Economic trends in CESEE

Stubbornly high inflation despite cooling economy ^{1 , 2 , 3}

1 Regional overview

CESEE is not yet out of the woods, though. Economic activity continued to weaken in early 2023 (also compared to the euro area) and inflation remains ­stubbornly high despite the notable cooling of the economy. Adjustments to the measures introduced to shield households from spiraling energy prices have ­introduced quite some volatility in headline inflation rates. Underlying (core) price pressures are proving sticky, with labor markets very tight throughout the CESEE region. At the same time, the fast rise in policy rates is starting to bite, and rising (global) financial sector risks could – despite generally solid fundamentals – spill over into CESEE banking sectors. Public support amid the energy crisis and rising government financing costs have consumed fiscal space and are limiting fiscal ­policymakers’ ability to respond flexibly to new challenges.

Economic activity weakened throughout the review period

Output contracted in the CESEE EU member states in Q4 2022

Table 1: Real GDP growth  

	2020	2021	2022	Q1 21	Q2 21	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Period-on-period change in %
Slovakia	–3.4	3.0	1.7	–1.4	1.9	0.3	0.4	0.3	0.3	0.3	0.3
Slovenia	–4.3	8.2	5.4	1.7	2.0	2.9	3.4	1.0	0.8	–1.3	0.8
Bulgaria	–4.0	7.6	3.4	2.7	1.3	1.9	1.5	0.4	0.7	0.6	0.6
Croatia	–8.6	13.1	6.3	7.2	0.5	2.4	2.1	2.4	1.3	–0.5	0.9
Czechia	–5.5	3.6	2.5	–0.5	1.4	1.7	0.8	0.6	0.3	–0.3	–0.4
Hungary	–4.5	7.2	4.6	1.1	2.3	1.6	2.5	1.3	0.7	–0.7	–0.4
Poland	–2.0	6.8	4.9	2.6	2.2	2.1	1.7	4.2	–2.2	1.1	–2.4
Romania	–3.7	5.9	4.8	2.0	1.8	0.8	0.6	1.3	1.2	1.2	1.0
Türkiye	1.9	11.3	5.6	2.6	2.0	2.7	1.6	0.7	1.9	–0.1	0.9
Russia	–2.7	5.6	–2.1	0.7	1.6	0.6	0.9	0.2	–4.6	0.5	0.5
CESEE average1	–2.0	7.8	2.2	1.6	1.8	1.5	1.3	1.1	–1.4	0.4	0.2
Euro area	–6.1	5.3	3.5	0.0	2.0	2.3	0.6	0.6	0.9	0.4	0.0
Source: Eurostat, national statistical offices.
1 Average weighted with GDP at PPP.

Private consumption almost completely disappeared as a central pillar of growth

Gross fixed capital formation advanced by close to 5% on average in the region during the second half of 2022 and was especially buoyant in Slovakia, Croatia and Romania. While nominal financing conditions tightened notably throughout ­CESEE, real interest rates remained firmly in negative territory, and high profitability provided sources for internal financing. Capital formation was also ­supported by the beginning utilization of funds under the Recovery and Resilience Facility (RRF), above-average capacity utilization and/or efforts to save (increasingly scarce) labor in several countries. Stock changes, however, weighed on GDP as the high inventories that were built up in 2021 and early 2022 (mostly related to supply chain issues) were slowly being depleted.

Although net exports slowed down toward the end of 2022, they often made a positive contribution to growth – for the first time since late 2020. Real exports increased more strongly than real imports. This in part reflected the unclogging of supply chains amid order backlogs from the past and stronger than expected ­demand from Western Europe. Exchange rate weakness (for example in Hungary), the strong tourist season (for example in Croatia), consumption restraint and/or lower energy imports due to high world market prices and/or energy-saving ­measures also played a role. In 2022, natural gas demand declined notably in ­almost all CESEE EU member states, most strongly so in Romania and Croatia (–14% and –19%, respectively, compared to the 2019–2021 average). In addition, CESEE countries used 4% to 17% less electricity in 2022 than in 2021, with Slovakia and Romania leading the way.

