German industry supports CEE

On the radar

• Fitch ratings affirmed Poland’s rating and kept the outlook negative.
• Today, retail sales growth will be released in Poland at 9.30 AM CET and money supply growth in the afternoon.
• In Slovenia, unemployment rate for 2Q26 will be published.

Economic developments

The Flash Composite PMI index for Eurozone in August edged up to 52.1, suggesting that the eurozone economy continues to maintain solid momentum in the third quarter. So far, economic activity appears to have remained relatively resilient despite the ongoing conflict in the Middle East and the associated uncertainty. The improvement was driven primarily by the manufacturing sector as manufacturing PMI increased by 0.9 points to 52.8. Further, Germany was the main contributor, with its manufacturing PMI index rising by as much as 1.9 points to 54.1. The recovery was accompanied by the biggest increase in output and export orders since mid-2022, pointing to a broader improvement in external demand. The services sector also remained in expansion, although the pace of growth was broadly unchanged from the previous month. The improvement in eurozone manufacturing is particularly encouraging for the CEE region, given its strong integration into European and German industrial supply chains. All in all, the latest PMI readings therefore point to a more supportive external environment for CEE industry in the second half of the year, although the sustainability of the recovery will depend on whether the rebound in new orders continues and whether geopolitical tensions remain contained.

Market movements

Fitch Ratings affirmed Poland's long-term rating at "A-" with a negative outlook, citing the absence of a credible fiscal consolidation plan amid high deficits and rapid debt growth. Fitch expects the general government deficit will remain elevated at 6.9 percent of GDP in 2026, more than double the current peer median of 3 percent. Further, Fitch expects the fiscal deficit to narrow marginally to 6.7 percent of GDP in 2027. In Romania, the parliament reconvenes in extraordinary session this week to pass outstanding reforms needed to unlock the remaining EU funds. Hungary is powering up the nuclear power plant and plans to have it running at full capacity by middle of the week as the level of water in Danube River has been rising. On the core markets, rising energy prices, higher inflation risks, and a surprisingly robust economy are increasing the pressure on the ECB to act. We expect another interest rate hike of 25 basis points to 2.5% in September.

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