The magnitude of fiscal multipliers in CEE

On the radar

• Unemployment rate in Hungary is due 8.30 AM CET.

• At 10.30 AM CET Slovenia will publish retail sales growth in February.

• Croatia will release retail trade data in February at 11 AM CET.

Economic developments

Today, we continue the topic of fiscal impulse and the magnitude of fiscal multipliers from the perspective of triggering escape clause for defense spending. First, the size of fiscal impulse is decision at the country level. Increasing defense spending up to 1.5 percentage point would be treated favorable by the European Commission i.e. not taken into account in the Excessive Deficit Procedure when evaluating the size of the country’s budget gap. Nevertheless, we remain cautious about the extent of use of fiscal space by CEE countries. The positive effect on the economy will depend on the size of fiscal multiplier. Based on Sheremirov and Spirovska (2022) findings (using data on military spending for more than a hundred countries), annual government spending multipliers are in the range 0.75–0.85. Moreover, the multiplier estimates remain significant over longer horizons. The European Commission estimate of short-term fiscal multipliers is at 0.75. More important findings, however, are that the multiplier is larger in developed countries than in developing countries, under a fixed exchange rate than under a floating regime, in recessions than in expansions, and in closed economies than in open economies. Applying these conclusions to the region, we would tend to assume the fiscal multiplier to be rather weaker than stronger. Although CEE would be classified as a developed region, CEE countries are open economies, and the fiscal stimulus overlaps with expansion time. Many CEE countries are also under a floating regime.

Market developments

Poland’s central bank Governor Glapinski reiterated his view about rates stability as high inflation has been preventing the bank from interest rate cuts. If there is any space for monetary easing, rate cuts should be expected in the second half of the year in our view. Hungarian Economy Ministry published the regulations on Thursday, which require minimum holdings of debt for domestic funds. From October, local investment funds must hold at least 3% of their assets in short-term government debt, in addition to existing rules requiring them to hold 5% in government bonds. From April 2026, the minimum requirement is to rise to 6% for bonds plus 4% for shorter-term notes, while for dedicated bond funds that will go up to 10% plus 5%, respectively. The Hungarian forint has weakened against the euro by roughly 1% this week in response to change in regulations of minimum holdings for domestic funds as well as hawkish tone of the central bank after interest rate decision. The Czech koruna and the Polish zloty have strengthened slightly against the euro this week. Long-term yields have declined across the region and the most in Hungary (10 basis points down this week)..

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