CEE Quarterly

External weakness clouds the outlook

• We expect the economies of EU-CEE1 to grow by around 2.3% in 2024 and 2.8% 2025, with the Western Balkans2 growing above 3%. In Turkey, we forecast that growth will slow to 3% this year and 2.8% in 2025.
• Private consumption will remain the biggest growth driver. We expect investment to contribute more to growth in 2025, especially if public investment picks up with the help of more EU funds. We expect a gradual recovery in external demand next year.
• Labor markets have remained tight, supported by strong domestic demand, although we observe some differentiation among sectors reflecting the varying impact of weak external demand. We expect wage growth to continue to outpace inflation.
• We expect to see significant fiscal consolidation efforts in Slovakia, Romania and Turkey in 2025 while any adjustment in Poland and Czechia will be small. Hungary will continue to lower its budget deficit. Fiscal risks are limited in all other CEE countries. In the absence of fiscal tightening, we see risks of sovereign downgrades in Hungary, Romania and Slovakia.
• Disinflation may stall in 4Q24 but resume next year, which together with declining core market rates creates space for central banks in the region to cut rates. Fiscal risks and the divergence between goods and services inflation warrant a cautious approach. We expect the NBP and the CBRT to start to cut rates in 1H25, when the CNB may already reach its terminal rate. The NBH, NBR and NBS, on the other hand may continue cutting rates gradually as they are yet to reach the end of the cycle beyond 2025.
• While risks of excessive FX weakening are muted because of improving external positions, we expect exchange rates to trend higher due to loose fiscal positions and a positive gap in the inflation outlook relative to the region’s main trading partners. The exception is EUR-CZK.
• Strong EU-CEE representation in the new European Commission offers significant opportunities for these countries to shape the future of the European Union.
• The potential re-election of Donald Trump as US president could imply economic and geopolitical risks for CEE if US economic policy becomes more protectionist and its commitment to NATO weakens.

CEE Quarterly (PDF)

Source: UniCredit Group Investment Strategy  - CEE Quarterly, 1 October 2024, Executive summary