Navigating Slowdown: Assessing CEE Countries' Potential for Growth Amid Global Trends

Restrictive monetary policy, tighter credit conditions and declining confidence levels point to slowing growth in many parts of the world. The Central and Eastern Europe (CEE) region is no exception, where weakening domestic demand will keep growth rates under pressure. In later sections of this Directional Economics publication, we discuss whether policymakers will be in a position to address this slowdown with easier monetary policy. Yet the prospect of lower policy rates is not the only positive for the region. In this article, we look at which of our selected countries in the CEE region stand to benefit from:

(1) a pick-up in trade volumes;

(2) the drop in energy prices; and

(3) a rebound in tourism

 

Indices of global exports, energy prices, tourism; 2019 = 100

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At a first glance, the CEE is seen as a group of countries that share a few similarities, such as membership in regional economic and political unions, a similar level of income and population, global supply chain specialisation, historical connections, negative current accounts and a high role of trade with the EU. That said, there are differences within the group that call for a separate analysis of the exposure to global trends.

 

For example, the Czech Republic is a slower-growing developed economy by international standards, while the rest are faster-growing developing economies. There are as well differences in the domestic and foreign policy course that also affect the economic ties.

 

We see several channels through which the outlined global trends manifest themselves in the economic realities of the CEE. Physical trade volumes and services/tourism are factored into net exports and economic growth, the values of trade are contributing to current accounts and FX expectations, while commodity inputs affect the CPI trends (and the current account).

 

In this article, we explore the exposure of selected CEE countries, the Czech Republic, Hungary, Poland, Romania and Turkey – as a group and individually – in terms of these channels and see how they factor in the expected economic and financial performance.

To set the scene, we look at which countries in the region stand to benefit the most from the pick-up in trade. Global merchandise trade surpassed pre-Covid levels in 2021 but has proved sluggish since. Yet factors like the expected, but so far delayed, Chinese recovery, lower shipping costs and a weaker dollar should support trade over coming years.

 

The IMF expects global merchandise trade to return to 3-4% pa growth rates in 2024-25 after temporarily slowing to 1.5% in 2023.

 

Another positive trend we examine is that of the sharp decline in energy prices. After a 63% spike in 2022 (including a 100% spike in natural gas) global energy prices (oil, gas, coal) are expected to post a 40% decline this year, according to the IMF. While we acknowledge that energy prices are subject to upside risks (largely supply related), there are big differences in how lower energy prices will play out across the region – both through energy’s share of imports and weight in CPI baskets. And lastly, we look at the positive expectations for tourism, which unlike merchandise trade has yet to recover to pre-pandemic levels.

 

This is bouncing back with the removal of epidemiological constraints and a catch up on the previously under-consumed services. According to UNWTO (World Tourism Organization), despite showing 86% YoY growth in 1Q23, the number of international arrivals globally is still 20% below 1Q19 levels. The reopening of China is one of the most important factors supporting expectations of further recovery. UNWTO’s panel experts expect better tourism performance later this year and a return to 2019 levels in 2024 or somewhat later. We take a look at how each of the three factors will impact countries across the region