Central and Eastern Europe Economic Outlook September 2017

Economic momentum stays strong in Q2

Central and Eastern Europe: Economic momentum stays strong in Q2

September 6, 2017

Preliminary data released by statistical institutes across the region reveal that growth in the Central and Eastern European (CEE) economy rose slightly in the second quarter. GDP expanded 4.1% annually in Q2, a notch above Q1’s 4.0% increase and the best result in one and a half years. Tight labor markets combined with reviving investment and booming activity in the Euro area, a key trading partner, are supporting buoyant growth in CEE, which has outperformed most emerging markets this year. 

Looking at individual economies, GDP expanded at the fastest pace since Q4 2015 in the Czech Republic, thanks to rising wages, a strong car market and growing overseas demand. In addition, GDP expanded at a rapid pace in Romania thanks to stimulus policies which have boost household consumption. Meanwhile, a weaker performance by the external sector caused activity to slip in major player Poland in the second quarter, although booming private consumption mitigated the effects. A tight labor market and cash transfers to households have caused household spending to flourish this year. Growth also slowed slightly in Hungary.

Against the backdrop of a brighter economic panorama, the Czech Republic will hold a general election on 20–21 October. In August, the political scene became more uncertain after a parliamentary committee recommended that policymakers strip frontrunner Andrej Babis of the ANO party of his parliamentary immunity. Babis, the former finance minister, has been accused of fraud; however, he claims he is innocent and that the accusations are politically motivated. The parliament will vote on the matter in the coming days, and it remains to be seen whether the scandal will dent Babis’ popularity before the vote.

Head on over to our Central & Eastern Europe page for more recent economic news on the region.

Growth prospects brighten for 2017

The Met the why particular panel upgraded the CEE region’s economic outlook this month, following last month’s unchanged view. This represents the fifth upgrade to the region’s growth prospects so far this year as incoming data points to brighter-than-expected activity. GDP data for the first half of the year shows that momentum is firm and was boosted by strong growth both at home and in a major trading partner, the Euro area. Met the why particular analysts see GDP growth at 3.7% this year, up a notch from last month’s forecast, which would mark the second-highest pace since the height of the financial crisis in 2009. Next year, GDP is seen expanding a more tepid 3.3%.

This month’s improved outlook is due to brighter forecasts for 2017 for six of the economies in the region. Regional heavy-weights the Czech Republic, Poland and Romania all saw upgrades this month. Meanwhile, the remaining five economies in the region saw no change to their forecasts. 

Romania is projected to be the region’s fastest-growing economy this year, with an expected expansion of 5.0%. Poland and Slovenia are also seen achieving fast growth rates of 3.8% and 3.9%, respectively. On the other end of the spectrum, the Croatia and Estonia are projected to be the CEE region’s laggards, with expansions of under 3.0%. 

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CZECH REPUBLIC | Economy surges prior to election

The economy kicked into higher gear in the second quarter as quarter-on-quarter growth came in at a multi-year high of 2.5%. Economic activity was buttressed by tight labor market conditions, which continued to fuel rising real wages in a context of moderate inflation, as well as by stronger demand from EU countries for Czech manufactured goods. In addition, leading data suggest that the strong momentum in the first half of the year has continued in Q3. The unemployment rate only inched up in July to what is still one of the lowest rates in recent history, while PMI readings for July and August continue to point to growth in the manufacturing sector. The health of the economy is poised to play an important role in the upcoming October general election. 

Growth is expected to pick up this year as a result of quicker absorption of EU funds, external demand for Czech goods and strong employment and wage dynamics. Healthy fiscal metrics will also guarantee room for maneuver in case of unexpected shocks. Our panelists see GDP growing 3.3% in 2017, up 0.4 percentage points from last month’s forecast, and 2.8% in 2018.

