wiiw Summerforecast 2023: Southeast Europe motors on while rest of region struggles

Despite the impressive resilience demonstrated in the face of the economic consequences of the Ukraine war, the fragile growth in many economies of Central, Eastern and Southeastern Europe (CESEE) is coming under pressure. The still high inflation, the tightening of monetary policy and a weak international environment are all weighing heavily on the region’s economies. These are part of the findings of the 2023 summer forecast published by the The Vienna Institute for International Economic Studies (wiiw) :

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Southeastern Europe markets outperform the rest of the region

Looking at the real GDP developments in the first quarter of 2023, after the past-Covid high in 2021 a marked growth slowdown underway in most of the markets covered by the wiiw. This is particularly true for the EU countries in the CESEE region, where a slowdown in growth to an average of 1.2% is expected (Euro area 0.5%). With a forecasted growth at an average of 1.9%, the picture is more positive for the western Balkan countries.

For 2023 according to the wiiw prognosis Hungary will be the only country in the CESEE region to see a recession, owing to inflation and delays in EU transfers. However, the growth expectation is at least slightly positive in most other countries in the region, with the exception of Romania and Croatia, which are expected to grow more strongly. Overall, Southeastern Europe is holding up quite well. For the two countries mentioned, this is mainly due to large inflows of EU funds, but also to booming tourism and foreign direct investment.

A positive development can also be expected for Ukraine. Based on the assumption that the war will not escalate any further, it should be able to recover slightly this year, with growth of 2.0%.

The recession in Germany weighs heavily on growth in export-oriented markets

While regional trade relations with Germany are very strong – wiiw calls it the main external market for the region – the country has been in recession since the fourth quarter of 2022. This led to a weak demand from Germany and the euro area dragging down especially the Visegrád countries.

The peak of inflation passed in 2022, but remains high and is largely profit led

Inflation has passed its peak in all the countries observed by the wiiw according to their prognosis. Nevertheless, it is likely to remain high for some time to come. On average, it will be around 16% in the region in 2023, almost three times as high as in the euro area (5.7%). According to their finding the main drivers of inflation in Central, Eastern and Southeastern Europe (CESEE) are high food prices and rising corporate profits.

Lots of positive stories to tell but also many challenges

In conclusion wiiw sees a lot of positive stories to tell in the region but also many challenges. Most CESEE countries are experiencing a marked slowdown in growth, but Southeastern Europe is showing good resilience and Ukraine should be able to recover slightly after last year's dramatic GDP slump. The recession in Germany weighs on growth in the region, especially in EU-CEE countries. On a positive note, even though inflation remains high and is largely profit-led, with little evidence of a wage-price spiral, the peak of inflation has already passed. Nevertheless, tight monetary policy will likely stay at least until end-2023 which dampens credit dynamics and GDP growth.

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