CEE Quarterly

Domestic demand powers growth, worries central banks

• We expect the economies in EU-CEE1 to grow by around 2.7% in 2024 and 2.9% 2025, with the Western Balkans growing by around 3%. We expect GDP to grow by 3.6% in 2024 and 3.3% in 2025 in Turkey and by 3.0% in 2024 and 1.6% in 2025 in Russia.
• Private consumption will remain the biggest growth driver, with public investment contributing this year and capex expected to rebound in 2025. Net exports will not boost economic growth until next year.
• Labor markets have remained tight through the soft patch in economic activity of 2023-1H24. We see purchasing power continuing to rise in CEE in 2H24 and 2025.
• Hungary, Slovakia, Poland, Romania and Turkey will have to reduce their budget deficits, but they will remain far from the 3%-of-GDP threshold. 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.
• Central banks have turned more cautious in 2024 due to persistent inflationary pressure amid loose fiscal policy and strong consumer demand. However, markets may now be underestimating the number of rate cuts in 2025, when we see policy rates approaching terminal rates in this cycle.
• The Hungarian presidency of the Council of the EU will prioritize EU expansion to the Western Balkans, reducing migration to the EU and improving competitiveness.
• The Western Balkans have a historic opportunity to reform, receive EU funding and, in the longer term, access the European customs union and receive sovereign upgrades. So far, reform momentum remains weak, and we see Montenegro as the frontrunner in negotiations.
• In our view, the main risks are 1. a hasty peace in Ukraine, 2. the stalling energy transition in Central Europe, 3. political infighting delaying euro adoption in Bulgaria, 4. some CEE countries falling behind in a two-speed Europe, 5. less investor appetite for EM assets and 6. weak reform appetite ahead of the demographic cliff at the end of the decade

CEE Quarterly (PDF)

Source: UniCredit Research - CEE Quarterly, 26 June 2024, Executive summary