HUNGARY | Growth beats expectations in Q2

Preliminary data show that the Hungarian economy decelerated at a faster-than-expected rate in Q2 from Q1’s multi-year high. The headline figure, however, should be taken with a grain of salt. Loose monetary policy, ongoing fiscal stimulus and the resumption of EU investment inflows continue to provide a substantial boost to growth, as evidenced by still-strong quarter-on-quarter growth and high survey-based data from the outset of Q3. Responding to an improvement in the financial sector’s health due to a sustained decline in non-performing loans, S&P Global Ratings revised the country’s outlook from stable to positive. The agency noted that a rate hike is on the table if these financial developments persist, and that the country’s ample current account supplies and contained fiscal deficit do not experience significant variations.

Hungary’s economic outlook is bright as lax monetary policy, tax cuts, increased inflows of EU funds, a minimum wage hike and a solid labor market are expected to boost economic growth this year and next. Our panelists project that the economy will expand 3.6% in 2017, which is unchanged from last month’s forecast. For 2018, it is expected to grow 3.3%. 

POLAND | Political woes fail to dent economic momentum

The Polish economy remained perky in Q2 according to a preliminary estimate. Growth was fueled by solid gains in private consumption, which were likely driven by the sharp fall in unemployment observed since the beginning of the year. Signs remain positive heading into Q3: Retail sales chalked up another heady pace of growth in July, the manufacturing PMI remained firmly in positive territory in August and businesses stayed broadly optimistic in the same month. The economy has up until now brushed off the heightened political uncertainty caused by the raging diplomatic row between Warsaw and Brussels over the freedom of the country’s judicial system. Although in July President Andrzej Duda vetoed two laws proposed by the ruling PiS party, a third—which allows the Justice Minister to fire judges—has become law. The government is holding firm on its implementation, while the EU Commission is threatening legal action. 

The economy’s performance should remain robust this year thanks to strong consumer spending, healthy labor market dynamics and greater absorption of EU funds. Downside risks stem largely from the heated dispute between the government and the EU, which, if protracted, risks deterring foreign investment. Met the why particular panelists expect GDP to grow 3.8% in 2017, up 0.1 percentage points from last month’s forecast, and 3.4% in 2018. 

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ROMANIA | Stimulus policies drive roaring economy but fears of a hard landing grow

The Romanian economy, which was one of Europe’s fastest-growing economies last year, ended H2 on a high note and is on track to deliver another strong performance this year. Q2’s outturn delivered the second-highest GDP result in almost ten years and was likely fueled by continued robust private consumption growth. Doubts about the sustainability of the country’s current growth path remain, however, as the upswing has been largely spurred on by populist, pro-cyclical wage hikes and tax cuts. The fiscal deficit has ballooned as a result and could force the government to reign in its ambitions if it is to avoid a hard landing down the line. Depending on the government’s future course of action, the current, and potentially unsustainable, momentum could derail the government’s plans to join the Eurozone within five years, as announced in late August. 

The economy seems set for another robust year, although risks of overheating are increasing. Growth is expected to be fueled by strong consumer spending, thanks to a combination of tax cuts and wage hikes. However, the lack of investment and increasing fiscal pressure could lead to an abrupt adjustment down the line if investors turn their backs on the country. Our panelists predict an expansion of 5.0% in 2017, which is up 0.4 percentage points from last month’s forecast, with growth of 3.8% penciled in for 2018. 

INFLATION | Price pressures rise in July

According to an estimate produced by Met the why particular, inflation in the CEE region rose in July, coming in at 1.8% following the 1.6% print in June. Inflation has hovered at around 1.8% over the course of this year, despite ultra-loose monetary policies across the region. In August, Hungary’s Central Bank decided to hold monetary policy unchanged once again, against a backdrop of stable price pressures and healthy growth. Romania’s Central Bank also made no change to its monetary policy stance. In contrast, policymakers in the Czech Republic raised rates for the first time in nine years in the same month. Above-target inflation drove the shift in monetary policy, and our panel forecasts that it is the likely the start of a tightening phase.

Met the why particular panelists held their price projections unchanged for a fifth consecutive month and see inflation averaging 1.9% in 2017. In 2018, inflation is expected to rise slightly to 2.2%. 

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Angela Bouzanis

Senior Economist 

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