Economic Snapshot for Central & Eastern Europe

April 3, 2019

Central & Eastern Europe growth set to slow further in 2019

Regional growth is set to slow further in 2019, but it should remain healthy. Despite moderating, consumer spending will expand solidly, fueled by strong wage growth and tight labor markets. Similarly, growth in fixed investment will remain robust, yet it will decelerate due to slowing EU fund inflows. Pronounced economic weakness in the Eurozone cloud the outlook.

Central & Eastern Europe is projected to grow 3.3% in 2019, unchanged from last month's forecast, and 2.9% in 2020.

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Poland Economic Outlook

Growth climbed to an over 10-year high in 2018, which likely translated into a strong fiscal performance. Economic activity, however, seems to have softened slightly in Q1 2019, on the back of slowing albeit still robust consumer spending and fixed investment. In January−February, retail sales grew at a milder pace than in Q4 2018—probably due to a rise in unemployment—although still expanded solidly nonetheless thanks to healthy wage growth. As for the production sector, evidence is not yet conclusive; the strong showing of industrial production in the first two months of the year is at odds with contractionary PMI readings throughout Q1. Meanwhile, business confidence, although far from reaching the highs of mid-2018, remained positive throughout the quarter, hinting at healthy private sector activity.

Less buoyant consumer spending due to softer wage gains, coupled with slower fixed investment on the back of a reduced absorption of EU funds, will weigh on economic activity this year. Moreover, weaker growth in key trading partners will dent external demand. That said, the government’s fiscal stimulus could lead to upside surprises by boosting household spending.

Czech Republic Economic Outlook

 Fourth-quarter growth picked up considerably, ending last year on an upbeat note and landing above analysts’ expectations. Fixed investment jumped; construction, as well as machinery and equipment, underpinned gains. Household spending, on the other hand, benefited from the exceptionally tight labor market and resilient economic sentiment. On the external front, exports held up remarkably well despite the recent pullback across the Eurozone. Looking at the new year, things appear less rosy. From the demand side, economic sentiment and retail sales have each dwindled since the turn of the year, while inflation has risen sharply. From the supply side, industrial output posted further losses in January and survey-based data through March highlighted that firms have been struggling to find new orders—and especially export orders.

Although fundamentals should remain solid this year, growth is expected to moderate somewhat in line with the late-stage business cycle. Domestic demand will underpin gains amid the tight labor market and contained inflation. External-sector risks, meanwhile, appear tilted to the downside given the slowing global economy and unresolved trade conflicts.

Romania Economic Outlook

Fourth-quarter growth moderated somewhat but was nonetheless upbeat, landing roughly in line with analysts’ expectations. Household spending remained firmly in the driver’s seat, as consumers appeared to benefit from the tight labor market and lower inflation. Investment continued to contract; absorption of EU-linked structural funding was sluggish. On the external front, weaker industrial output regionwide ate into local manufacturing activity and bruised export growth. Looking at the new year, some familiar trends stand out. On the upside, unemployment fell lower in January and retail sales jumped. On the downside, industrial output growth stalled. In late March, facing a stock-market backlash, the government largely scrapped its controversial new tax on banks’ assets; the move should lift business confidence and, in turn, investment.

Economic growth is expected to cool this year as slower employment growth and labor shortages weigh on household spending gains. Investment, meanwhile, is still expected to be hit by weak economic sentiment in light of the government’s tax proposals, as well as rising labor costs. Twin deficits also pose downside risks, especially in the event of a global downturn.

Hungary Economic Outlook

Available first-quarter indicators suggest growth moderated at the outset of the year, on the heels of last year’s snappy fourth quarter. Deteriorating business confidence through March obscured upbeat industrial output, while weaker consumer confidence has been broadly tracking retail sales in recent months. Export growth, meanwhile, held up in January. Fourth-quarter national accounts, however, were even more upbeat. Domestic demand was again in the driver’s seat; the tight labor market fueled household spending, while fixed investment was propped up by the absorption of EU-linked structural funding and the ongoing construction boom. Looking ahead, following a slew of positive economic indicators, as well as recent credit-rating upgrades by S&P Global Ratings and Fitch Ratings, all eyes are on Moody’s in the run-up to its decision in early May. As it stands, the ratings agency seems likely to follow suit.

Domestic demand should ease this year as the narrower intake of EU-linked structural funds and slower employment growth, compounded by higher inflation, restrain fixed investment and household spending, respectively. Short-term growth prospects for the European Union remain a downside risk for the economy given Hungary’s trade relationship with the bloc.

CEE Monetary & Financial Sector News

Regional inflation rose to 2.2% in February from January’s 1.9%, due to faster price rises in all the region’s major players. Looking ahead, inflation is seen picking up owing to firm growth and rising wages. That said, weak price pressures for tradable goods should put a lid on inflation, with upside risks stemming from higher-than-expected oil prices.

Central Banks in the region’s largest countries stood pat at their latest meetings, chiefly owing to softening economic activity. This year, policy rates should be largely stable in Poland and Hungary, owing to the loose monetary stance of the European Central Bank. Some tightening is expected in Czech Republic and Romania, however, to counter strong wage pressures.

In recent weeks, strong economic figures supported the zloty against the euro. In contrast, both the leu and koruna depreciated on soft data, and the forint lost ground on dovish comments from the Central Bank. Robust growth fundamentals should underpin most regional currencies this year. The Romanian leu, however, is seen weakening due to sizeable twin deficits. 

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