Inflation will remain a key indicator to follow as space for monetary easing has been narrowing

The 1Q24 GDP growth proved to be solid in the region, driven mostly by private consumption. As households regain purchasing power, private consumption is likely to be the key driver of the growth in 2024. Increased willingness to save may, however, moderate households’ overall spending. We expect GDP growth to be around 1.3% in Czechia and above 3% in Croatia and Serbia. Further, investment activity has slowed or declined, due to the EU funds downturn at the beginning of the new budgeting period. Economic sentiment has so far been stronger than in 2023. In recent months, however, confidence indicators in industry and retail sectors have been moving sideways. PMIs in manufacturing are above the threshold of 50 only in Romania, but recovering German exports allow for optimism regarding growth of industry in the region.

In the second half of the year, headline inflation is likely to increase in several CEE countries. External factors provide a mixed bag. Ingeneral, however, a period of fast disinflation comes to an end and space for rate cuts has been narrowing in the region. We currently see upside risks to our year-end forecast of the key interest rate in Czechia (currently at 4%). Monetary easing is coming to an end in Hungary. Romania and Serbia are expected to lower key interest rates in the months to come, but the more the central banks wait, the less space they may have. The ECB cut key interest rates by 25 basis points in June. This should be the last missing piece for Romania and Serbia, as inflation has been easing lately.

Serbia had its outlook changed to positive by S&P and is eyeing an investment grade. In Croatia, we expect the rating upgrade(s) in the second half of the year. Hungary and Slovakia currently have a negative outlook in the assessment of Fitch and Moody’s. On June 14, both rating agencies have the rating revision scheduled.

Political developments and the geopolitical situation remain key risks for the outlook. The strong result of far-right parties in Germany and France (snap election scheduled for June 30 and July 7) raise questions about how the European Union's major powers can drive policy in the bloc. In the region, on the other hand, the focus moved away from right-wing parties toward democratic parties. In Hungary, Peter Magyar and his Tisza party received almost 30% of the votes. Fidesz remained first with roughly 45%, but the result was much lower than polls had predicted. In Slovakia, Progresivne Slovensko secured almost 28% of votes, while the ruling party Smer was second. In Poland, Koalicja Obywatelska won over Prawo i Sprawiedliwosc. The far-right party Konfederacja, however, was third, securing roughly 12% of votes.    

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