Central European and Baltic economies shrugging off political uncertainty

By bne IntelliNews June 30, 2017

Medium-term economic growth forecasts for Central Europe and the Baltics have been raised by The Vienna Institute for International Economic Studies (wiiw) in a report issued on June 29.

The most important factors driving growth are the economic recovery in the Eurozone and the relatively low oil price, the analysts note. Many countries in the region are also experiencing favourable developments in private consumption and investments. In general, the economies are “performing very well and… firmly shrugging off negative political developments”, the report sums up.

wiiw expects regional GDP across Central, Eastern and Southeast Europe (CESEE) to grow 2.4% in 2017, before accelerating to 2.6% and 2.7% over the following two years. That is despite political uncertainty across the region, the analysts note.

Negative political developments in Poland and Hungary have not yet had a material negative economic impact. However, together with Brexit, they represent the greatest sources of uncertainty in the medium term.

“Economies in EU member states in Central and Eastern Europe (EU-CEE) are performing better than we had expected at the time of our spring forecast, with a projected average growth rate of 3.5% this year,” wiiw says. The growth differential compared to the Eurozone amounts to 1.8pp.

GDP growth projections for 2017 range from 2.3% for Estonia to 4% in Hungary. The forecast for Poland is less optimistic than most at 3.3%. Slovakia is expected to grow at the same rate, with Lithuania (3%) and Latvia (2.9%) not far behind. The Czech Republic is forecast to expand its economy by a relatively optimistic 2.7% this year.

Exports are increasing strongly, reflecting the economic recovery in the Eurozone. Wages are continuously increasing – on the one hand caused by a shortage of skilled labour, on the other hand supported politically by increases in minimum wages (e.g. in Hungary, Latvia, Poland, Romania, and Slovakia), social benefits, and wages paid in the public sector.

At the same time inflation remains low, partly due to the low oil price. This environment supports private consumption in particular as the most important growth driver in the region. The start of the new EU funding programming period is also expected to result in an increase in EU co-financed investments.

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