In the review period, poor economic confidence, weakening loan growth and losses in purchasing power in the wake of strong inflation had a growing impact on consumer spending in the CESEE EU member states. By the fourth quarter of 2022, private consumption growth had declined to only 0.5% on average (and was even negative in Czechia and Poland), delivering a moderate contribution to GDP growth at best. The central pillar of growth over the first half of 2022 has thus almost completely disappeared.

Labor market tightness persists

Earthquakes weighed on activity in Türkiye

Russian economy is weathering Western sanctions rather well

The price cap for Russian oil and the European Union’s import ban increased the price discount of Russian oil vis-à-vis oil from other origins from late 2022 ­onward. This weighed on the ruble’s external value and the currency fell back to its pre-invasion level against the euro in late March 2023 (see chart 2). Inflation spiked at 17.8% in April 2022 but came back to 11% in February 2023. After ­reducing its key rate to 7.5% in mid-September 2022, the Bank of Russia (CBR) has so far left it at this level.

Inflation in CESEE EU stabilizes at a high level amid considerable volatility

However, price dynamics in the region have not yet embarked on a stable und sustainable downward trend. Core inflation, for instance, remained very high and kept on increasing in several countries of the region. This reflected lagged effects of the pass-through of producer price spikes to consumer bills, an expansion of profit margins in some sectors as well as rising (labor-intensive) services prices. The latter could suggest a stronger translation of wage costs into the general price level amid tight labor markets. Nominal wage growth had already accelerated to around 11% on average in the fourth quarter of 2022. However, the risk of a wage-price spiral is mitigated to some extent by the low unionization in CESEE EU member states and easing inflation expectations. Surveys among consumers show that inflation expectations recently converged back to the values reported in 2018. Inflation expectations in industry, retail and services came down as well but have not yet returned to their pre-pandemic levels.

Moreover, aid packages to shield households from spiraling prices (mostly ­energy prices) had to be adjusted in several instances as they negatively impacted national budgets and/or the balance sheets of energy suppliers. This once again boosted (regulated) energy prices, and the average inflation rate in the CESEE EU member states again edged up to 16.9% by February 2023. Hungary, for instance, abandoned its fuel price caps and increased its regulated prices for household ­energy; Czechia introduced a price cap to replace its (subsidized) energy-saving tariff; and Poland removed tax breaks on fuel and energy. Going forward, further adjustments cannot be ruled out, at least in some countries, as the prices for household energy are not yet aligned with world market prices and/or as tax rates (­especially for food and energy) have not yet returned to pre-pandemic levels. However, statistical effects as the war-related price spikes of early 2022 drop out of the base should also contribute to some easing of price pressures going forward.

Tightening cycles near an end

The interest rate ceiling may also have been reached in Romania, after the ­central bank hiked its policy rate by a moderate 25 basis points to 7% at the ­beginning of January 2023. Forward rate agreements for the abovementioned countries indicate that market expectations are broadly in line with current market rates. In Hungary, even some unwinding of the emergency rate step of October 2022 is expected in the course of the year.

In Türkiye, both headline and core inflation decelerated from their peaks (at 85% and 79%, respectively, in October 2022) to 55% and 57%, respectively, in February 2023. In parallel, the Turkish central bank (TCMB) delivered policy rate cuts by 150 basis points each in October and November (to 9%) and another one in February to 8.5%, implying a large negative real key rate. Against this background and despite regulatory measures to foster a “liraization” of banks’ assets and liabilities, the lira depreciated against the euro by 30% in nominal terms since January 2022 (see chart 5).

Most currencies have recovered to levels seen prior to the invasion of Ukraine

Currencies only temporarily affected by international financial market turbulences

Banking sector momentum has weakened

This increasingly restrictive situation in CESEE banking sectors is not yet fully reflected in credit market data and banks’ balance sheets. Credit dynamics in the CESEE region decelerated in the review period, reflecting a slowdown in new lending due to higher interest rates, more early repayments than in previous years and declining volumes in housing transactions. The weakening, however, was not observed evenly across countries and sectors. Credit growth rates, for example, remained broadly stable in Croatia, Bulgaria and Hungary amid some deceleration in growth of credit to households and largely unabated corporate sector credit ­dynamics. By contrast, corporate loan growth weighed heavily on credit market developments in Slovenia, Czechia, Poland and Romania.

