wiiw Autumn Forecast: Growth in Eastern Europe under pressure

Despite their previous resilience to the economic consequences of Russia’s war in Ukraine, the economies of Central, Eastern and Southeastern Europe (CESEE) are coming under increasing pressure. These are part of the findings of the 2023 autumn forecast published by the The Vienna Institute for International Economic Studies (wiiw) (wiiw).

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Economic growth in CESEE in Q2 notably resilient, outperforming the EU

The CESEE region recorded a growth rate of 1.5% in the second quarter of 2023, which was better than in the previous two quarters, but with significant differences between countries. At the same time, the EU remained stagnant over the same period. According to the wiiw experts, growth in the CESEE region was driven by a decline in imports – primarily on account of the strong base effects resulting from the high level of imports seen the previous year, when energy concerns led to stockpiling. This effect is temporary and will lead to a slowdown in future growth

For 2023, the wiiw forecasts an average growth of 0.6% for the region's EU members which is similar to the 0.5% prognosis for the euro area and half the growth rate expected by the wiiw in their summer forecast published in July. While the growth outlook for EU-CEE has been revised downwards for 2023, except for Croatia and Slovakia, it was revised upwards for the Western Balkans (2.1%), Turkey and Ukraine. The main drivers for these developments remain mainly the same as described in the wiiw summer forecast. For one, the recession in Germany had a negative impact on the EU-CEE countries, on the other hand, the Western Balkan countries are benefiting from tourism, remittances and foreign direct investment. Ukraine also did better than anticipated so far, as they adapted to the new reality and is likely to see a slight recovery this year, with 3.6% growth.

For 2024 and 2025, the outlook remains clouded, with lower growth and further increased inflation, which is becoming more complex and is no longer only energy price driven. Nevertheless, wiiw forecasts that the region’s EU members will see growth of 2.5% on average in 2024. Overall, the region covered by the wiiw continues to grow well above the EU average.

Moderating of inflation is slow

While inflation has started to moderate, the process is slow, and it will remain high for some time. The main driver of inflation is rising food prices, according to the wiiw. However, core inflation, excluding food and energy, now exceeds headline inflation in most countries of the region. While corporate profits are at a historically high level, real wages are also picking up for the first time in a while. If companies were to respond to this with further price rises, that could lead to an entrenchment of inflation.

Outlook

Looking ahead, the region appears to be moving toward a new equilibrium, the main features of which will be lower growth and higher inflation. Growth expectations for 2024 and 2025 have been revised downward owing to the global economic slowdown, a weak EU economy, sustained inflation, tight monetary conditions, and less fiscal support. Inflation is expected to remain elevated. Also, monetary conditions are expected to remain tight in 2024 with less-supportive fiscal policy in the coming years.

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