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Growth

The economic growth in Hungary and Romania was the most surprising in Q3, with the former contracting and the latter expanding by 1.1% YoY, well below expectations. As a result, we have already revised our 2024 growth forecast downwards to 0.5% and 0.8%, respectively. Similarly, flash GDP in Slovakia was also disappointing at 1.2% YoY, below expectations of expansion close to 2%. Economic growth in Serbia was solid at 3.1% YoY in Q3 2024, although below our expectations. We still expect Serbia to expand by 4% in 2024, the most within the CEE region. In other countries (Czechia, Poland, and Slovenia), flash estimates were mostly in line with market consensus regarding year-on-year growth dynamics. Nevertheless, the Polish economy unexpectedly contracted quarter-on-quarter, as flash 3Q24 landed at -0.2% QoQ. Overall, the economic recovery has been weaker than initially anticipated.

Regarding the outlook for 2025, we continue to see risks to the downside concerning our current forecasts due to the relatively sluggish recovery of the German economy. In Czechia, we already revised the 2025 growth forecast down to 2.3%. While the Eurozone as a whole seems to be doing slightly better than expected, the weakness of the German industry is weighing on the economic development of the main trading partner of CEE countries. Moreover, the increased uncertainty in the aftermath of the US election and the impending presidency of Donald Trump will affect market sentiment and the appetite to undertake new investment projects. The scale of protectionism will determine to what extent the economies in the region will be held back in 2025 and beyond.

Inflation

Since the beginning of the year, inflation has been continuously dropping in all CEE countries except Czechia and Poland. Although October's inflation was lower in most of the region compared to January 2024, the headline footprints in October increased in all the CEE countries but Slovenia. Energy and food prices are behind such development. In Slovakia, the increase in food prices was particularly high. In Romania, inflation surprised to the upside as well, but it is at the lowest levels in three years. While local factors may play a role in Slovakia, in general, the development of the World Food Price Index suggests that food prices are likely to increase and contribute positively to the headline inflation numbers in the short term. The World Food Price Index rose to 127.4 in October, which is the highest in a year and a half.

While external factors may add to inflation figures, we expect disinflation to continue in 2025 in most of the CEE countries. The weak economic recovery and high uncertainty ahead regarding growth prospects are disinflationary in nature. The most outstanding exception is Slovakia, where changes in indirect taxes and delayed adjustment of energy prices will increase inflation in 2025.

Monetary policy

While the CEE central banks may be done with monetary easing in 2024, we expect more interest rate cuts in 2025 and 2026. cuts in 2025 and 2026. In Czechia, we see the terminal interest rate being 100 basis points lower compared to the current level, while in Hungary and Romania, roughly 200 basis points may be expected. The inflation outlook supports monetary easing across the region in the following year.

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