The new Spring Forecasts brought two main implications for CEE5 (the Czech Republic, Slovakia, Poland, Hungary and Romania) countries. The GDP outlook for these countries in 2010 remains much better than those seen in either the EC Autumn Forecasts or even Stability Programs submitted by individual countries at the beginning of this year (for Hungary, Czech Republic and Slovakia) and it is very close to our forecast. Downward growth revision (compared to EC Autumn forecasts) mainly hit Greece, which has been forced to start earlier with consolidation compared to other Euro Area countries.

We share the view with the EC that, among CEE countries, only Poland, Slovakia and the Czech Republic will outperform the growth of the Euro Area in 2010, while Romania will be very close (Romania 2010F Erste Group 0.9/EC 0.8 vs. Euro Area 2010F Erste Group 0.7/EC 0.9). We forecast (in line with the EC forecast) that, from 2011, the Romanian and Hungarian economies will also outperform the growth of the Euro Area, which is going to be constrained by deferred consolidation.

More interesting than the GDP outlook was the data published on public finances, as deficits remain elevated across all of Europe. Among CEE5 countries, only the Polish and Romanian deficits are expected to exceed the Euro Area average (6.6%), but remain safely below the high deficits seen among the Portugal, Ireland, Greece, Spain. Furthermore, the EC assumes that the PIGS will need to deliver a much stronger consolidation effort (reducing the structural balance by 0.8-5.9pp in 2010, compared to the 0.1-1.0pp forecasted for CEE5) to meet these forecasts. The consolidation in CEE5 is slightly weaker than outlined in the recently published Stability Reports, but especially in Romania, where, to reach a reduction of the structural deficit of 2pp, greater acceleration in expenditure cuts is needed. Other Euro Area members have planned to start with the consolidation of their budgets not earlier than in 2011, so for some of them, their structural deficit is even going to widen in 2010.

The earlier start of fiscal consolidation in CEE and in general much lower level of public debt give the CEE5 countries more room to keep a positive outlook for strong growth in years beyond 2011. The Hungarian public debt to GDP is projected to drop well below the Euro Area average (79% vs. 85%), while the public debt to GDP of Romania, Slovakia and the Czech Republic is to remain less than half of the Euro Area average. The new EC forecasts reveal a very positive improvement of Hungarian public finances, as their structural deficit is estimated at 2.1% (better than the 3.6% of GDP projected for Germany in 2010), while Romania (-6.9%)and Poland (-6.4%) have to intensify their consolidation efforts, in order to meet their fiscal consolidation plans.

Macro/Fixed Income

Erste Group Research

Juraj Kotian

co-Head CEE Macro and Fixed Income Research Erste Group Bank AG

1010 Wien, Neutorgasse 17 Tel.   :+43 (0) 50100 17357 Mob. :+43 (0) 50100 6 17357 Fax.  :+43 (0) 50100 11227