Eastern Europe’s recovery remains on track

However, excessively weak recovery in Germany, disruptions to global supply chains and the election of Donald Trump as the next US president could also create turbulence in the region.

Despite the challenging international environment and significant downside risks, the economies of most Central, Eastern and Southeastern European countries are expected to perform well in 2024—especially the EU member states among them.

This is the finding of the latest Spring Forecast from the Vienna Institute for International Economic Studies (wiiw) for 23 countries of the region.

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“With rising real wages—due primarily to a significant decline in inflation—private consumption is the main driver of growth,” says Olga Pindyuk, economist at wiiw and lead author of the Spring Forecast.

“Investment activity will only recover gradually. However, in manufacturing—particularly in the Visegrád countries, which are closely intertwined with the struggling German economy—we still observe challenges,” notes Pindyuk. “The hoped-for recovery of the German economy from 2025 onwards—so crucial for the region—will naturally play a key role.”

Convergence continues

For 2024, wiiw forecasts average growth of 2.5 per cent for the EU members of the region; this should pick up to three per cent in 2025. That means they are likely to significantly outperform the euro area
(0.6 per cent), which will almost stagnate this year, and will grow almost twice as fast as the euro area next year (1.6 per cent).

“The EU members of Central and Eastern Europe are thus continuing their economic catch-up process 20 years after the start of the EU’s eastward enlargement, even if this will slow down somewhat from 2025,” comments Pindyuk.

The Visegrád countries of Poland, Czechia, Slovakia and Hungary are expected to expand at a rate of 2.4 per cent on average this year, increasing to three per cent in 2025. Although Poland and Hungary have in theory increased access to EU funds again, thanks to recent developments (a new government in Poland and Viktor Orbán’s Ukraine deal with the EU), the actual flow of funds is still slow in the case of Poland and largely yet to materialise in the case of Hungary.

The Southeastern European EU members Romania (three per cent) and Croatia (2.9 per cent) are expected to grow particularly strongly in 2024. The inflow of funds from the NextGenerationEU coronavirus recovery fund is supporting the economy there.

The six countries of the Western Balkans will expand by an average of three per cent (led by Montenegro with growth of 4.2 per cent).

For the region as a whole, however, there are considerable downside risks. “A major war in the Middle East between Israel and Iran would probably lead to another energy price shock and fuel inflation again,”
warns Pindyuk.

“An excessively weak recovery in Germany, disruptions to global supply chains and the election of Donald Trump as the next US president could also create turbulence in the region.”

Ukraine

For Ukraine in particular, a possible Trump election victory is already casting a long shadow. Although the country has shown astonishing resilience since the start of the Russian invasion, persistent uncertainty over and delays to Western military and economic aid is holding back the recovery.

The Vienna Institute is forecasting growth of 3.2 per cent for Ukraine this year, after 5.3 per cent in 2023. Despite such economic successes as the reopening of the Black Sea corridor for the export of agricultural and metallurgical products—something of a lifeline for Ukraine—the country has been suffering from a blockade of trade via the common border with Poland by the country’s farmers.

In 2023, Ukrainian exports of goods to Poland fell by around a third. Added to this are the recent massive Russian air strikes.

“The lack of air defence missiles is also increasingly becoming an economic problem, because energy supplies and important industrial companies are being hit more and more frequently,” adds Pindyuk.

“Ultimately, everything will stand or fall on the receipt of adequate and timely military and financial aid from the West: in 2024 alone, Ukraine faces a financing gap of 40 billion US dollars.”

Photo by Dragisa Braunovic on Unsplash.

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