Germany‘s underperformance is sneaking into CEE
CEE Macro Outlook , 11. Sep.
2Q24 surprised to the downside in several CEE countries: Hungary, Romania, Slovenia and Slovakia. Thus, the 2024 growth revisions followed (GDP down between 0.5 and 1 percentage points). Serbia and Croatia are on track, as real wage growth is strong, while Poland surprised to the upside. We fine-tuned 2024 Polish GDP to 3.2%. As far as the outlook is concerned there are some clouds, however. Germany’s weakness is sneaking into CEE. Increasing number of firms sees demand as a factor limiting production. Such development goes hand in hand with declining level of capacity utilization that (apart from pandemic year 2020) is the lowest in last decade. Further, fiscal consolidation (in the 2025 plans in all countries, except for Poland and possibly Hungary) is also a potential risk for the growth prospects beyond 2024.
On one hand, lower growth will be disinflationary in its nature, making central banks more comfortable with ongoing monetary easing. On the other hand, labor markets remain tight. There are also upside risks stemming from the pending adjustment of energy prices (Slovakia) and possible tax increases within fiscal consolidation plans. We expect average inflation to moderate in 2025, however, and monetary easing to continue next year in all CEE countries. Thus, the long-term yields are expected to decline further in one year horizon, additionally supported by interest rate cuts on core markets.