Central Europe in 2024:who fall the hardest, rise the highest?

Further fragmentation of the emerging markets dynamics and a decoupling of the business cycles has been particularly seen in the CEEMEA region. Central European economies seem to be on the winners’ side with several supporting factors reversing the 2023 headwinds poised to push CE3 (Poland, Hungary, and Czechia) GDP growth much higher in 2024: +2.4% in PPP-weighted average terms compared to a slight contraction of 0.1% in 2023. Just like in case of many energy importing economies, several global trends should prop up growth in the CE3 region including the softening in commodities prices (mainly for food and energy), fading second-round effects on core prices helping to tame underlying inflationary pressures and early rate-cutting cycles from the domestic central banks easing the strains on the financial conditions. In addition, Central European economies should benefit from stronger external demand thanks to the gradually recovering growth in euro area growth and, especially, in Germany (Czechia exports are particularly exposed to the latter), resilient labour markets with strong wage growth and additional investment opportunities for businesses thanks to the unblocked EU funds for Poland. Meanwhile, the stickiness of the core inflation remains an important factor of uncertainty, despite stronger-than-expected deceleration in the headline inflation (mainly on the account of the energy-linked base effects). Indeed, the progress on core prices has significantly slowed down due to positive real wage growth in the recent months and some strains on the local currencies. Region’s political developments with a standoff between the new government and the old president in Poland blocking the necessary reforms as well as continuous EU-Hungary confrontation (in the context of higher fiscal position fragility) might as well pose risks to the outlook.