Growth outlook for 2017 improves in Central Europe

Subject

The economic outlook after first-quarter data.

Significance

First-quarter GDP breakdowns indicate that Central Europe (CE) is experiencing a cyclical upswing after a subdued 2016, which saw economic growth slow to an average of 2.6% across the sub-region. Hungary and Poland have emerged as the two strongest economies, with each posting annualised GDP growth of 4.2% in the first three months, although Hungary’s quarterly growth rate was stronger than Poland’s.

Impacts

• The supply side (particularly construction) and rising wages will support growth alongside an expected rise in disbursements of EU funds.
• Net exports will gradually make a stronger contribution to headline growth, in line with a pick-up in GDP across the euro-area and wider EU.
• Additional fiscal stimulus measures and accommodative monetary policy in Hungary and Poland are likely to lift GDP above forecasts.
• However, monetary policy may be tested given the prospect of an expected rise in inflationary pressures as wages continue to strengthen.
• Absent structural reform, labour shortages, population ageing and inconsistent labour productivity rates cast doubt over medium-term growth.