Yet banks’ results and balance sheets have remained sound

In Türkiye, the supervisory authority has required since mid-2022 that ­corporations are only granted access to new lira loans if their foreign exchange holdings (including gold) remain below a low ceiling. Moreover, to contain lira loan growth, the central bank has introduced and gradually raised reserve requirement ratios and securities maintenance ratios on selected commercial lira loans, plus additional ratios for banks with high loan growth or relatively high loan interest rates. Despite these measures, growth of credit to the private sector remained well in the double digits. Banking sector profitability increased amid higher operating income and asset growth was reflected in lower NPL ratios.

Even Russia’s banking sector reported a moderate profit in 2022

External balances slid further into deficit amid terms-of-trade effects

Sufficient financing for covering external deficits

Inflation is boosting government revenues and lowering debt ratios

At the same time, the unexpectedly strong rising price level also boosted tax receipts and – through higher nominal GDP – reduced public debt ratios.

The above factors translated into somewhat lower headline deficits across most of the region, with the exceptions of Poland and Türkiye. Deficit ratios, however, remained elevated, with only Croatia and Slovakia staying below the 3% of GDP target. Debt ratios were lower than a year earlier and hovered between 39.4% of GDP (Türkiye) and 73.3% of GDP (Hungary). Only Bulgaria (22.9% of GDP) and Russia (15.1% of GDP) reported lower government debt levels in 2022. ­Concerning public finances in Russia, the general government balance reverted from a small surplus in 2021 to a deficit of 1.4% of GDP in 2022. This reflected rising ­budgetary support for strategic enterprises, SMEs as well as households, expanding arms production, and sharply declining imports and thus import taxes due to Western trade restrictions.

2 Slovakia: one-eyed among the blind? The economy grows dull but scrapes past a recession

Labor market indicators have come close to their pre-pandemic levels over the last months. Following a moderate but continuous decline until July 2022, the ­unemployment rate has remained broadly stable since. Employment, in contrast, has kept on rising, although only marginally as demand for labor has weakened amid elevated uncertainty. Foreign workers, particularly refugees from Ukraine, have continued to fill vacant jobs and thus helped mitigate the notorious skill ­mismatch and lack of (skilled) labor. Nominal wages saw a significant increase, predominantly in the public sector, mainly owing to a previously bargained one-off bonus. Yet, while labor cost increases have outpaced productivity growth, nominal wage growth did not keep up with rising costs of living. Headline inflation continuously headed upward and came in at 15.4% in February 2022. While soaring food and energy prices seem to have peaked in November 2022, core inflation continued climbing to more than 15% most recently. Hence, despite a reduction in the VAT rate for selected goods and services, price hikes have been bloated by nearly all components, most notably food and services.

The general government deficit came in at 2% of GDP in 2022. The reduction compared to 2021 was driven by stronger economic growth, higher tax revenues (not least on the back of high inflation) and lower pandemic-related expenditures. However, these positive factors were counteracted by government expenditures related to the war in Ukraine and measures to compensate firms and households for galloping prices. After the government did not survive the no-confidence vote in the parliament in December 2022, it remains in office with a limited care-taking mandate since snap elections have only been scheduled for end-September 2023. This unusually long run-up has some uncommon consequences such as a power shift toward the parliament, which may also bear some risks.

