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      CEE Mid-Year Sovereign Outlook: inflation subsides but economic recovery remains fragile
      TUESDAY, 25/07/2023 - Scope Ratings GmbH
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      CEE Mid-Year Sovereign Outlook: inflation subsides but economic recovery remains fragile

      High headline inflation will continue to decline in the 11 EU countries of Central and Eastern Europe (CEE-11), but tight monetary policy and weak external demand mute the economic recovery.

      Download the CEE Mid-Year Sovereign Outlook here.

      “We see substantial risks to the downside for economic growth for the rest of 2023. Average growth in the CEE-11 region is expected at 1.7% this year, down from 4.4% in 2022,” says Giacomo Barisone, Managing Director, Scope Ratings.

      “The recovery will pick up momentum again by next year as inflationary pressures subside, with output growth for CEE-11 rising to 2.5%, though growth will vary considerably country by country,” says Barisone.

      Scope has downgraded several CEE sovereign issuers in the past 18 months, reflecting structural economic risks and the lingering effects of energy and inflationary shocks, which took their toll on real growth, public finances and economic resilience.

      Uncertainty about recovery dominates top economic themes for the next 18 months

      The growth outlook remains challenging. High inflation, tight monetary policy and sluggish global demand are contributing to a subdued economic outlook. Smaller economies with strong focus on energy-intensive manufacturing face higher downside risks stemming from the effects of weak external demand.

      “Inflation is set to further decelerate gradually. Inflation in most CEE-11 economies will be running in the single digits by the end of this year. However, average inflation for 2023 in the region is seen staying elevated at 11.8% compared with 13.9% last year. Looking ahead to 2024, we expect average inflation to decline to 5.6%,” says Barisone.

      External deficits are improving but remain elevated. “The shock to the region’s terms of trade from higher energy costs is gradually reversing while weak domestic demand is curtailing growth in imports. The average current account deficit for CEE-11 will narrow this year to 3.1% of GDP from 4.5% last year,” says Barisone.

      Fiscal sustainability in the region remains a concern. CEE-11 governments continue to juggle the need to reduce fiscal deficits after Covid-19 in an uncertain economic context with support for strategic sectors and need for greater energy, infrastructure and defence spending. The average budget deficit in the region will be little changed at 4.1% of GDP this year compared with 4.0% last year. Front-loaded debt issuance in the first months of 2023 has reduced refinancing risks for the full year.

      Flow of EU funds is critical. Meeting milestones to allow for timely disbursements of EU funds is crucial for the regional economy as this is the final year of the previous Multiannual Financial Framework. Delays or cuts in funding could limit policy flexibility and fiscal consolidation prospects, pressuring external finances. Concerns are highest in Hungary and Poland where unresolved disputes with the European Commission over the rule of law have delayed the roll out of EU funds.

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