Central & Eastern Europe Economic Forecast

Economic Snapshot for Central & Eastern Europe

May 8, 2019

Central & Eastern Europe growth set to slow further in 2019

Regional growth is set to slow further in 2019, but it should remain healthy. Despite moderating, consumer spending will expand solidly, fueled by strong wage growth and tight labor markets. Similarly, growth in fixed investment will remain robust, yet it will decelerate due to slowing EU fund inflows. Pronounced economic weakness in the Eurozone cloud the outlook.

Central & Eastern Europe is projected to grow 3.3% in 2019, unchanged from last month's forecast, and 2.9% in 2020.

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Poland Economic Outlook

Economic growth likely remained healthy in Q1 2019, despite decelerating from the previous quarter. Higher unemployment and softer retail sales growth suggest consumer spending eased in the quarter; however, a surprisingly strong industrial sector, rosier business confidence and buoyant construction activity should have cushioned the slowdown in Q1. Meanwhile, in April, parliament backed a plan to expand the government’s flagship child benefit programme; in the same month, the government unveiled plans to reform the pension system, which will help finance its fiscal package and keep the budget deficit under control. Last year, the government recorded a robust fiscal outturn, and in mid-April S&P Global Ratings and Moody’s affirmed the country’s credit ratings at A- and A2 with a stable outlook, respectively, citing robust growth and solid fiscal metrics.

Economic activity will likely decelerate this year amid a less supportive external environment and a diminished contribution to growth from EU-driven fixed investment. Nevertheless, sizable wage and job gains should sustain consumer spending and GDP. Moreover, the government’s fiscal measures, which are set to come into effect in H2, represent a key upside risk to growth.

Met the why particular analysts see growth at 3.8% in 2019, which is up 0.1 percentage points from last month’s forecast, before decelerating further to 3.3% in 2020.

Czech Republic Economic Outlook

Available data signals that economic activity moderately lost pace in Q1. Despite industrial output rebounding in February, the crucial car production sector remained weak amid challenging external conditions, particularly in Germany. Moreover, both business confidence and the manufacturing PMI dipped in March, bringing their quarterly average below that of Q4 2018 and signaling softer dynamics in the private sector. On the demand side, although retail sales fared relatively well in January–February, declining consumer confidence and rising inflation throughout the quarter likely restrained household consumption somewhat. Turning to Q2, the PMI continued on its downward spiral and hit an over six-year low in April, boding ill for manufacturing activity. Meanwhile, in mid-April the police recommended the indictment of Prime Minister Andrej Babis over the long-running allegation of EU subsidy fraud. State prosecutors would have to decide on whether to press charges, raising political uncertainty ahead.

Growth is expected to moderate this year, in large part due to softer fixed investment. That said, the overall expansion should remain firm, propped up by solid private consumption on the back of the extremely tight job market. Weakening EU demand and heightened trade tensions, which would bruise the industrial sector, are the key downside risks to the outlook.

Met the why particular analysts expect growth of 2.7% in 2019, which is unchanged from last month’s forecast, and 2.5% in 2020.

Romania Economic Outlook

Available first-quarter indicators suggest that household spending remains a force to be reckoned with; retail sales through March hint that last year’s household-spending binge found its second wind. Moreover, employment gains through March, as well as the recent upturn in inflation, also point to resilient economic activity. Import growth through February does the same. Industrial output, meanwhile, has been lackluster since the outset of the year—in line with sector-specific weakness regionwide—and is expected to bruise fixed investment, which has been hobbled for several quarters. That said, the government’s recent easing of its controversial new tax on banks’ assets should serve to boost economic sentiment in the near-term.

Romania’s economy is expected to continue cooling off this year as slower employment growth and labor shortages weigh on household spending gains. Fixed investment, meanwhile, is still expected to be hit by weak economic sentiment, as well as by rising labor costs. Twin deficits will remain a key concern, especially in the event of a global downturn.

Met the why particular analysts expect growth of 3.3% in 2019, up 0.1 percentage points from last month’s forecast, and 2.9% in 2020.

Hungary Economic Outlook

Despite upbeat first-quarter indicators, analysts expect last year’s growth spurt to be petering out amid a more challenging external-sector backdrop. Domestic demand still looks to be in the driver’s seat. Both the labor market and consumer confidence have notched gains in recent months, while industrial-sector capacity constraints and the ongoing construction boom have likely buoyed fixed investment. Some cracks have begun to appear, however. Business confidence plunged to a two-year low in April and, more broadly, higher inflation since the outset of the year is expected to take its toll. In early May, all eyes were on Moody’s in the run-up to its credit-rating call—now postponed. Ahead of any announcement, strong fundamentals and well-managed public finances bode well for an upgrade to its Baa3 credit rating—although analysts remain split on the matter.

Household spending and fixed investment should get reined in this year by slower employment growth and the narrower intake of EU-linked structural funds, respectively. Higher inflation is only expected to compound matters, while short-term growth prospects for the European Union remain a downside risk for the economy.

Met the why particular analysts expect growth of 3.6% in 2019, which is up 0.1 percentage points from last month’s forecast, and 2.7% in 2020.

CEE Monetary & Financial Sector News

Regional inflation rose to 2.6% in March from February’s 2.2%. Going forward, inflation is seen broadly steady this year, with oil prices posing the main upside risk. Price pressures in most major players will stem from strong wage growth and higher food prices. Inflation in Eurozone member states, on the other hand, should soften.

Central Banks in Poland, Hungary and Romania left rates unchanged at their latest meetings, while the Czech National Bank hiked rates. In the coming months, the loose monetary stance of the ECB should translate into largely stable policy rates in Poland and Hungary. Some tightening is expected in Czech Republic and Romania, however, to counter strong wage pressures.

In recent weeks, the Czech National Bank’s monetary tightening supported the koruna, and the zloty strengthened against the euro. In contrast, the forint lost further ground after Hungary’s Central Bank decided not to hike rates. Regional currencies should remain broadly stable this year, supported by healthy growth and higher policy rates compared to the Eurozone.

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