Not only domestic demand, but monetary easing, improvement in the labour market and a boost in public investment due to higher EU funding is expected to support this growth, with only higher external vulnerabilities in Hungary potentially effecting its economy.
Growth decelerated in emerging and developing Europe in 2013, as the region contended with large capital outflows, tighter monetary conditions, and rising market volatility.
Despite positive EU spillovers, recovery is expected to weaken slightly, with fragilities in the EU area, some domestic policy restrictions, rising financial market volatility and increased geopolitical risks stemming from Ukraine having an effect.
Regional growth is highly correlated with EU area growth,with stronger growth lifting activity in most CEE while remaining the main source of shocks for CEE. A large decline in portfolio investment and gross capital inflows to the region turned sharply negative in 2013. Accelerated outflows will become a risk if financial market volatility spikes again, with negative consequences for financing still-sizable fiscal deficits in many countries and external deficits in some.
Inflation will decline or remain moderate, with core inflation staying low in Bulgaria, Croatia and Romania. Deflation risks are low as domestic demand takes hold and the effect of one-off factors dissipate. The resolution of foreign-currency-denominated mortgages in Hungary, financial sector and corporate restructuring in Slovenia, will also have an effect on the economic outlook for these countries.