Politics clouds Central Europe’s short-term outlook

Significance

Last year ended dramatically, with the European Court of Justice (ECJ) ordering the Polish government to suspend its reform of the Supreme Court, and the European Commission announcing that subsidies to major Czech agricultural conglomerate Agrofert, owned by Prime Minister Andrej Babis, would be suspended until allegations of conflict of interest were resolved. Tensions between the EU and Central Europe (CE) are expected to escalate ahead of the European Parliament (EP) elections due on May 23-26.

Impacts

• The slowdown’s severity will vary among countries, with robust fundamentals, cheap borrowing and lower government debt all positives.
• A hit to private consumption from higher inflation could dampen the popularity ratings of leading parties absent additional fiscal stimulus.
• In Hungary, Fidesz may launch a ‘pro-family’ policy to win back popularity; reversing population decline was an election campaign pledge.