Table 2: Main economic indicators: Slovakia  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	–3.4	3.0	1.7	1.4	1.3	2.9	1.3	1.4	1.1
Private consumption	–1.2	1.7	5.1	3.0	3.1	9.3	4.2	2.8	4.5
Public consumption	–0.6	4.2	–3.2	1.0	3.9	–1.4	–7.1	–2.1	–2.0
Gross fixed capital formation	–10.8	0.2	6.5	–1.8	5.3	6.4	0.5	8.2	9.8
Exports of goods and services	–6.4	10.6	1.0	–2.0	2.2	–5.8	–0.9	8.8	2.6
Imports of goods and services	–8.2	12.1	3.0	4.4	4.5	–1.5	–1.4	6.9	8.0
	Contribution to GDP growth in percentage points
Domestic demand	–5.0	4.1	3.6	6.6	3.4	7.5	0.9	0.0	6.3
Net exports of goods and services	1.6	–1.0	–1.9	–5.3	–2.1	–4.6	0.4	1.5	–5.2
Exports of goods and services	–5.8	9.0	0.9	–1.6	1.7	–5.8	–0.9	6.9	2.5
Imports of goods and services	7.5	–10.1	–2.8	–3.7	–3.8	1.2	1.3	–5.4	–7.7
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	5.6	2.7	6.6	4.4	5.5	5.4	6.8	8.8	5.6
Unit labor costs in manufacturing (nominal, per hour)	1.5	–3.0	8.6	10.2	7.7	10.2	11.1	3.6	10.1
Labor productivity in manufacturing (real, per hour)	2.6	9.9	–0.9	1.5	6.4	0.5	–0.2	2.4	–5.7
Labor costs in manufacturing (nominal, per hour)	3.6	7.3	7.6	11.9	14.7	10.8	10.9	6.1	3.8
Producer price index (PPI) in industry	–0.5	6.8	27.8	9.3	14.5	24.4	30.6	31.0	25.0
Consumer price index (here: HICP)	2.0	2.8	12.1	3.4	4.8	8.5	11.8	13.3	14.9
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	6.8	6.9	6.2	6.8	6.6	6.4	6.2	6.1	6.1
Employment rate (%, 15–64 years)	67.5	69.5	71.4	70.3	70.8	70.6	71.4	71.6	71.8
Key interest rate per annum (%)	0.0	0.0	0.6	0.0	0.0	0.0	0.0	0.5	1.8
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	4.5	7.3	10.5	5.2	7.3	8.9	11.7	12.0	10.5
of which: loans to households	6.1	8.8	10.3	8.0	8.8	10.5	11.3	11.1	10.3
loans to nonbank corporations	1.4	4.3	10.8	–0.2	4.3	5.5	12.6	13.9	10.8
	%
Share of foreign currency loans in total loans to the ­nonbank private sector	0.1	0.1	0.1	0.1	0.1	0.1	0.1	0.0	0.1
Return on assets (banking sector)	0.5	0.7	0.8	0.8	0.7	0.5	0.7	0.7	0.8
Tier 1 capital ratio (banking sector)	18.1	18.3	18.0	18.8	18.3	18.1	17.8	17.8	18.0
NPL ratio (banking sector)	2.3	1.9	1.7	1.9	1.9	1.9	1.9	1.8	1.7
	% of GDP
General government revenues	39.4	40.1	40.2	..	..	..	..	..	..
General government expenditures	44.7	45.6	42.3	..	..	..	..	..	..
General government balance	–5.4	–5.4	–2.0	..	..	..	..	..	..
Primary balance	–4.1	–4.4	–1.1	..	..	..	..	..	..
Gross public debt	58.9	61.0	57.8	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	54.5	52.7	51.2	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	46.6	47.9	48.0	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	1.1	–0.5	–6.2	–2.6	–1.6	–6.7	–4.3	–4.8	–8.9
Services balance	1.0	0.6	0.4	1.2	0.2	0.5	0.1	0.2	0.6
Primary income	–0.8	–1.5	–1.7	–1.4	–2.7	–0.9	–1.9	–1.6	–2.3
Secondary income	–0.7	–1.0	–0.8	–0.8	–0.4	–1.5	–0.9	–1.2	0.4
Current account balance	0.6	–2.5	–8.3	–3.6	–4.5	–8.6	–6.9	–7.4	–10.2
Capital account balance	0.8	1.3	1.3	0.2	0.7	–0.1	1.0	1.1	2.8
Foreign direct investment (net)3	2.6	0.3	–2.2	–1.2	0.7	–1.7	–2.2	–3.0	–1.8
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	119.6	135.0	105.0	116.9	135.0	141.5	129.6	111.6	105.0
Gross official reserves (excluding gold)	6.5	7.0	9.0	7.1	7.0	8.8	9.6	9.3	9.0
	Months of imports of goods and services
Gross official reserves (excluding gold)	0.9	0.9	1.0	1.0	0.9	1.1	1.2	1.1	1.0
	EUR million, period total
GDP at current prices	93,414	98,523	107,730	26,025	25,935	24,076	26,807	28,504	28,344
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Foreign currency component at constant exchange rates.
2 Nonprofit institutions serving households.
3 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

3 Slovenia: inflation moderates as consumption loses steam and energy prices decline

The budget deficit amounted to 3% of GDP in 2022, down from 4.6% ­recorded in 2021. This improvement was supported by a strong rise in revenues, which were aided by corporate tax proceeds and VAT revenues. At the same time, budget ­expenditures decreased owing to a fall in current transfers as support measures related to COVID-19 were gradually phased out.

