May 14, 2017    4 minute read

Why CEE Countries Are Expected to See Accelerated Growth

A Bright Future    May 14, 2017    4 minute read

Why CEE Countries Are Expected to See Accelerated Growth

Economic growth in Central and Eastern Europe (CEE) will accelerate, and inflation will moderately increase with it, reported the National Bank of Poland.

Accelerating Growth

Economic growth in CEE should accelerate between 2017-2018 to slightly above 3%. International institutions and financial market participants expect a slightly slower GDP growth only in the economies growing at the fastest rate last year, such as Romania, Bulgaria and Slovakia.

In other CEE countries, acceleration of growth is due to a moderate revival of investment. Private consumption will remain a key driver of recovery due to further increases in disposable income. Nominal wages will continue to rise in the near future. Furthermore, in 2017 and 2018, the National Bank of Poland anticipates a faster mobilisation of EU structural funds, although public investment will remain at a lower level than in the record years of 2014-2015. According to the authors of the report, increased social transfers and public consumption in the region will increasingly support the recovery.

Rising Inflation

Some countries will witness an additional impetus for domestic demand due to a reduced tax burden. The projections point to a gradual, moderate increase in inflation in CEE countries over the medium term. Short-term inflation prospects in the region will form the base of changes in energy and food prices.

In the horizon of the coming months, the rise in inflation will also be affected by the rise in world metal prices due to the decrease in the capacity of the Chinese metallurgical industry. Simultaneously, a gradual rise in core inflation can be expected, driven by strengthening demand and wage growth. Higher inflation in CEE will also be affected by the gradual acceleration of price growth in the EU-15.

The European Bank for Reconstruction and Development (EBRD) forecasts moderate GDP growth across the region, according to a report released on Wednesday. Poland’s GDP growth forecast was maintained for 2017 at 3.2% and set at the same level at 2018. By way of comparison, in the case of Slovakia, these figures are 3.2% and 3.5%, while Hungary sits at 3.0% and 3.0%. Estonia has forecast growth of 2.4% and 2.7%. Furthermore, GDP growth in Russia will, according to EBRD estimates, be 1.2% in 2017 and 1.4% in 2018.

CEE Countries and the Eurozone

In the CEE region, the common currency has been accepted by the Baltic countries, Slovakia, Slovenia while Poland, the Czech Republic, Hungary, Romania, Bulgaria and Croatia still maintain their national currencies. Slovakia was, in fact, one of the first countries to join the Eurozone. One great advantage of the Eurozone is the low interest rate, which facilitates cheaper borrowing and the absent risk of a depreciating national currency.

Today, the Eurozone is radically divided, monetarily and politically between countries that have a comfortable fiscal situation and the countries in the south that are struggling to service their debts. Eliminating these internal divisions would allow CEE countries to seriously consider joining the euro. Today, however, the Eurozone’s future is deeply uncertain.

Furthermore, the European Central Bank (ECB), which sets interest rates in the Eurozone, is naturally dominated by larger countries, notably Germany, rather than the CEE countries.

A Closer Look at Poland

For the next five to ten years Poland and the whole region will catch up with the global economy without a recession or a crisis. After this period much will depend primarily on government policy. Furthermore, Poland’s low fertility rate positions it among the fastest-ageing populations in OECD countries. It is feared that the current reforms (like the lowering of the retirement age) will not reinforce long-term growth.

Additionally, Poland’s public finances are less certain, but it is much better than comparable situations in Greece, Italy, France, Portugal or Spain. However, there may well be pressure on interest rates due to government initiatives if the national debt grows too fast.

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