.1.

Market developments

On Thursday, the Czech National Bank lowered the key interest rate by 25 basis points to 4.5%. At the press conference, it expressed prudence regarding future meetings, contingent on macroeconomic trends and fresh data. According to the new forecast, inflation is projected to hit 2.2% this year, tapering to 2.0% in the following year, while the GDP growth should attain 1.2% in 2024 and accelerate to 2.8% in 2025. From our perspective, existing data implies that the central bank could potentially reduce rates to 4% by the end of the year without triggering substantial inflationary concerns. As for the FX market, the EURCZK moved slightly down on Thursday, while the EURHUF and EURPLN moved in the opposite direction. On the bond market, the long end of the curve has moved visibly down across the region since the beginning of the week.

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