For 2023, the government plans a budget deficit of 5.3% of GDP. The ­widening of the deficit is mainly related to increased spending on measures to mitigate the impact of the energy and cost-of-living crisis, but in part also due to increased ­public sector wages and pension outlays. The Fiscal Council has noted that less than 20% of the adopted measures to ease the cost-of-living crisis represent ­targeted measures. It has also criticized that, excluding crisis mitigation measures, budget expenditure growth is expected to be the highest ever. It also warned that the government will likely have to revise the 2023 budget later in the year, as some expenditure items have been underestimated. In fact, in late March 2023, the ­government announced a proposed revision of the 2023 budget, cutting both ­expenditures and the deficit, stating that fewer measures were needed to mitigate the impact of higher energy costs than previously anticipated.

HICP inflation hovered around 10% and 11% between September and December 2022, before falling back to 9.4% by February 2023. The decline in early 2023 was caused mainly by the prices for energy (and, to a smaller extent, unprocessed food), which partly reflected favorable international energy price developments and government measures to mitigate the impact of rising energy prices. By ­contrast, core inflation edged somewhat higher on the back of accelerating price increases for processed food and services.

The combined current and capital account recorded a deficit during the second half of 2022 as the surplus on the goods and services balance continued to evaporate while the combined deficit on the other items increased modestly. The worsening of the goods and services balance resulted largely from the deterioration of the terms of trade.

Banking sector profitability worsened modestly in 2022. Operating income improved on the back of intensified lending activity and an improvement in the interest margin, but banks created some additional provisions (despite a modest improvement in the quality of the credit portfolio).

