Growth in CEE begins to weaken

Even though most countries of the region – with the exception of Hungary – should avoid a full-year recession, they will suffer a growth slump compared to last year.

Despite the impressive resilience demonstrated in the face of the economic consequences of the Ukraine war, the fragile growth in many economies of Central, Eastern and South East Europe
(CESEE) is coming under pressure.

The still high inflation, the tightening of monetary policy and a weak international environment are all weighing heavily on the region’s economies. This is revealed in the new Summer Forecast of the Vienna Institute for International Economic Studies (wiiw) for 23 countries of the region.

After an already lacklustre display in the fourth quarter of 2022, growth in many countries came to a standstill in the first quarter of the current year – and even slipped into negative territory in Poland, Czechia and Hungary.

“Apart from falling real incomes, this is mainly due to the recession in Germany and high energy prices. German industry, in particular, is suffering, which is dragging down the Visegrád countries, which are closely bound up with it,” explains Vasily Astrov, senior economist at wiiw and lead author of the forecast.

For 2023, wiiw forecasts a slowdown in growth to an average of 1.2 per cent for the EU members in the region – though that means they should still grow more than twice as fast as the euro area (0.5 per cent).

Romania (three per cent) and Croatia (2.5 per cent) will see comparatively strong growth, while the Visegrád countries (Czechia, Hungary, Poland, Slovakia) are set to expand only slightly, at an average of 0.6 per cent.

The economies of the Western Balkans will grow at an average of 1.9 per cent. Montenegro (3.5 per cent), Kosovo (3.4 per cent), and Albania (3.3 per cent) are all forecast to see their economies grow by more than three per cent. Growth will be slower in Serbia (1.3 per cent), Bosnia and Herzegovina (1.5 per cent) and North Macedonia (1.6 per cent).

Even though most countries of the region – with the exception of Hungary (-0.5 per cent) – should thus avoid a full-year recession, they will suffer a growth slump in 2023 compared to the previous year.

The opposite is true for those countries of the region that have been most affected by the war in Ukraine. Russia, despite suffering from sanctions and a sharp drop in energy revenues, is expected to grow by one per cent again this year, thanks to a booming defence industry.

After the devastating slump of 2022 (-29.1 per cent), Ukraine could recover slightly this year, with growth of two per cent. Belarus (1.9 per cent) and Moldova (2.5 per cent) are also expected to expand again this year, following a deep recession last year.

“Compared to the spring, the downside risks to our forecast have increased,” says Astrov. “In addition to a possible military escalation of the Ukraine war at any time, the recession in Germany and further interest rate hikes by the European Central Bank are weighing on the outlook. The competitiveness of German industry is suffering enormously from energy costs that are much higher than in the US. This is, of course, poison for the economies of Central and Eastern Europe.”

Inflation in double digits

Inflation has passed its peak in all the countries observed. Nevertheless, it is likely to remain high for
some time to come.

On average, it will be around 16 per cent in the region in 2023, almost three times as high as in the euro area (5.7 per cent).

The main drivers of inflation in Central, Eastern and South East Europe are high food prices and rising corporate profits.

“So there is no sign of a classic wage-price spiral, which is why central banks will have difficulty in getting inflation under control via interest rate hikes,” explains Astrov.

Ukraine: Fragile recovery in sight

After the dramatic GDP slump of almost a third last year, Ukraine should be able to recover slightly this year. This forecast is based on the assumption that the war will not escalate any further.

The energy bottlenecks caused by the Russian bombings have largely been resolved; business sentiment is moderately positive; and inflation is declining. The unemployment and poverty rates are nevertheless both above 20 per cent.

As Olga Pindyuk, Ukraine country expert at wiiw, explains, “The International Monetary Fund recently confirmed that Ukraine meets all the necessary conditions. So there is a green light for the disbursement of the next loan tranche of 900 million US dollars. Probably even more important is the positive signal it gives to foreign investors.”

Given the country’s enormous financial needs, Western support remains vital.

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