Economic Snapshot for Central & Eastern Europe

June 5, 2019

Central & Eastern Europe growth set to moderate in 2019

Although regional growth will moderate this year, largely due to weakness in the Eurozone and a mature business cycle, it will remain solid. Robust domestic demand will propel the expansion, spurred by strong wage and credit growth, supportive EU investment funding and expansionary fiscal and monetary policies.

Central & Eastern Europe is projected to grow 3.5% in 2019, which is up 0.1 percentage points from last month’s forecast, and 3.0% in 2020.

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Poland Economic Outlook

The economy expanded strongly in Q1, buoyed by robust domestic demand. A tight labor market and rapidly rising wages continued to spur consumer spending, while fixed investment benefited from sustained EU funding and low interest rates. Momentum is expected to have carried over into Q2. A jump in retail sales, the declining unemployment rate and sturdy wage growth in April all point to resilient household spending, although cooling consumer confidence calls for caution. As for the production side, surging industrial production in April and positive business sentiment in the first two months of the quarter reinforce the picture of a solid economy. In the political arena, the governing Law and Justice (PiS) party won a convincing victory in the European elections. This, together with the government’s fiscal stimulus measures, bodes well for PiS in this autumn’s parliamentary elections.

Although growth will ease in 2019 on Eurozone weakness, buoyant domestic demand will ensure the economy remains healthy nonetheless. Consumer spending will benefit from marked wage gains and expansionary fiscal policies, while EU-funded projects underpin investment. Moreover, the fiscal stimulus should also boost growth, although it will widen the fiscal deficit.

FocusEconomics analysts see growth at 3.9% in 2019, which is up 0.1 percentage points from last month’s forecast, before decelerating further to 3.4% in 2020.

Czech Republic Economic Outlook

Recently-released GDP data showed that growth held steady in Q1 from Q4 2018’s healthy upturn. Household spending, which strengthened amid buoyant real wage growth and an extremely tight job market that saw the unemployment rate dip to a historic low, drove growth in the quarter. Fixed investment cooled markedly while net trade improved marginally, but this was mainly due to a sharp slowdown in imports. Looking at Q2, available data hints at somewhat softer activity. After an uptick in April, economic sentiment tumbled to a near-three year low in May. In particular, confidence in the industrial sector declined amid a deterioration of firms’ near-term outlook—reflective of still-elevated trade tensions and weak dynamism of German manufacturing. Meanwhile, on 31 May, the European Commission determined that Prime Minister Andrej Babis breached conflict-of-interest rules over his ties with the Agrofert conglomerate, which he placed in trust funds in 2017. If the findings are confirmed in further proceedings, his minority government could face a potential no-confidence vote.

Although the economy is seen losing some steam this year, growth should remain solid overall.  In particular, private consumption—buoyed by rising wages and low unemployment—should continue driving activity. Given the country’s export-oriented industrial base, weakening EU demand and an intensification of global trade conflicts pose key risks to the outlook.

FocusEconomics analysts expect growth of 2.6% in 2019, which is down 0.1 percentage points from last month’s forecast, and 2.5% in 2020.

Romania Economic Outlook

Romania’s economy grew 5.0% year-on-year in the first quarter, overshooting analysts’ expectations and marking the strongest outturn in more than a year. Ahead of comprehensive first-quarter national accounts, retail sales through March suggest that household spending remained firmly in the driver’s seat, as do falling unemployment and rebounding inflation. Domestic demand, however, was likely hobbled by lackluster fixed investment as weak demand from the Eurozone appeared to stifle first-quarter industrial output. Meanwhile, external imbalances, exacerbated in recent months by tepid export growth and trickling FDI inflows, continue to loom. In late May, on the heels of a thumping for his Social Democrats at the European elections, ruling party leader Liviu Dragnea was sentenced to three years in prison on graft charges; economic sentiment improved on the news.

Growth is set to decelerate again this year as slower employment growth and labor shortages taper household spending gains in the aftermath of the two-year-old economic boom. Fixed investment, meanwhile, is expected to recover somewhat but could be hit by rising labor costs. Fiscal and current account deficits remain a concern.

FocusEconomics analysts see growth at 3.5% in 2019, up 0.2 percentage points from last month’s forecast, and at 3.0% in 2020.

Hungary Economic Outlook

Growth reached a near two-decade high in the first quarter, powered by the manufacturing and construction sectors. From the demand side, each propelled fixed investment; capacity constraints led manufacturers to upgrade machinery and equipment, while European Union-tied structural funds continued to fuel a construction boom. Moreover, household spending remained a force to be reckoned with amid the further tightening of the labor market. On the external front, export growth picked up despite some turbulence within the Eurozone, outpacing import growth in the process. Looking ahead, softer survey-based data and higher inflation at the outset of the second quarter hint at an impending cool-off. In politics, voters handed Viktor Orban’s anti-immigrant Fidesz party a resounding victory at the EU’s elections on 26 May, delivering him a mandate and all but ensuring further clashes with Brussels.

Capacity constraints are expected to rein in domestic demand this year. Moreover, weaker employment gains and a tailing off of the EU-funded construction boom are set to tame household spending and fixed investment, respectively. Lackluster short-term growth prospects for the EU could cap export growth, which would, in turn, dent the current account surplus.

FocusEconomics analysts see growth at 3.9% in 2019, which is up 0.3 percentage points from last month’s forecast, and at 2.8% in 2020.

CEE Monetary & Financial Sector News

Regional inflation rose to 2.8% in April from March’s 2.6%, mainly on higher fuel and food prices. Inflationary pressures strengthened in Poland, Hungary, Romania, Slovenia and the Baltic states, while they moderated elsewhere in the region. Inflation should hold broadly steady this year, fed by robust domestic demand, sizable wage gains and higher food prices.

Despite rising inflation, Central Banks in Poland, Hungary and Romania stood pat at their May meetings, due to a weak external environment and the ECB’s loose monetary policy stance. Going ahead, rates are seen stable in Poland, influenced by the ECB’s stance, while they should rise somewhat in the Czech Republic, Hungary and Romania, on mounting wage pressures.

In recent weeks, the political fragmentation resulting from EU parliamentary elections and dovish monetary policy stances of central banks provoked some jitters in the currencies of the region’s major players. Going forward, regional currencies are seen largely stable: Upward pressure from healthy growth will be broadly offset by weakening current account balances.

See the Full FocusEconomics Central and Eastern Europe Report