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wiiw: Slowdown in CEE not as sharp as expected

The economy of emerging Europe is cooling down, but much less than expected in spring. As a result, forecasts for 2019 from the Vienna Institute for International Economic Studies (wiiw) have been revised upwards for the majority of countries. Poland, at 4.6 per cent, is expected to see the highest growth in the region this year.

The Vienna Institute claims that particularly in the Central and Eastern European European Union member states (EU-CEE), GDP growth has so far decoupled from the downturn in the euro area.

The EU-CEE countries’ economies continue to benefit from several factors, such as robust wage growth, buoyant investment activity (thanks to low interest rates and, in many cases, high EU transfers) and solid export performance; their growth edge over the euro area is even expected to increase slightly this year. Signs of overheating are mounting in Romania, Hungary, Poland and Bulgaria, although only in the case of Romania this is a cause for concern. The increasing labour shortages seem to be leading to investments in the automation and robotisation of workflows, particularly in the Visegrád countries.

The outlook for the remaining countries in the region for the coming years is broadly stable.

In the Western Balkan countries, growth is expected to settle at around three per cent per year. Here, too, wage growth is slowly gaining momentum, supported in several cases by fiscal easing. In addition, the Western Balkan countries are attracting significantly higher FDI inflows and benefiting from infrastructure investments, not least as part of the Chinese Belt and Road Initiative. The current growth slowdown in the region is almost exclusively due to Serbia, where one-off factors (such as the Fiat-Chrysler sales problems and the introduction of 100 per cent customs tariffs on Serbian exports by Kosovo) play a role.

A further deterioration in the external environment, however, especially if reinforced by increasing protectionism, is likely to lead to a significant slowdown in growth in the coming years. The small and open economies in Central Europe would be most affected.