MNI INTERVIEW: CEE Recovery, Risks Remain - WIIW Economists

The economies of the Czech Republic, Hungary and Poland will continue to see a gradual recovery in the coming quarters, but they remain fragile due to a combination of sluggish German growth, fiscal challenges, rising geopolitical risk and inflation uncertainty, a leading regional economist told MNI.

Incoming data provides greater grounds for optimism than in previous survey rounds, Vienna Institute for International Studies (WIIW) economist Zuzana Zavarska said in an interview, helped by a small first-quarter rebound in German output (See MNI INTERVIEW: Weak Germany To Hit Czech Growth "For Years")

But a threat to the growth outlook is a tightening of fiscal policy later this year, as governments’ reluctant to introduce tougher fiscal consolidation before local and European elections in June are faced with the “inevitable unsustainability” of their fiscal positions, Zavarska said. (See MNI EM INTERVIEW: Hungary Deficit Target "Realistic", Not Assured). That will dampen Budapest’s hopes of 4% growth in 2024, Zavarska said, with 1.9% the more likely figure.

“We need to consider the credibility of the Hungarian government’s economic forecasts. Last year they projected growth of 4.4%, and it turned out to be -0.9%,” she said. “So 4% seems absolutely unrealistic given all the constraints that the Hungarian economy is facing”.

CZECH BOUNCE

The Czech Republic, by comparison, should perform better than foreseen late last year, when the Czech National Bank forecast GDP growth of just 0.6%, despite a push to reign in fiscal deficits.

Recent Ministry of Finance projections put this year’s growth at 1.4%, and while Zavarska said although she had been forced to downgrade her own estimations from 1.7% as a result of a weaker German performance, 1.2% annual growth is still within reach.

“One of the reasons I'm somewhat more optimistic than the Czech National Bank is that if you look at the breakdown of their forecast components, they seem to be a bit more hesitant about the role played by private consumption,” she explained. “With inflation subsiding, the growth that we are seeing in nominal wages will give quite a boost to purchasing power,” a factor that could boost growth to around 1.2%, she said.

PRICE CONCERNS

Poland remains most susceptible in the region to inflation risks, Zavarska said, due to a combination of a very tight labour market, high nominal wage increases in both the public and private sectors, and sticky service sector inflation, with added risks from higher energy costs. (See MNI INTERVIEW: Polish CenBank Ignores Core Data-MPC's Tyrowicz)

A propensity for boosting savings following a two-year period of declining incomes means that consumer-driven growth will be limited, “but the message is still positive, even if it is not as positive as real wage growth alone would predict,” she said.

More broadly, and despite a large, broad-based decline in the pace of price growth, it is doubtful how much impact central bank monetary policy in the region has ultimately had in bringing inflation back from some of the highest levels in Europe, Zavarska said, which much of the price-fighting work done via the exchange-rate channel.

“Now domestic factors are really in focus, and central banks are doing what they can to tackle relatively high core inflation.”

Spring forecasts by the WIIW indicate that Central, Eastern and Southeastern European EU member states are expected to see their economies expand by an average of 2.5% and 3% in 2024 and 2025, compared with just 0.6% and 1.6% in the euro area.