Central & Eastern Europe Economic Forecast

Economic Snapshot for Central & Eastern Europe

January 11, 2017

Growth on track to pick up after Q3’s slowdown

Complete data confirmed a sharp slowdown in the economies of Central and Eastern Europe (CEE) in the third quarter of last year. GDP expanded 2.6% over the same period of 2015, the worst result seen since Q3 2013 (Q2 2016: +3.3% year-on-year). A slump in fixed investment and a weak external sector drove the deceleration, despite expansionary fiscal policies in key economies.

Looking at the individual countries in the region, growth in Poland—the region’s largest economy—fell to a three-year low in Q3. While a wave of fiscal measures caused private consumption to pick up notably, it was not enough to offset shrinking investment due to reduced EU development funds and a subdued external sector. The Czech Republic also experienced slower growth amid faltering exports, while economic activity in Romania remained strong, albeit at a weaker pace than in Q2. Romania is expected to have been the region’s top-performer last year as expansionary fiscal policy and muted inflationary pressures spurred a consumption spree.

FocusEconomics’ panel of analysts sees the CEE economy having remained on weak footing in the final quarter of 2016, but that it will regain some momentum this year. The panel sees GDP growth having picked up slightly to 2.7% annually in Q4 and expects activity to accelerate to 2.9% in the first quarter of 2017. Strong domestic dynamics thanks to an improving labor market and supportive government policies should fuel the uptick, while investment in the region is expected to bounce back and expand this year.

On the political front, risks are high in major player Poland. Controversial policies by the government, including an attempt to restrict media access to parliament and a vote on the 2017 budget that did not include the opposition, have sparked protests and increased uncertainty. Continued policy ambiguity or more unorthodox moves by the government could hurt private investment and are a key risk for the country’s economy going forward. Meanwhile, Romania voted in a new coalition government led by the Social Democrats at the start of January, ending a brief period of political uncertainty following December’s election. The new government has pledged a number of social welfare measures including raising the minimum wage and increasing pensions. However, keeping the economy from overheating as well as limiting the budget deficit will be key challenges going forward.      

Domestic economy to drive growth in 2017

Economic activity is expected to pick up moderately in the Central and Eastern Europe economy this year, after a projected expansion of 2.9% in 2016. A rebound in investment and an improving labor market should fuel GDP growth of 3.0%, which is unchanged from last month’s forecast. For 2018, growth is forecast to remain stable at 3.0%.

This month’s 2017 outlook reflects unchanged growth forecasts for 6 of the 11 economies surveyed, including the Czech Republic and Romania. The GDP projections were revised up for Bulgaria, Croatia, Hungary and Slovenia, while Poland was the only country to see a downgrade.

Romania will likely be the region’s fastest-growing economy this year, with an expected expansion of 3.6%. Poland and Slovakia are also seen achieving fast growth rates of 3.0% and above. On the other side of the spectrum, Estonia and Slovenia are expected to be the CEE region’s laggards, with expected expansions of 2.4%. 

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CZECH REPUBLIC | 2017 budget in the red as election approaches

The Czech economy decelerated in Q3, dragged down by a weak external sector, slowing government consumption and a contraction in fixed investment. Data available for the final quarter of 2016 point to an acceleration in growth. Both merchandise exports and industrial production rebounded in November, after the poor performance recorded in October. Moreover, in the last three months of the year all leading indicators suggested better economic conditions: business confidence hit multi-year highs and both consumer confidence and the PMI recovered from the lows reached in the third quarter. In December, the Czech parliament approved the budget for 2017, which projects a small fiscal deficit, contrasting the budget surplus achieved in 2016. Last year’s favorable fiscal conditions have opened a Pandora’s Box of possibilities to use the surplus ahead of the next general elections scheduled for October.

