Central & Eastern Europe Economic Forecast

Economic Snapshot for Central & Eastern Europe

June 7, 2017

Recovering investment and buoyant consumption power CEE economy in Q1

Complete data for the region confirms that growth quickened in the economy of Central and Eastern Europe (CEE) at the start of 2017, although at a softer clip than the preliminary figure. GDP expanded 3.9% over the same period last year in Q1, notably above Q4 2016’s 2.8% expansion. Tighter labor markets and fiscal stimulus are supporting booming consumption in the region, while a recovery in investment is underway after a lull in EU development funds led to a profound drop last year. The first quarter’s reading marked the fastest growth since Q4 2015.

Growth rose to an over one-year high in Poland, the region’s largest economy, driving the region’s gains. Consumption is still being fueled by the 500+ child benefit scheme and a robust labor market. Accelerations were also seen in other major-players the Czech Republic, Hungary and Romania.  

The FocusEconomics panel sees growth edging down in Q2 but remaining healthy overall at 3.3%. Solid demand from the Eurozone and tight labor markets should fuel broadly steady growth in the coming quarters. However, rising inflation could take a bit out of consumption and political uncertainties will persist in a few core countries.  

Prospects upgraded after solid Q1

The FocusEconomics panel raised the CEE region’s economic outlook for a second consecutive publication this month. Robust growth in Q1 along with strong demand at home and abroad and more support from EU development funds should push regional GDP to expand 3.3%, above 2016’s 2.9% and a notch above last month’s forecast. Next year, the panel sees activity remaining healthy and the economy growing 3.2%.

Nearly half of the economies surveyed saw brighter forecasts this month, including major-players Hungary, Poland and Romania. However, panelists left their outlooks unchanged for five countries, while Estonia was the only economy to be downgraded.

Romania is projected to be the region’s fastest-growing economy this year, with an expected expansion of 4.2%. Bulgaria, Hungary, Poland and Slovakia are also seen achieving fast growth rates of over 3.0%. On the other side of the spectrum, the Czech Republic and Estonia are expected to be the CEE region’s laggards, with expansions of 2.6% and 2.5% respectively. 

See the Full FocusEconomics Central and Eastern Europe Report

CZECH REPUBLIC | Economy remains strong despite political uncertainty

The Czech economy has continued to fire on all cylinders so far in the second quarter, thanks to a buoyant labor market, rising wages, expansionary conditions in the manufacturing sector and upbeat business and consumer confidence. The economy has built on a strong start to 2017, with recently released data showing GDP accelerated significantly in the first quarter on the back of robust external demand and stronger household spending. Thus far, the economy seems to have been largely unaffected by the recent political turmoil, which has seen the Prime Minister attempting to dismiss the Finance Minister and leader of the centrist ANO party Andrej Babis, in order to capitalize on Babis’ unclear tax dealings ahead of October’s parliamentary elections. The dispute was finally resolved when Sobotka accepted the nomination of Ivan Pilny, a leading parliamentarian for ANO, as the new finance minister.

The economy is forecast to accelerate this year as a tight labor market prompts further wage growth, underpinning household spending, and stronger external demand supports exports. Nevertheless, a slower-than-expected implementation of EU-financed investment projects could restrain the scope of the expansion. Panelists see GDP growing 2.6% in 2017, unchanged from last month’s projection, and the same in 2018.

HUNGARY | Growth gains steam in Q1

The country was off to a spectacular start to the year with GDP growth surging 4.1% in Q1. The figure, which more than doubled the previous quarter’s print, was underpinned by a strong performance in the service and industrial sectors and marks the fastest expansion in almost three years. The quarterly reading shrugged off lingering weakness in the economy and promised to usher in the start of a cycle of strong growth. A battery of measures such as an over 15% rise in the minimum wage, higher EU investment inflows and expansionary fiscal and monetary policy will all provide further impetus to economic activity. The most recent survey-based data from the second quarter reached a multi-year high, suggesting that the strong momentum is continuing.

Hungary’s economic outlook is promising as loose monetary conditions, a minimum wage hike, tax cuts, increased EU fund inflows and a solid labor market will boost economic growth this year. Our panelists forecast that the economy will expand 3.3% in 2017, which is up 0.1 percentage points from last month’s forecast. For 2018, it is expected to grow 3.2%.

POLAND | GDP surprises on the upside in Q1

Recent data indicates that the economy started the year on a strong footing as it grew 4.0% in Q1, which beat market expectations as well as Q4’s result. Q1’s stellar print was driven by higher private consumption—the result of a tight labor market—and a recovery in EU-funded investment. However, the improvement in public investment, along with the lowering of the statutory retirement age, will likely translate into a widening of the fiscal deficit. On the external front, exports continued to rise in Q1 driven by higher external demand, but their effect on growth is being offset by similarly robust import growth, which is benefiting from a stronger zloty. The currency’s strength vis-à-vis the Euro is also helping to keep inflation in check.

Higher investment and stronger Euro area demand should allow the economy to accelerate this year. The FocusEconomics panel sees GDP expanding 3.5%, which is up 0.1 percentage points from last month’s projection. In 2018, the panel sees GDP expanding 3.4%.

See the Full FocusEconomics Central and Eastern Europe Report

ROMANIA | Fiscal woes persist despite buoyant growth

The Romanian economy surprised analysts with a strong performance in the first quarter. According to a preliminary estimate released by the Statistics Institute, annual GDP growth came in at 5.7%, only slightly less than Q2 2016’s multi-year high of 6.0%. While detailed national accounts data have yet to be published, sequential data for the first quarter suggests growth was fueled by strong domestic demand, as well as an improving external sector. Unemployment continued on its downward trend while wages grew strongly on the back of tax cuts and public sector wage increases, all of which will have served to stimulate household consumption, as evidenced by the fast pace of retail sales growth. Industrial production also grew strongly in Q1, stimulated both by stronger demand from Romania’s traditional trading partners and by the implementation of tax cuts on investments, the expectation of which had caused fixed investment to contract steeply in Q4. Despite the strong pace of growth, tax revenues have not followed suit according to the head of the country’s fiscal watchdog, meaning the fiscal deficit could exceed 3.0%, as forecast.

The economy should record another year of robust growth this year, though risks of overheating are increasing. Our panelists predict an expansion of 4.2% in 2017, which is up 0.3 percentage points from last month’s forecast, with growth of 3.5% penciled in for 2018.

INFLATION | Price pressures recede in April

According to an estimate produced by FocusEconomics, inflation in the CEE region inched down in April, falling from March’s 1.9% to 1.8%. Despite the fall, inflation still rests at one of the highest levels seen in years as the effect of low oil prices wanes.  

FocusEconomics panelists held their inflation projections unchanged this month and see inflation averaging 1.9% in 2017. A strong domestic economy along with rising commodity prices will drive price pressures. In 2018, inflation is expected to rise slightly to 2.2%. 

See the Full FocusEconomics Central and Eastern Europe Report

Written by: Angela Bouzanis, Senior Economist

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