pre-pandemic levels

The CEE region in general offers quite a heterogenous picture in terms of tourism importance and development. Some countries in the region (eg, Croatia, Bulgaria, Montenegro) are highly dependent on tourism revenues and its indirect effects, which can account for more-or-less a fifth of their GDP. These countries benefited greatly from a tourism boom that lasted almost a decade but which came to an abrupt end in 1Q20.   However, the selected CEE countries we cover in this article have more sophisticated economies and although they may still have sizeable tourist sectors (eg, Hungary and Turkey), the diversification of their economies offers an important cushion in less impressive tourist years.     The type of tourism also varies greatly among these countries, not only between Turkey and CE4 but even within the CE4. Hungary and the Czech Republic benefit more from tourism focused on their capital cities, while for Poland and Romania, tourism is less concentrated and more evenly spread across regions. Turkey, on the other hand, offers a broad range of mass tourism destinations, both cultural and leisure.   As elsewhere, 2020 was a lost year for tourism in the CEE, with lingering effects into 2021 as well. In fact, apart from Turkey, which has recovered strongly, CEE countries are still struggling to reach pre-pandemic levels in terms of total tourist arrivals. While Poland and Romania are only marginally above 2019 levels, Hungary and the Czech Republic have a lot more to recover. It is worth mentioning that domestic tourism has been the main driver of recovery in many countries - one of the few positive dynamics that developed through the pandemic.   Key indicators of foreign tourism, selected CEE countries (2019-2022)   If we turn our attention only to international arrivals, the picture is even more grim for the CE4 group, as no country was above 2019 levels by the end of 2022. Arguably, the outlook appears much better for Hungary, which, on the one hand, still has more to recover while, on the other hand, should benefit from the ongoing Chinese reopening and new direct flights between China and Hungary.   To some extent, this could have positive spillover effects for the Czech Republic given the proximity and relatively good connecting infrastructure. While relative comparisons have their advantages, they can grossly understate the huge nominal differences between Turkey and the rest of the CE4. Prior to the pandemic, the combined CE4 international arrivals significantly exceeded Turkey’s arrivals (with a clear trend nevertheless in favour of the latter), but the situation has changed dramatically in the post-pandemic era as CE4 numbers have dropped roughly to one third of Turkey’s.   It is worth mentioning that of the five countries, Turkey, Hungary and Poland have a clear positive balance when it comes to travel receipts and expenditure, while the Czech Republic flirts with negative balances and Romania is a confident net payer of tourism receipts.   The importance of the tourism sector for the CE4 and Turkey is generally above the EU average, with a tendency to be quite sizeable in Turkey and Hungary. Given its size and geographic location, Turkey stands out both in nominal and relative terms, whether in respect of tourism’s importance for GDP, the number of visitors, air connectivity or types of tourism it can provide. Having ranked in the top five countries worldwide by number of tourists visiting, Turkey’s tourism revenues help to some extent compensate for the large goods deficit in the balance of payments. Improvements in tourism are likely to maintain its healthy growth trend in the period ahead.   The CE4 economies offer yet again a rather heterogenous picture, with Romania somewhat departing from the group when it comes to road and rail connectivity with the west, though arguably offering a wider range of destination types. As Romania is not particularly well connected with its CEE peers it cannot match Turkey’s much wider accessibility for types of tourism.    Tourism is key for Hungary with a high share within its GDP and the potential for more growth from Asian tourists. And a return of tourism should be welcome for both Poland and the Czech Republic, although net tourism receipts seem less important for the latter

