The European Bank for Reconstruction and Development (EBRD) has raised its forecast for central and eastern Europe and the Baltic states (CEB) to 5.2 per cent for 2021 in its latest Regional Economic Prospects (REP) report, published today.

This corresponds to an upward revision of 0.6 percentage point from the Bank’s June forecast, largely down to better-than-expected output in the first half of 2021, though supply-chain disruptions weighed on growth in some economies. For 2022, the EBRD economists forecast growth in the region to moderate to 4.7 per cent.

EBRD Chief Economist Beata Javorcik said: “This is a bittersweet recovery. The first half of 2021 brought a robust rebound. But we are now seeing growing cause for concern. While high commodity prices are benefiting exporters, they are weighing heavily on the trade balances of importers. The supply of affordable energy as we enter the winter period is becoming a serious worry, especially as governments’ headroom is limited.”

The forecasts are subject to a high degree of uncertainty because of the risks associated with the future path of the Covid-19 pandemic, a possible worsening of external conditions and weaker growth in trading partners.

Central Europe and the Baltic states

The economies in the region grew 5.1 per cent on average in the first half of 2021 as the majority of Covid-19 restrictions were lifted. Most managed to recover to pre-pandemic levels, led by Estonia and Lithuania, which achieved this in the first quarter of 2021. At the same time, several countries saw substantial increases in their export market shares for both goods and services.  

Still, high energy prices and shortages of components, chips and raw materials have started to affect countries in which manufacturing accounts for a significant share of gross domestic product (GDP), most notably, the Czech Republic, Slovenia, the Slovak Republic and Hungary.

Increased utility prices are likely to affect the most vulnerable households. Homes in the region already spend more than 15 per cent of their incomes on utilities, on average, above the levels of the more advanced European economies. In Germany, for instance, the corresponding figure is about 7 per cent.

While the spread of the Covid-19 virus and vaccination resitance remain a concern, funds from the European Union’s (EU) Recovery and Resilience Facility (RRF) are expected to boost the economic recovery and facilitate more sustainable investments.

Croatia

The Covid-19 pandemic inflicted significant damage on the Croatian economy in 2020, with GDP declining 8 per cent on the year. The rebound in the first half of 2021 was broad based, with the economy growing 7.5 per cent year on year. Goods exports were a highlight, while domestic demand was strong and tourism recovered faster than expected during the summer season. The Bank has revised up its GDP growth forecasts for Croatia to 8.0 per cent for 2021 and 4.2 per cent for 2022. The downside risks relate to the weakening external outlook and possible containment measures, as the country’s vaccination rate lags the EU average.

Czech Republic

The Czech Republic recorded a 5.8 per cent decline in GDP in 2020. The economic climate improved after Covid-19 restrictions were eased in the second quarter of 2021. GDP is forecast to grow by 3.4 per cent in 2021, with a stronger recovery of 4.6 per cent in 2022 on the back of robust domestic demand, supported by EU funds and an improved global outlook. The upside risks to our forecast include a stronger rebound in consumption as households look to spend accumulated savings, while the downside risks are tied to supply-chain issues and the evolution of the pandemic.

Estonia

Estonia’s economic recovery gathered considerable pace in the first half of 2021, with a GDP growth rate of 8.5 per cent year on year. Persistent labour shortages are putting significant pressure on wages and, thus, inflation, which rose to 6.4 per cent in September. EU funds are likely to boost investment, especially in infrastructure. GDP growth is forecast to reach 9.0 per cent this year, before slowing to 4.0 per cent in 2022.

Hungary

In the first half of 2021, Hungarian GDP grew 7.6 per cent on the year, backed by strong investment and high government spending. Headline inflation registered 5.5 per cent in September and the central bank began to raise its main policy rate in response. Increased energy prices, coupled with global supply shortages, are negatively affecting Hungary’s manufacturing sector. The post-crisis recovery is likely to be boosted by investment, co-financed by EU funds. GDP growth is forecast to remain strong throughout 2021, coming in at 7.7 per cent for the year as whole, before slowing to 4.8 per cent in 2022.

Latvia

GDP growth reached 5.2 per cent year on year in the first half of 2021, returning the Latvian economy to pre-crisis levels. The labour market continues to tighten, despite some increase in unemployment rates, reflecting labour shortages and sharply rising wages. Latvia remains relatively resistant to vaccination against Covid-19, with only 54 per cent of people receiving at least one dose. The EBRD forecasts 4.5 per cent GDP growth in 2021, picking up to 5.5 per cent in 2022.

Lithuania

The Lithuanian economy expanded 5 per cent year on year in the first six months of 2021. The recovery in domestic demand was mostly fuelled by strong investment and household consumption. Labour shortages are at record highs and translating into rapid nominal wage growth. GDP growth in Lithuania is likely to reach 4.5 per cent this year, boosted by faster public-sector investment, and to slow to 4.0 per cent in 2022.

Poland

In the first half of 2021, Poland’s GDP grew 4.6 per cent year on year. Exports rebounded quickly, while domestic demand boosted imports at an even faster pace. Rising utility prices and shortages of industrial components, together with rising domestic demand, are triggering inflation, which reached 5.9 per cent in September. As a result, the National Bank of Poland raised the main policy rate by 40 basis points in October. According to the Finance Ministry, EU funds could add 0.4 percentage point to annual growth. Overall, GDP growth is forecast at 4.9 per cent and 4.8 per cent in 2021 and 2022, respectively.

Slovak Republic

The Slovak Republic’s economy expanded 4.9 per cent year on year in the first half of 2021, fuelled by recovering domestic demand. The lifting of restrictions allowed household consumption to rebound, while net exports contributed positively to growth. Disruptions in the supply of subcomponents has already hurt production in the car industry. At the same time, high energy prices are fuelling inflation and putting pressure on nominal wages. GDP is likely to grow 4.0 per cent this year and 5.0 per cent in 2022, the Bank forecasts.

Slovenia

Slovenia’s economy rebounded strongly, by 8.8 per cent on the year, in the first half of 2021, bringing GDP to only marginally below pre-pandemic levels. Expansionary fiscal policy will continue to support the economy, with the fiscal deficit projected to deepen in 2021. The increase in consumer prices has been more muted than in comparable economies, but the risks are to the upside towards the end of the year. GDP growth is forecast at 6.0 per cent for 2021 and expected to moderate towards 4.5 per cent in 2022.