Eastern Europe’s recovery remains on track. Romania and Croatia, expected to register particularly strong growth

Despite the difficult international environment and significant downside risks, the economies of most CEE countries are expected to perform well in 2024 – especially those of the EU member states in between. This is the conclusion of the latest spring forecast of the Vienna Institute for International Economic Studies (wiiw) for 23 countries in the region, writes Emerging Europe.

“With real wages rising – primarily due to a significant drop 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 the manufacturing industry – especially in the Visegrád countries, which are closely linked to the struggling German economy – we continue to see challenges,” notes Pindyuk.

“The hoped-for recovery of the German economy from 2025 – so crucial for the region – will naturally play a key role.”

Convergence continues

For 2024, wiiw foresees an average growth of 2.5% for EU members in the region; this should rise to 3% in 2025. This means they are likely to significantly outperform the euro area (0.6%), which will almost stagnate this year, and grow almost twice as fast as the euro area euro next year (1.6%).

“Central and Eastern European EU members are thus continuing their process of recovering economic gaps 20 years after the start of the EU’s eastward enlargement, even if it will slow down somewhat from 2025,” comments Pindyuk.

The Visegrád countries, namely Poland, the Czech Republic, Slovakia and Hungary, are expected to experience an average growth rate of 2.4% this year, rising to 3% in 2025. Although, in theory, Poland and Hungary have increased access to EU funds again, thanks to recent developments (a new government in Poland and the agreement between Viktor Orbán and the EU on Ukraine), the actual flow of funds is still slow in the case of Poland and largely has not yet materialized in the case of Hungary.

Southeast European EU members Romania (3%) and Croatia (2.9%) are expected to see particularly strong growth in 2024. The influx of funds from the NextGenerationEU coronavirus recovery fund is supporting the economy in this country.

The six countries of the Western Balkans will see an average growth of three percent (led by Montenegro, with an increase of 4.2%).

However, for the entire region, there are considerable downside risks. “A major war in the Middle East between Israel and Iran would likely 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 already casts a long shadow. Although the country has shown amazing resilience since the beginning of the Russian invasion, lingering uncertainty about and delays in Western military and economic aid is holding back the recovery.

The Vienna Institute predicts 3.2% growth for Ukraine this year, after 5.3% in 2023. Despite economic successes such as the reopening of the Black Sea Corridor for the export of agricultural and metallurgical products – a lifeline of sorts for Ukraine – the country has suffered from a blockade of trade across the shared border with Poland by the country’s farmers.

In 2023, Ukrainian exports of goods to Poland fell by about a third. Add to this the recent massive Russian airstrikes.

“The lack of air defense missiles is also becoming more and more of an economic problem, as energy supplies and important industrial companies are hit more and more often,” Pindyuk adds.

“Ultimately, everything will depend on receiving adequate and timely military and financial aid from the West: in 2024 alone, Ukraine faces a funding shortfall of US$40 billion.”