Industrial production contracted by 2.0% in 2022 and 4.6% year-todate. As of March 2023, it remains almost 6.0% below its prepandemic levels (ie, January 2020). Among the few brighter spots are the food, automotive and pharma sectors which have continued their upward trend and are above both the pre-pandemic period and the similar period from 2022. On the downside, the textile and chemical industries are both some 35% below their pre-pandemic levels, followed by the metallurgical industry at 30% below. The latest confidence data does not look particularly encouraging as production expectations and capacity utilisation collapsed in May 2023 to a two-year low. The number of employees remained fairly constant, though significant shifts occurred within subsectors.   Industry still below pre-pandemic levels   Fiscal picture is improving but we are not there yet   Elections and social demands could derail the adjustment The 4.4% of GDP budget deficit target for 2023 was shaping up to be quite challenging and it definitely is. As of April 2023, the budget deficit reached 1.72% of GDP and already prompted the government to come up with a mild (read: insufficient) spending optimisation plan, amounting at best to some 0.3% of GDP.   Given the social demands for higher wages (at the time of writing there is an ongoing major strike in the public education sector) and the lower GDP growth (leading to lower budget revenues), a more substantial adjustment is likely to be needed at the usual mid-year budget revision. The good news is that sticking to the 4.4% of GDP target for 2023 seems to be a priority.   The bad news is that it might involve cutting public investments which were just catching up some speed.   Current account deficit remains Achille’s heel (% of GDP)   Inflation (YoY%) and main components (ppt)   Economic slowdown and lower fiscal gap are helping The current account deficit (CAD) surpassed the worst fears in 2022 as it reached 9.4% of GDP, from 7.3% in 2021. We estimate that at least 1ppt of the 2022 deterioration came from worsening terms of trade, which should be largely reversed in 2023. As mentioned many times already, we remain particularly worried about the stickiness of the CAD and blaming it on the fiscal deficit only holds so much. More positively, the financing structure of the CAD looks relatively sound.   We estimate that over the next 3-4 years, between 70% and 80% of the deficit can be covered via non-debt-creating inflows such as FDIs and EU funds. As a consequence, we estimate that a CAD of 4.0-5.0% of GDP could be considered a ‘natural’ level for an emerging economy like Romania. But we’re not there yet…   Switching to single digits by the Autumn After remaining consistently at the lower end of inflation forecasts, it seems things are finally turning our way: inflation looks set to touch 7.0% by the end of 2023, driven by base effects, lower energy prices and an easing of food prices.   We reduce our 2024 year-end estimate to 4.0% from 4.3% previously, while maintaining the view that inflation will not reach NBR’s 1.5-3.5% target range over the next two years. These developments alone (especially those from 2024) would allow the NBR to cut the key rate quite significantly and still maintain a positive real rate. However, we believe that the NBR will want to consolidate the lower inflation prints and will maintain a relevant positive differential between the key rate and inflation, at least until we see inflation within NBR’s target range.

The global tourism industry has faced unprecedented challenges during the COVID-19 pandemic and companies in the sector have suffered significant losses. However, as the world recovers and travel restrictions finally come to an end, the industry is now poised for a resurgence. A successful summer season on the horizon brings new hope to the afflicted industry. As travel resumes, equity prices in the tourism and travel sector are expected to show positive momentum. The market reaction to the reopening of borders and the resumption of international travel is likely to be reflected in the share prices of companies in the industry.   While the industry is on track to recover, it is important to note that reaching pre-pandemic levels may not happen immediately for all companies. The losses incurred during the pandemic have had a significant impact on the financial position of many tourism enterprises. Some companies are still striving to recover losses and restore financial stability, but here’s a look at the prospects for individual sectors of the tourism industry:   Airlines: Companies such as Lufthansa and other major airlines have been hit hard by the pandemic. As demand for travel increases, airline shares are expected to rise. However, the recovery of airline inventories will depend on various factors, including vaccination rates, travel regulations and consumer confidence in air travel.   Online booking platforms: Platforms such as Airbnb and Booking.com are likely are likely to benefit from the resurgence of the travel industry. As travelers start planning their trips, the demand for online booking services is expected to increase. Hence, these platforms may see their stock prices rise as they gain momentum.    Hotels: The hospitality sector has faced major challenges during the pandemic. As travel resumes, hotels are expected to reopen. However, the pace of recovery may vary depending on factors such as location, travel restrictions and the ability to meet changing consumer preferences, such as an increased focus on hygiene.    In terms of the impact of inflation on the travel industry, rising prices have the potential to affect both the market and share prices. Higher prices may lead to higher spending on travel-related services, which may affect consumer behavior and demand. Companies operating in the travel industry will need to carefully manage their pricing strategy to balance profitability and affordability for customers.   When it comes to investment opportunities, it is extremely important to do a thorough research and consider various factors before making an investment decision. While the share prices of some travel companies may have risen significantly, there may still be room for growth. Further development of stock prices in the near future will depend on factors such as the pace of the global recovery, travel trends, company performance and market dynamics against the backdrop of Fed policy.

