Central & Eastern Europe is facing a very tough year economically

Not many European countries are heading into 2023 with much optimism, and as we start the year, it’s useful to have a look at the macroeconomic context – because it will drive a lot of political decision-making over the next 12 months.

The first thing to say is that the picture isn’t rosy for any country in Europe, and things certainly aren’t all bad in Central & Eastern Europe. The European Commission’s forecasts for GDP growth this year and next, for example, indicate a mixed picture for the larger CEE countries, with Romania and Bulgaria predicted to be near the top of the EU’s growth table for 2023, the Czech Republic and Hungary towards the bottom:

Next year, things look more broadly encouraging for this region: of the 10 member states that are forecast to grow by more than 2% in 2024, seven are in CEE.

There are a couple of underlying factors here which are consistent across most of this region and have been in place for a long time.

The first is unemployment rates, which we have written about before and which remain low across much of CEE.

The second is levels of government debt – which are lower across CEE than they are in Western Europe:

Those are the main positives.

The negatives, unfortunately, look more serious.

First, of course, there’s inflation, which is running at particularly high levels across CEE (and, for reasons we have discussed before, is likely to take longer to bring under control in this region than the rest of Europe). The European Commission is forecasting an inflation rate of 7% for the EU as a whole this year, with only one non-CEE country (Germany) above that average line. The five member states with the highest predicted rates are Hungary (where inflation is forecast to be 15.7% for the full year), Slovakia (13.9%), Poland (13.8%), Romania (10.2%) and the Czech Republic (9.5%):

Second, government spending. The IMF is forecasting that government revenues will remain low in CEE for at least the next two years:

As you would expect, this will lead to weak levels of government spending, with the IMF’s forecasts for expenditure matching revenues very closely.

That, on its own, would be a serious concern for a lot of businesses. Add it to the range of priorities that will demand increased public spending – including the need to enhance defence capabilities and support the energy transition – and you have a recipe, surely, for tax increases on those business sectors which governments believe will be best able to absorb them.