wiiw Spring Forecast 2023: Sailing Through Rough Waters

Most of the economies of the 23 countries of Central, Eastern and Southeastern Europe (CESEE) seem to have largely digested the economic shock caused by the Ukraine war. Although economic activity has weakened considerably compared to last year – which was marked not least by catch-up effects following the coronavirus pandemic – almost all of them will continue to grow in 2023, despite the war. These are part of the findings of the 2023 spring forecast published by The Vienna Institute for International Economic Studies (wiiw) :

Find the wiiw news release as well as the report for download here ?? https://bit.ly/3LCPuvh

Inflation persists

While the slowdown in economic growth in 2022, due to higher inflation, weighed on real incomes and confidence, the bottom appears to have been reached for all countries in the region in late 2022 or early 2023, and business confidence is starting to improve in 2023. This is due, among other things, to the global decline in energy prices. Nevertheless, inflation is currently still in the double-digit range in most of the CESEE countries and is more persistent than predicted in wiiw's winter forecast. Drivers are housing and food, but also high core inflation. This should average around 17% in the region in 2023, compared to 5.7% in the euro area. In 2024–2025 inflation is expected to subside across the region, but it will still exceed 2% in all countries, apart from Estonia.

In early 2023, Hungarian inflation was the highest in the EU. Measures to rein in inflation have been unavoidable but do little to encourage growth. Albania on the other hand, is mentioned as a positive example in terms of inflation by wiiw experts. Through electricity generation from 100% renewable energy (mostly hydropower) as well as measures to control major food prices, inflation was the lowest in the whole CESEE region, averaging 6.7% in 2022. However, still high by the country’s own standards.

?Continued decoupling from Russia

CESEE countries mostly continued their decoupling from Russia in 2022 though the speed of exiting Russia by companies varied greatly. All countries managed to reduce gas consumption to wean themselves off their dependency on Russian fossil fuels. But the share of renewable energy in electricity generation mostly decreased across the region.

Growth outlook for 2023–2025

For 2024–2025, wiiw expects a general acceleration of economic growth across the region, mainly due to a recovery in private consumption. Investment is also expected to recover, but its contribution to economic growth will generally be quite modest, except in Croatia, Romania and Northern Macedonia. These countries will see a growth in line with household final consumption, supported to a large extent by inflows of foreign direct investment and in the case of the first two countries EU funds. The region is still expected to grow faster than the Eurozone, with South-Eastern Europe outperforming others.

Conclusion

In summary, wiiw expects that the growth has bottomed out and inflation has peaked. Which means the real GDP growth will accelerate in 2024/2025. They expect most of the relative success stories for this time period to be in Southeast Europe. Risks for their forecast are monetary tightening, intensification of the war in Ukraine and a Republican victory in the US 2024 presidential election.

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