Tourism will be the main growth driver this year The slowdown in the Spanish economy can be attributed to the overall deceleration of the global economy. Nevertheless, Spain is poised to become the best-performing economy among the larger eurozone countries this year. We forecast average growth of 2.2% for Spain this year, well above the eurozone average of 0.4%. Continued growth in the tourism sector will be the main driver of Spain's higher growth rates. Although the number of international tourists entering Spain in 2022 was still 14% below pre-pandemic levels, the gap may be closing this year. In May, the number of international visitors had already risen to 104% of the pre-pandemic level, compared with 88% in May 2022. Strong travel demand points to a promising tourist season ahead. Contributing about 15% to GDP, the tourism sector will remain one of the main catalysts for economic growth throughout the year.   The number of foreign tourists increased above pre-Covid levels in April and May (in millions)     Spanish headline inflation reaches 1.9% Spanish inflation has fallen faster than in other eurozone countries. In June, Spanish inflation stood at 1.9% year-on-year, while the eurozone recorded 5.5%. These positive developments can be attributed to more favourable base effects from energy prices, which rose faster in Spain than in other countries last year. However, if these favourable base effects fade in the coming months, Spanish headline inflation could rise again. In addition, the phasing out of several government measures by early 2024 is expected to have an upward effect on inflation. Spanish core inflation, excluding energy and food prices, remains remarkably high at 5.9% and is even above the eurozone average of 5.4%. Core inflation is expected to remain at a high level throughout the year and gradually decline. Yet there are indications that core inflation is also on a sustained downward trend. For instance, inflation in the buoyant hospitality sector, which accounts for 14% of the inflation basket, is cooling markedly despite strong sustained demand on the back of a strong tourist season. Core inflation is expected to remain at high levels throughout the year and only gradually decline.   Slowing momentum despite tourism recovery For 2023, we expect growth of 2.2%, well above the eurozone average of 0.4%. Although the economy performed strongly in the first quarter, momentum is expected to wane as financial conditions tighten. The main driver of growth will be net exports, supported by the continued recovery of the tourism sector, which surpassed pre-pandemic levels in May and April. Although headline inflation fell to 1.9% in June, it is expected to rise in the coming months due to less favourable base effects for energy and persistent core inflation.   Spanish economy in a nutshell (%YoY)  

Tourism will be the main growth driver this year The slowdown in the Spanish economy can be attributed to the overall deceleration of the global economy. Nevertheless, Spain is poised to become the best-performing economy among the larger eurozone countries this year. We forecast average growth of 2.2% for Spain this year, well above the eurozone average of 0.4%. Continued growth in the tourism sector will be the main driver of Spain's higher growth rates. Although the number of international tourists entering Spain in 2022 was still 14% below pre-pandemic levels, the gap may be closing this year. In May, the number of international visitors had already risen to 104% of the pre-pandemic level, compared with 88% in May 2022. Strong travel demand points to a promising tourist season ahead. Contributing about 15% to GDP, the tourism sector will remain one of the main catalysts for economic growth throughout the year.   The number of foreign tourists increased above pre-Covid levels in April and May (in millions)

Spanish headline inflation reaches 1.9% Spanish inflation has fallen faster than in other eurozone countries. In June, Spanish inflation stood at 1.9% year-on-year, while the eurozone recorded 5.5%. These positive developments can be attributed to more favourable base effects from energy prices, which rose faster in Spain than in other countries last year. However, if these favourable base effects fade in the coming months, Spanish headline inflation could rise again. In addition, the phasing out of several government measures by early 2024 is expected to have an upward effect on inflation. Spanish core inflation, excluding energy and food prices, remains remarkably high at 5.9% and is even above the eurozone average of 5.4%. Core inflation is expected to remain at a high level throughout the year and gradually decline. Yet there are indications that core inflation is also on a sustained downward trend. For instance, inflation in the buoyant hospitality sector, which accounts for 14% of the inflation basket, is cooling markedly despite strong sustained demand on the back of a strong tourist season. Core inflation is expected to remain at high levels throughout the year and only gradually decline.   Slowing momentum despite tourism recovery For 2023, we expect growth of 2.2%, well above the eurozone average of 0.4%. Although the economy performed strongly in the first quarter, momentum is expected to wane as financial conditions tighten. The main driver of growth will be net exports, supported by the continued recovery of the tourism sector, which surpassed pre-pandemic levels in May and April. Although headline inflation fell to 1.9% in June, it is expected to rise in the coming months due to less favourable base effects for energy and persistent core inflation.   The Spanish economy in a nutshell (% YoY)

