Central & Eastern Europe Economic Outlook March 2019

Central & Eastern Europe: Economic Snapshot for Central & Eastern Europe

March 3, 2019

Q4 2018 slowdown confirmed; external woes still largely offset by resilient internal demand

Central and Eastern Europe’s (CEE) widely-anticipated cooldown was confirmed to have materialized in the fourth quarter of last year. On the heels of an expectations-defying outturn in the third quarter (Q3 2018: +4.3% year-on-year), a preliminary but comprehensive estimate revealed that regional growth cooled to 4.1% year-on-year in the fourth quarter (previously reported: +4.0% year-on-year). Fourth-quarter national accounts pinned the slowdown largely on external factors; a pullback across the Eurozone appeared to weigh on exports and, in turn, industrial output. Internal demand, meanwhile, remained firmly in the driver’s seat—although tight labor markets appeared to no longer be delivering the returns they once did. Lower fuel costs helped insulate gains somewhat.

Fourth-quarter growth in Poland and Romania, two of the region’s heavyweights; as well as in Croatia, Slovakia and Slovenia, was bruised by subdued industrial output, which appeared to leave firms with space to delay private-sector investment. That said, despite the broader malaise in regional manufacturing, upbeat export growth in Poland and a handful of other economies signaled that European supply chains remained broadly intact. Although these forces were also at play in Czech Republic and Hungary, the region’s other two heavyweights, resilient labor markets—and, in Czech Republic’s case, an uptick in public-sector investment—appeared to buffer external headwinds.


In politics, the center-right opposition beat the incumbent centrists when Estonians headed to the polls on 3 March. Kaja Kallas, center-right Reform’s leader, is set to become the next prime minister when coalition talks wrap. Analysts praised the election result, which should ensure middle-of-the-road economic policy through the forecast horizon. Moreover, Kallas’ outright dismissal of working with the third-place, far-right Conservative People (EKRE), which jumped in the polls on an anti-European Union platform, bodes well for Estonia’s continued membership in the bloc.

Meanwhile, in the run-up to this autumn’s parliamentary elections, Poland’s ruling Law and Justice (PiS) government unveiled a massive PLN 40 billion (EUR 9.3 billion) expansion to its popular “Family 500+” social-support program on 23 February. Most analysts acknowledged, however, that an improved fiscal backdrop in recent years left more than enough room for the stimulus, which is expected to leave the fiscal deficit still comfortably within all EU-mandated limits. Despite the coalescing of some opposition parties in recent months, current opinion polls suggest that the national-conservative PiS will scrape together a second mandate later this year.

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CEE to face cyclical downturn this year as Eurozone pullback looms

Looking ahead, the regional economy is expected to continue cooling down this year as the region’s major-player economies approach the tail-end of the current business cycle. External-sector uncertainty looms; deteriorating economic activity within the Eurozone and, more broadly, a pullback in global trade could upend the region’s export-oriented industries. Moreover, emerging-market (EM) capital outflows threaten to expose structural weaknesses. Internally, however, tight labor markets and low borrowing costs should keep most economies growing above potential. Meanwhile, well-managed public finances will afford some governments countercyclical measures in the event of a rapid slowdown. Over the forecast horizon, aging populations and the region’s complicated relationship with the European Union will remain front-and-center concerns.

Analysts expect full-year regional growth last year to have clocked in at 4.3%. That said, in light of moderating fourth-quarter metrics, they cut short-term economic prospects in recent weeks and now see regional growth this year at 3.3%, down 0.1 percentage point from last month’s forecast. For 2020, they still see regional growth at 2.9%.

Slovakia and Slovenia had their full-year growth forecasts for 2019 cut in recent weeks. Meanwhile, the remaining eight economies—including Czech Republic, Hungary, Poland and Romania—had their growth forecasts left intact. Poland and Slovakia are expected to be the region’s top-performers this year, each expanding at over 3.5%. On the flipside, Croatia, Czech Republic and Lithuania are expected to grow at below 3.0%.

POLAND | Economy cools off in Q4 2018; PiS offers up PLN 40 billion stimulus ahead of parliamentary elections

Last year’s fourth-quarter slowdown confirmed widely-held expectations. Although fixed investment growth moderated, domestic demand remained a force to be reckoned with. Household spending remained in the driver’s seat despite decelerating somewhat amid slower employment gains. Notably, a pullback in the Eurozone failed to bruise export growth. Available first-quarter data, meanwhile, suggests that last year’s industrial-sector woes persisted at the outset of the year. Eyeing last year’s impressive fiscal outturn and this autumn’s parliamentary elections, the Law and Justice (PiS) government unveiled an additional PLN 40 billion (EUR 9.3 billion) spending plan on 23 February. The expanded “Family 500+” program is expected to boost household spending and should effectively cushion this year’s cool-off without stretching the fiscal deficit beyond EU-mandated limits.