This year, the pace of economic growth will broadly mirror 2016’s performance, as an expected rebound in fixed investment will offset a weaker external sector. Uncertainties associated with the Brexit negotiations and subdued demand from the Euro area represent the main downside risks to the outlook. Panelists see GDP growing 2.6% in 2017, which is unchanged from last month’s forecast, and expect it to maintain the same pace of expansion in 2018.

HUNGARY | Government measures should boost activity

The Hungarian economy lost steam and decelerated in Q3. GDP growth was dragged down by a sharp contraction in fixed investment and a slowdown in private consumption. The deceleration, however, is expected to be transitory as private consumption, the main engine of growth, is set to remain resilient. The unemployment rate dropped to a multi-year low in November and consumer confidence rose to an over ten-year high in December. The latest economic developments, coupled with the government decision in late December to cut taxes and hike wages to spur growth, should result in an increase in disposable income and investment.

Hungary’s economic outlook is promising. Loose monetary conditions, the stimulus plan announced by the government and higher overseas demand for Hungarian goods will boost economic growth this year and next. Our panelists forecast that Hungary’s economy will expand 2.9% in 2017, which is up 0.2 percentage points from last month’s forecast. For 2018, the economy is also expected to grow 2.9%.  

POLAND | Controversial government moves increase political tension

Poland’s economy disappointed in 2016 as domestic politics, plunging investment and a weak external sector caused growth to slow sharply. Complete data for the third quarter confirm that GDP expanded at the weakest pace in three years, as reduced EU development funds caused a sharp contraction in investment. Data for the final quarter of the year suggest that the economy may have regained some steam. Industrial production rebounded in November and retail sales picked up. In addition, steady gains have been seen across the labor market and the unemployment rate rested at a multi-year low. Meanwhile, the political scene remains tense. A series of protests took place in December after the government attempted to restrict media access to parliament. While the move was eventually abandoned, the vote for the 2017 budget ended up taking place without the opposition present, sparking accusations that the government is backsliding on democracy.   

GDP growth is seen picking up slightly in 2017 amid a strong labor market and a recovery in investment. The FocusEconomics panel sees growth of 3.1%, which is down 0.1 percentage points from last month’s projection. In 2018, the panel sees GDP expanding 3.2%.  

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ROMANIA | New government takes reigns economy

Romania’s economy lost some momentum in Q3 2016 according to a revised estimate from the Statistics Institute released on 6 December. The slowdown was felt across the board, with private consumption, investment and government spending growth all dropping compared to Q2’s very strong set of figures. On the political front, Romania’s Social Democrats (PSD) took office again in January as the main party in a left-leaning coalition, following a 12-month hiatus. The new government’s platform is fiscally expansive, consisting of tax reductions and increases in the minimum wage, pensions and welfare spending, meaning it may struggle to stick to its pledge to keep the fiscal deficit below the EU’s 3% limit. The 2017 budget, due to be approved in the coming weeks, will be the first test of the government’s fiscal credentials

The new government’s planned spending rises and tax reductions should boost domestic demand and help prop up growth in the short term. Panelists predict an expansion of 3.6% in 2017, which is unchanged from last month’s forecast, with growth of 3.3% penciled in for 2018.

INFLATION | Price pressures pick up in November

According to an estimate produced by FocusEconomics, inflation rose to the highest level since March 2014 in November 2016. Inflation in the CEE region ticked up from October’s 0.1% to 0.3%. Just over half of the economies recorded positive price pressures, as inflation gradually returns in the region and the effect of low oil prices wanes.

Price pressures are expected to increase this year after a 0.4% fall in consumer prices in 2016. The FocusEconomics panel sees inflation of 1.5% this year, which is unchanged from last month’s projection. This month’s 2017 outlook reflected stable inflation forecasts for three countries in the region, including the Czech Republic. The inflation outlooks for four countries were lowered, while an equal number of economies saw an upward revision. In 2018, inflation is expected to rise slightly to 2.1%. 

See the Full FocusEconomics Central and Eastern Europe Report

Written by: Angela Bouzanis, Senior Economist

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