Poland leads the region in defense spending

On the radar

• Today at 10AM, Poland will release PPI, industrial production and wage growth.

• Tomorrow, Slovenia will publish their PPI.

• In Croatia, unemployment rate in May 2024 was 5.0%.

• The average monthly gross wage in Croatia for April 2024 were 18.3% higher in nominal terms and 14.1% higher in real terms.

Economic developments

This week, NATO unveiled their first round of estimates for defense expenditure in 2024. Defense costs are considered as payments by a national government that have been or will be made over the course of the fiscal year to meet the needs of its armed forces. Therefore, this is a cash-basis principle, which is in some countries much higher than defense expenditure on accrual basis considered as a “relevant factor” for the assessment of ESA deficit. When looking at the country specific estimates, Poland is a clear leader of the region in terms of defense spending, at 4.1% of GDP in 2024, up by 0.8% of GDP from last year. Second in the region is Romania (2.3%), which increased their military budget by a solid 0.7% of GDP. The critical threshold of 2% is met also by Czechia, Hungary and Slovakia. On the other hand Croatia and Slovenia are still below 2% of GDP, with the latter needing further 0.7% of GDP to meet the criterion.

Market movements

The Czech koruna extended its losses to almost 1% week-on-week against the Euro, following a 0.3% daily increase in both EURCZK and EURHUF yesterday. The Polish zloty clearly outperformed its regional peers, surging 0.3% daily against the euro. Yesterday, the EU Commission recommended placing seven EU member countries, including Hungary, Poland, and Slovakia, under the Excessive Deficit Procedure. However, the decision is not final; it still requires approval from the Council. In autumn, these countries should receive a reference path for fiscal adjustment, which can be completed either within a 4-year or 7-year period, depending on whether they execute reforms and increase investment in parallel with fiscal consolidation. The bond market’s reaction in CEE was rather muted, as this step had been widely expected.

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