Full-year growth reached 5.1% last year. Going forward, however, an uncertain global backdrop and the late-stage business cycle will increasingly taper gains. Domestically, household spending and fixed investment will be hit by slower wage and credit growth, respectively, as well as higher borrowing costs. On the external front, a slower Eurozone will dent export-oriented activity. FocusEconomics analysts see growth at 3.6% in 2019, unchanged from last month’s forecast, before decelerating further to 3.1% in 2020.

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CZECH REPUBLIC | Q4 2018 growth exceeds expectations

Recently-released national accounts data revealed the economy ended last year on a solid note, with annual growth in Q4 accelerating from the modest showing in Q3 and landing well above market expectations. Notably, quarterly growth picked up to a one-and-half-year high. Soaring fixed investment, particularly in construction and machinery equipment, and healthy private consumption—buttressed by an overheated labor market, brisk wage growth and elevated consumer confidence—drove the fourth-quarter expansion. Meanwhile, the external sector dragged only marginally on overall growth, with exports holding surprisingly strong despite the recent slowdown in the Eurozone. Looking ahead, available data hints at softening activity at the start of this year: The manufacturing PMI slid yet again in February amid falling output and new orders, remaining in contractionary territory for the third month running.

Growth is seen losing some steam this year amid an economic cycle that is past its peak. However, it should remain solid and driven primarily, as in 2018, by domestic demand. In particular, swift wage growth and an extremely tight labor market are set to boost private consumption. Heightened global trade tensions and weaker EU demand are key downside risks to the outlook. FocusEconomics Consensus Forecast panelists see GDP growing 2.7% in 2019, which is unchanged from last month’s projection, and 2.6% in 2020.

ROMANIA | Q4 2018 growth moderates; budget passes as concerns over fiscal slippage mount

Economic activity moderated in the fourth quarter of 2018, with growth for 2018 as a whole well below 2017’s expansion. Strong retail sales in the quarter suggest consumer spending was again in the driver’s seat, supported by a tight labor market, declining inflation and robust wage rises. On the other hand, the industrial sector languished in Q4, affected by pronounced weakness in the industrial sector in the EU and by sluggish foreign demand. On the political front, in mid-February, parliament approved the 2019 budget, which targets a fiscal deficit of 2.8% of GDP and projects GDP growth of 5.5% for the year. Many analysts consider both projections to be optimistic and also warn against risks of budgetary slippage. Meanwhile, recent plans to relax anti-graft laws and the newly introduced tax on banks prompted the European Commission to urge the country to resume the reform drive.

After decelerating sharply in 2018, the economy will lose further steam this year. Labor shortages and lower employment gains will weigh on consumer spending, while new taxes on corporations and rising labor costs will restrain investment. Downside risks stem from the large fiscal and current account deficits and recurrent political clashes with the EU. FocusEconomics analysts expect growth of 3.3% for 2019, which is unchanged from last month’s forecast, and 2.7% in 2020.

HUNGARY | Credit-rating upgrades cite improved growth prospects

Growth was buoyant in Q4 2018, boosted by soaring domestic demand. Fixed investment continued to surge, fueled by inflows from EU funds and sturdy construction production, while robust wage growth and an extremely tight labor market powered solid consumer spending. Heading into Q1, low unemployment in January and solid albeit softening optimism among businesses in the first two months of the year point to robust growth, even if it is likely to moderate somewhat. In a testament to the country’s rosy economic situation, in February both Standard & Poor’s (S&P) and Fitch Ratings upgraded the country’s rating to BBB from BBB-, with a stable outlook. S&P highlighted Hungary’s strong growth prospects, amid wage gains and the expansion of export capacity; Fitch Ratings cited the country’s rapid external deleveraging, a sizable current account surplus and a declining debt-to-GDP ratio.

The economy should perform robustly this year, although growth is poised to soften following a superb 2018. Particularly, a slowdown in EU fund inflows will translate into a less impressive expansion in fixed investment, while higher inflation and fewer job gains will drag on consumer spending. Risks to the outlook stem mainly from the economic performance of the EU. FocusEconomics panelists see the economy expanding 3.4% in 2019, unchanged from last month’s forecast, and 2.6% in 2020.

MONETARY SECTOR | Regional inflation stable in January

A comprehensive estimate produced by FocusEconomics revealed that regional inflation was stable from a month earlier at 1.9% in January. Notably, the region was broadly split; inflationary pressures intensified across four economies—including Czech Republic—and eased across five—including Poland. Lower fuel costs were roughly offset by rising food and living costs. All told, annual average inflation across the region clocked in at 2.5% in 2018 (2017: 2.0%).

Low inflation and shakier growth prospects, in turn, led policymakers in Czech Republic, Hungary, Poland and Romania to hold interest rates at existing levels in recent weeks. Moreover, the European Central Bank similarly stuck to its guns in January. All announcements were widely expected by analysts.

Regional inflation is expected to remain broadly stable over the coming years and is seen averaging 2.4% in 2019, unchanged from last month’s forecast, and 2.5% in 2020

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Christopher Thomas


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