UK wage growth and US CPI set to slow   By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European equity markets got off to a slow start to the week yesterday, closing modestly higher with the FTSE100 underperforming due to concerns over weak demand out of China.   US markets were also resilient with the S&P500 and Dow both eking out new highs for 2023, as investors looked cautiously towards this week's central bank meetings of the Federal Reserve, European Central Bank, and the Bank of England, and their respective outlooks for rate policy heading into 2024.     Asia markets have continued in the positive vein of yesterday with that momentum set to continue into today's European open.   With the Federal Reserve due to start its 2-day meeting later today, and the Bank of England set to decide on rates on Thursday, today's UK wages data and US CPI numbers could go some way to shaping how policymakers react when they deliver their guidance on monetary policy later this week.     We start with the latest UK wages numbers for the 3-months to October and where wages have been trending higher by more than 8% for the last 3-months if bonuses are included.   Some at the Bank of England have been fretting about this high level of wages growth but they really shouldn't be given how badly inflation has impacted the pay packets of consumers these past 2 hours.   All that is happening now is that some of the purchasing power that has been lost over the last few months is slowly being clawed back and for the most part will take years to recover back to pre-pandemic levels. The central bank needs to be careful about overreacting to a phenomenon that they were too slow in reacting to on the way in.     With food prices only just recently dropping below 10% for the first time in over a year it can hardly be a wage price spiral if consumers are finally seeing the price/wage ratio finally starting to turn positive in their favour. Expectations are for wages ex-bonuses to slow from 7.7% to 7.4%, which might not be enough to reverse the calls for further rate hikes from the 3 hawks on the MPC, of Mann, Haskel and Greene. Later this afternoon we'll get to see whether the slowdown we saw in US CPI during October has continued into November.   US inflation fell to 3.2% in October, down from 3.7% reversing a trend that had seen inflation fall to 3% in June, before gaining ground in subsequent months.   Core CPI on the other hand has been steadier, slowing at a more modest pace and coming in at 4%. More importantly, super core inflation which the Fed monitors closely also slowed, and with the risk of a US government shutdown postponed until January next year, the economic risks to the US economy appear to have diminished further.   There has been some concern that the resilience of the US economy may delay the return to the 2% target, however judging by the latest PPI data there is little sign of inflationary pressure in respect of company's costs. These also slowed sharply in October declining -0.5%, dragging final demand down from 2.2% to 1.3%, in a sign that we could see further downside in US CPI, with the potential to slip below 3% before the end of the year.     Headline CPI for November is forecast to slow to 3.1%, with core prices remaining steady at 4%.       EUR/USD – holding above the 200-day SMA for now, stopping short last week at 1.0724, with a break below 1.0700 targeting the prospect of further losses toward the November lows at 1.0520. We need to see a move back through 1.0830 to stabilise. GBP/USD – tight range but holding above the 200-day SMA for now, with only a break below 1.2460 signalling a broader test of the 1.2350 area. Resistance currently at 1.2620 area.  EUR/GBP – still range trading between the 0.8590 area and the lows at 0.8545/50. While below the 0.8615/20 area the risk remains for a move towards the September lows at 0.8520, and potentially further towards the August lows at 0.8490. USD/JPY – after last week's test of the 200-day SMA at 142.50 we've seen a solid rebound with the move above 146.20 arguing for a move back towards 148.20. FTSE100 is expected to open 13 points higher at 7,558 DAX is expected to open 51 points higher at 16,845 CAC40 is expected to open 18 points higher at 7,569

With just two trading days remaining until the new year, attention in the City of London is shifting towards the prospects for 2024. Questions about the pace of interest rate cuts, the possibility of the UK avoiding a recession, the timing of the general election, and the potential victor are in focus.  One point of view indicates a more optimistic outlook for the UK as it "turns a page from the difficult post-pandemic years." PwC identifies various reasons for this optimism, including an anticipated improvement in conditions for households as the minimum wage is set to increase by almost 10% in the spring. Predictions suggest a faster-than-expected decline in inflation, nearing the UK's 2% target, contributing to a positive shift in consumer sentiment and while growth is anticipated to be modest, the UK is projected to exhibit a faster recovery relative to pre-pandemic levels compared to Germany, France, or Japan. Forecasts indicate that the UK will be the fourth-best performing G7 economy concerning pre-pandemic levels, with real GDP expected to be around 2.7% higher in 2024 on average relative to 2019 levels. However, challenges persist as consumer prices, despite an expected cooling of inflation, are projected to remain about a quarter higher than in early 2021 and with London's average rents are forecasted to continue rising, reaching over £2,000 per month by the end of 2024, approximately three times higher than the north-east's average while the rest of the UK is also expected to witness a continued uptrend in rents, with an average increase of over 5% in 2024. Additionally, a notable surge in corporate insolvencies is anticipated, with nearly 30,000 firms expected to face challenges due to high interest rates and increased costs which is likely to be felt more acutely by smaller businesses, particularly in sectors such as hotels & catering, manufacturing, and transport & storage and which could cause significant issues if it were to lead to an increase in unemployment just as the Bank of England is beginning to shift its policy and in particular around election period, potentially further influencing the ultimate results.