CEE recovering but no full rebound in sight, says wiiw

CEE recovering but no full rebound in sight, says wiiw
Kazakhstan is set to be the fastest-growing economy across the CESEE region in the next three years. / wiiw
By Clare Nuttall in Glasgow April 25, 2024

The economies of most Central, Eastern and Southeast European (CESEE) countries are already recovering from the shocks of the last two years, but growth remains well below levels seen prior to the pandemic and Russia’s invasion of Ukraine, says the latest Spring Forecast released by the Vienna Institute for International Economic Studies (wiiw). 

The 23 countries in the region covered by wiiw are expected to grow by 2.9% in 2024, rising to 3.1% in 2025 and 3.3% in 2026, but there are significant variations between countries, shows the report released on April 24. 

Across the region, growth in 2024 is set to range from 4.7% in Kazakhstan to just 0.4% in Estonia. 

Regional variations 

Small Southeast European countries – namely Albania, Kosovo, Moldova and Montenegro – are also expected to perform well this year. 

The Visegrád countries, including Poland, Czechia, Slovakia and Hungary, are anticipated to expand at an average rate of 2.4% this year, with growth expected to accelerate to 3.0% in 2025. 

Despite theoretical increases in EU funds accessibility for Poland and Hungary, actual fund disbursement remains sluggish, posing challenges to their economic growth.

Fellow EU members in Southeast Europe, notably Romania and Croatia, are poised for robust growth in 2024, with respective forecasts of 3.0% and 2.9%. These projections are buoyed by the inflow of funds from the NextGenerationEU coronavirus recovery fund, providing vital support to their economies.

Among the non-EU member states in the region, the six countries of the Western Balkans are expected to achieve an average growth rate of 3%, while Turkey is forecasted to grow by 3.4%. 

Despite the ongoing war, Ukraine is projected to experience a slight recovery, with a GDP growth forecast of 3.2% in 2024.

“The main message is that things look better in the region. Overall the recovery is here, and it’s here for more countries in the region, but it’s not a fantastic recovery,” Richard Grieveson, a deputy director of wiiw, told a webinar organised by the think-tank on April 24. 

“We’re not back at anything like we saw before the inflation shock, before Russia’s invasion of Ukraine. The recovery is here but there is still some way to go before we get back to levels of growth we expect for the region.” 

Falling inflation 

The main driver for growth, identified by wiiw economists, is falling inflation. 

Olga Pindyuk, economist at wiiw and lead author of the Spring Forecast, highlighted the pivotal role of rising real wages in propelling growth, driven primarily by the decline in inflation. 

Pindyuk pointed to private consumption as the primary growth driver, with investment activity expected to recover gradually. 

However, challenges persist, especially in manufacturing, and particularly in the Visegrád countries, which have close ties with the German economy.

Pindyuk underlines the importance of the anticipated recovery of the German economy, slated for 2025, in bolstering the economic prospects of the region. For 2024, wiiw projects an average growth of 2.5% for the EU members in the region, with a further uptick to 3% in 2025. These figures far outstrip the subdued growth forecasted for the euro area, signalling continued progress in the economic catch-up process for the EU members of Central and Eastern Europe, albeit with a projected slowdown post-2025.

At the same time, said Grieveson, consumer sentiment, while negative, is improving. 

A third factor is the slow fiscal consolidation. “Fiscal consolidation has not started in the region. In the medium- to long-term this will be a problem, but right now it’s not weighing on growth.” 

Downside risks

However, considerable downside risks loom over the region's economic outlook. Pindyuk warned of the potential ramifications of a major conflict in the Middle East, which could trigger another energy price shock and fuel inflation. 

Moreover, uncertainties surrounding the German recovery, disruptions in global supply chains, and political shifts, including the potential election of Donald Trump as the next US president, could exacerbate turbulence in the region.

Grieveson singled out German as the “weak point in the global economy”. “The CEE region is so reliant on Germany for export demand, investment, remittances, this is major reason why the recovery isn’t stronger,” he said. 

The report also highlights the precarious situation in Ukraine, where persistent uncertainty and delays in Western military and economic aid impede the country's recovery efforts. Despite economic successes such as the reopening of vital trade corridors, Ukraine is grappling with challenges including trade blockades and military strikes. Pindyuk called for timely and adequate military and financial assistance from the West to address Ukraine's financing gap, estimated at $40bn for 2024.

In Russia, despite a projected slowdown in GDP growth to 2.8% in 2024, the economy remains robust, fuelled by high government spending on the war. However, labour shortages, capacity bottlenecks, and elevated real interest rates pose challenges to sustained growth. Vasily Astrov, Russia expert at wiiw, warned of potential economic vulnerabilities post-war, particularly in light of increasingly stringent Western sanctions.