Will forecast economic growth in CEE have a political impact next year?

Will forecast economic growth in CEE have a political impact next year?

21. 12. 2023 – Lomond

If the last few years have taught us anything, it’s that trying to predict the future is a dangerous business. But there’s one thing we can say for sure about next year: 2024 will be a very big year politically, with the presidential election in the United States in November and the European Parliament election in June. There are a host of national elections scheduled in Europe too – including several in Central & Eastern Europe (CEE).

The economic context will be, as always, an important consideration in assessing likely voting intentions next year, but in this region at least, it’s far from straightforward to evaluate.

On the one hand, there are some top-line macroeconomic indicators which look encouraging for CEE. For example, the European Commission’s Autumn 2023 Economic Forecast, which was published last month, indicated that, after a tough 2023, GDP is scheduled to grow at a faster rate than the EU average in much of CEE next year – with the forecast even more positive for 2025:

Unemployment rates are also set to remain very low across most of this region (as they have been for a long time now). Next year, based on the Commission’s forecasts, the four biggest economies in the region – Poland, Romania, the Czech Republic and Hungary – will all still be well under the EU average for unemployment, and will remain there. The Czech Republic and Poland are predicated to have the lowest unemployment rates anywhere in the EU in 2025:

That all looks quite positive. The question is what impact it might have on political attitudes and voting intentions. That’s obviously tough to evaluate because it is not about objective metrics: it’s about how people feel.  But there are a few reasons to think that, even if the forecasts prove to be accurate, top-line economic growth won’t automatically translate into people feeling better about their circumstances next year:

1. Inflation will remain an issue

We have written a lot over the last two years about inflation in CEE – because rates have been even higher in this region than they have been in the rest of Europe. The fact that they are now falling is obviously good news, but if you look at the four largest economies in the region again, the Czech Republic is the only one where inflation is expected to drop to the EU average next year:

And even in the Czech Republic, after such an extended period of super-high inflation, it would be a surprise if voters’ attitudes were transformed by inflation retreating to more tolerable (but still reasonably high) levels next year.

2. Business confidence remains weak

That would be slightly less of an issue if business was booming – but, based on the OECD’s Business Confidence Index, business confidence in the three largest CEE countries covered by the Index remains below the OECD average:

That is, presumably, one of the reasons that wage growth has not kept pace with inflation in this region. As the European Commission’s recent “Labour Market and Wage Developments in Europe” 2023 annual review clarified, “from 2019 to 2021 nominal wage growth slowed down sizeably in some central and eastern European countries (notably Czechia, Croatia, Hungary and Romania). Then, from 2021, inflation increased significantly, while nominal wage growth increased less in all central and eastern European member states.” The signs aren’t great that 2024 will be the year when we can expect to see dramatic changes in this area.  

3. CEE governments are taking major steps to balance national budgets

One of the most illuminating parts of the Autumn 2023 Economic Forecast was the data on budget balances (i.e. the difference between government revenues and spending) and, specifically, which countries are forecast to make the biggest cuts in budget deficits over the next two years. Post-COVID, most EU member states are taking steps to reduce deficits – on average across the EU, deficits are forecast to come down by 0.5% of GDP between 2023 and 2025 – but the four biggest CEE countries are in the list of top five member states where the biggest cuts are being made:

These deficit reduction measures are already being put in place across the region and it isn’t just about public spending cuts – although they will be significant in all four countries. It’s also about taxation: both tax increases and measures to improve tax collection.

This will be a double whammy for many people: the tax burden will increase while public services are likely to decline further (or at least not improve to the extent people might be entitled to expect if more of their income is going to the government every month).

To be clear, there obviously isn’t a causal relationship between the macroeconomic context and attitudes to the government. Within CEE, Hungary probably best illustrates that point, as major economic challenges have led to falling living standards there – but it hasn’t, apparently, seriously undermined public support for the Orbán government.

However, the inference of the question in the title of this piece was whether the economic growth that is forecast over the next two years across CEE might lead to more support for incumbent governments. It feels possible that it might by the time we get to 2025. But next year? Almost certainly not.