Central & Eastern Europe Economic Forecast

Economic Snapshot for Central & Eastern Europe

July 3, 2019

Central & Eastern Europe growth to ease in 2019

This year, regional growth will ease, held back by a weak external environment and growing capacity constraints. That said, 2019’s growth forecast was revised up this month, following a strong Q1, and the economy should remain solid, underpinned by sturdy domestic demand benefiting from a continued absorption of EU funds, favorable financing conditions and notable wage gains.

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Poland Economic Outlook

Following the first quarter’s strong outturn, which was buttressed by upbeat domestic demand and a supportive external sector, momentum likely carried over into Q2. Surging industrial production and retail sales in April−May suggest the country’s industrial sector has so far dodged industrial weakness in the EU, and that a tight labor market coupled with swiftly rising wages are underpinning consumer spending. In the political arena, following May’s European elections, the government reshuffled many senior ministers, including the finance minister. Confirming the expectations of analysts, who see the new finance minister as more likely to loosen the purse strings, in June the government approved plans to raise the tax-free allowance for workers under 26 by more than 12-fold. Meanwhile, on 24 June, the EU’s top court ruled that Poland’s judiciary reform breached EU law, which means the country has to reverse the changes or face penalties.

Growth seems set to lose some steam this year, restrained by a weak performance of the EU. However, the expansion will remain solid, spurred by buoyant domestic demand on the back of easy credit conditions, continued EU funds absorption and strong wage growth. On top of that, the fiscal stimulus adds upside risks to the outlook, although it could widen the fiscal deficit.

FocusEconomics analysts see growth at 4.1% in 2019, which is up 0.2 percentage points from last month’s forecast, before decelerating further to 3.4% in 2020.

Czech Republic Economic Outlook

The economy kept its momentum at the start of the year, with growth marginally above that of Q4 2018’s. Firm household spending underpinned activity as consumers benefited from rising real wages, while exports recorded the slowest growth since Q3 2013 on downbeat demand from Eurozone partners. Available data for the second quarter is mixed. While retail sales surged in April amid a tight labor market, the manufacturing PMI lingered in contractionary territory in May and economic sentiment sunk in June.  Meanwhile, the political sphere has been rocked by massive protests in June, the largest seen since 1989. Graft allegations against Prime Minister Andrej Babis triggered the demonstrations and, although Babis’ government survived a no-confidence vote on 27 June, he will likely remain under pressure as the European Commission continues to investigate him for conflict of interest.  

Growth is seen slowing this year, weighed on by subdued export demand and softer investment. A tight labor market will support healthy household spending, however. Risks to the outlook chiefly stem from the critical external sector, in particular rising global protectionism or prolonged weakness in Germany’s automobile sector.

FocusEconomics analysts expect growth of 2.6% in 2019, which is unchanged from last month’s forecast, and 2.5% in 2020.

Romania Economic Outlook

The economy grew at the fastest pace in more than a year in the first quarter on red-hot domestic demand. Household spending powered the expansion, buttressed by a tight labor market, while fixed investment rebounded on what appeared to be an improved absorption of EU-linked structural funds. In contrast, exports slowed in Q1, on hobbled demand from the Eurozone. Turning to the second quarter, momentum seems to have moderated a notch. Softer retail sales growth in April hint that spending took a breather. Meanwhile, the current account deficit widened further in April, as merchandise imports once again surpassed exports. In the political arena, Prime Minister Viorica Dancila was elected leader of the ruling Social Democrats (PSD) at the party’s congress on 29 June, after surviving a no-confidence vote in mid-June.

Growth is projected to continue cooling this year despite recovering fixed investment as slower employment growth and labor shortages weigh on domestic demand. Rising labor costs will further restrain growth, while fiscal and current account deficits will remain a concern going forward, especially in the event of a downturn in the EU economy.

Our analysts see growth at 3.7% in 2019, which is up 0.2 percentage points from last month’s forecast, and at 3.0% in 2020.

Hungary Economic Outlook

Momentum appears to have carried over into the second quarter, with robust domestic demand continuing to shield the economy from the Euro area’s slowdown. Retail sales growth rose in April, signaling a faster rise in private consumption amid improved consumer sentiment and record-low unemployment. On average, households were less downbeat in Q2, especially in June thanks to a brighter outlook on personal finances. Meanwhile, industrial output remained buoyant in April, although moderated slightly as the manufacturing sector grapples with labor shortages. Business sentiment, however, dived to an over two-year low in June as EU-funded investments are set to run dry. In other news, the 2020 budget was presented to Parliament on 4 June which targets a deficit of 1.0%, marking a smaller shortfall than the 1.5% submitted to Brussels in April.

Growth will soften this year, as capacity constraints weigh on domestic demand. Reduced employment gains are set to weigh on household spending somewhat, while a weak Euro area could weigh on external demand. That said, the economy will expand healthily, spurred by strong EU fund inflows and a buoyant construction sector.

FocusEconomics analysts see growth at 4.1% in 2019, which is up 0.2 percentage points from last month’s forecast, and at 2.8% in 2020.

CEE Monetary & Financial Sector News

Regional inflation inched up to 2.9% in May from 2.8% in the previous month, as some moderation in oil prices was broadly counterbalanced by stronger increases in prices for food. Inflation is seen remaining largely stable this year, fueled by significant wage growth, resilient domestic demand and rising prices for food.

Against the background of broadly stable inflation, soft external demand and the ECB’s loose monetary policy stance, central banks in Poland, Hungary and Czech Republic stood pat at their June meetings. Going ahead, rates in the region are seen stable or rising slightly as central banks deal with a mix of strong domestic-led inflationary pressures and a weak external backdrop.

In recent weeks, CEE currencies gained some ground against the EUR. Rising expectations for Fed rate cuts prompted investors to sell dollars and buy regional currencies, while resurging tensions between EU institutions and Italy further dampened the euro. CEE currencies should remain broadly stable going forward, supported by solid growth offsetting weaker current account balances.

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