Economic recovery in the Baltics varies

On the radar

• Real Retail Sales grew 4.4% y/y in June in Poland.

• In Slovenia real wage growth in May landed at 3.4% y/y.

• Today, Hungarian central bank holds a rate setting meeting.

• At 10 AM CET, Poland will publish unemployment rate.

Economic developments

Today, we look at the growth prospects of the Baltic region, as yesterday’s report Economic performance further diverges digs deeper into the economic outlook for the three countries. Estonia's economy is expected to continue its struggle this year, with a forecasted slight decline of 0.5%, following last year's 3% contraction. The wood-manufacturing sector faces challenges due to reduced demand and supply chain issues, predominantly from Belarus. The transport sector is also dealing with disruptions in eastern transit. In contrast, Latvia and Lithuania are on the path to recovery, echoing the broader CEE trend, driven by domestic consumption and RRF funds. However, GDP growth forecasts for 2024 have been revised downward in the Spring forecasting round of the European Commission. Estonia's recovery is slower than expected, due to investment delays by firms and subdued household spending due to rising mortgage payments. Latvia and Lithuania's adjustments are caused by a slower external recovery. By 2025, all three countries are poised for a rebound in exports and investments from both private and public sectors.

Market movements

The Hungarian central bank will hold a rate-setting meeting today. We still believe that it will keep the interest rate stable due to communicated cautiousness, however, recent inflation data open the door for more monetary easing than was initially expected. A relatively strong and stable currency (EURHUF at 389) is not standing in a way to another interest rate cut. As for other CEE currencies, EURPLN moved slightly down on Monday to 4.27 while the Czech koruna slightly weakened against the euro. The Czech central banker Kubicek sees a room for 1.25 percentage point cut altogether. His calculation is based on the assumption that neutral interest rate in Czechia is around 3.5% while current key policy rate sits at 4.75%. Romania keeps seeing solid demand for the local currency bonds as it sold RON 335.4 million of 2038 papers. The long-term yields are marginally lower this week.

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