Table 3: Main economic indicators: Slovenia  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	–4.3	8.2	5.4	5.1	10.5	10.2	8.6	3.3	0.2
Private consumption	–6.9	9.5	8.9	5.8	21.2	20.0	12.9	3.2	2.4
Public consumption	4.1	5.8	0.9	5.4	8.3	4.8	0.8	–0.6	–1.0
Gross fixed capital formation	–7.9	13.7	7.8	11.8	13.2	9.4	7.3	8.7	5.9
Exports of goods and services	–8.6	14.5	6.5	12.6	13.8	8.2	9.3	11.9	–2.5
Imports of goods and services	–9.6	17.6	9.8	19.5	18.1	17.2	12.6	12.6	–1.5
	Contribution to GDP growth in percentage points
Domestic demand	–4.3	9.0	7.5	8.3	12.3	16.3	10.4	3.2	1.2
Net exports of goods and services	0.0	–0.8	–2.1	–3.2	–1.8	–6.1	–1.9	0.1	–0.9
Exports of goods and services	–7.2	11.3	5.4	9.5	11.1	6.9	7.8	9.7	–2.1
Imports of goods and services	7.2	–12.0	–7.5	–12.7	–12.9	–13.0	–9.7	–9.6	1.1
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	7.6	0.9	1.1	5.0	–4.3	–5.1	–2.3	4.2	8.7
Unit labor costs in manufacturing (nominal, per hour)	6.8	–3.0	2.0	3.9	–0.9	–3.0	2.7	–1.2	9.6
Labor productivity in manufacturing (real, per hour)	–3.3	9.9	5.3	2.9	10.4	9.7	6.6	5.1	–0.2
Labor costs in manufacturing (nominal, per hour)	3.2	6.8	7.3	6.9	9.3	6.4	9.5	3.9	9.4
Producer price index (PPI) in industry	–0.3	5.5	19.6	7.5	9.9	15.6	21.7	21.2	19.9
Consumer price index (here: HICP)	–0.3	2.0	9.3	2.3	4.5	6.3	9.0	11.3	10.6
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	5.0	4.8	4.0	4.5	4.5	4.3	4.2	4.0	3.4
Employment rate (%, 15–64 years)	70.9	71.5	73.1	73.4	72.4	72.5	73.1	73.9	73.0
Key interest rate per annum (%)	0.0	0.0	0.6	0.0	0.0	0.0	0.0	0.5	1.8
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	–1.0	5.6	10.4	2.2	5.6	8.0	10.4	12.8	10.4
of which: loans to households	0.1	5.0	7.5	3.6	5.0	6.7	7.9	8.2	7.5
loans to nonbank corporations	–2.2	6.2	13.4	0.7	6.2	9.4	13.2	17.6	13.4
	%
Share of foreign currency loans in total loans to the ­nonbank private sector	1.4	1.1	0.8	1.2	1.1	1.0	1.0	0.9	0.8
Return on assets (banking sector)	1.0	1.1	1.0	1.0	1.1	0.7	0.8	0.5	1.0
Tier 1 capital ratio (banking sector)	16.7	16.9	15.9	17.0	16.9	15.7	15.7	15.5	15.9
NPL ratio (banking sector)	1.9	0.8	0.7	0.9	0.8	0.9	0.8	0.8	0.7
	% of GDP
General government revenues	43.7	44.9	42.5	..	..	..	..	..	..
General government expenditures	51.4	49.5	45.5	..	..	..	..	..	..
General government balance	–7.7	–4.6	–3.0	..	..	..	..	..	..
Primary balance	–6.1	–3.4	–1.9	..	..	..	..	..	..
Gross public debt	79.6	74.5	69.9	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	47.8	46.1	43.1	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	27.8	26.4	25.1	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	5.0	1.7	–3.9	0.5	–1.1	–4.1	–4.1	–2.6	–4.9
Services balance	4.4	4.7	6.1	5.4	4.9	4.5	6.0	7.3	6.3
Primary income	–0.8	–1.7	–1.7	–1.1	–2.2	–1.2	–1.6	–2.6	–1.2
Secondary income	–1.0	–0.9	–0.9	–0.7	–0.9	–1.0	–1.0	–0.9	–0.7
Current account balance	7.6	3.8	–0.4	4.1	0.7	–1.9	–0.6	1.2	–0.5
Capital account balance	–0.5	0.1	–0.4	0.3	–0.1	–0.3	–0.3	–0.1	–1.0
Foreign direct investment (net)3	0.6	–0.8	–2.1	–1.3	3.8	–2.7	–1.8	–2.0	–1.8
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	102.1	97.3	88.0	103.1	97.3	96.2	92.8	90.5	88.0
Gross official reserves (excluding gold)	1.9	3.5	3.3	3.4	3.5	3.5	3.5	3.5	3.3
	Months of imports of goods and services
Gross official reserves (excluding gold)	0.3	0.5	0.4	0.5	0.5	0.5	0.5	0.5	0.4
	EUR million, period total
GDP at current prices	47,021	52,208	58,989	13,483	14,009	13,313	15,017	15,309	15,349
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Foreign currency component at constant exchange rates.
2 Nonprofit institutions serving households.
3 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

4 Bulgaria risks stagflation after fifth inconclusive election

The interplay of wages and prices also influences economic activity. Despite high inflation, real GDP continued to expand by 3.4% in 2022, supported by robust growth in exports and by wage and social transfer increases that compensated consumers for losses in purchasing power. Private and public consumption as well as the buildup of inventories contributed positively to real GDP growth over the year, while net exports and gross fixed capital investment contributed negatively.

Quarterly data reveal a pronounced cycle of inventories, and stock changes started to dampen GDP growth in the second half of 2022. The cycle was driven by disruptions of global supply chains that changed the incentives for firms to maintain stocks of commodities, raw materials and finished products.

The downward trend in fixed capital investment that started in 2021 persisted in 2022. Rising prices of investment goods and political stalemate that delayed the disbursement of NextGenerationEU (NGEU) funds and, more recently, higher interest rates, have been suppressing new investment. However, fixed capital formation started to add to GDP growth in the final quarter of 2022.

The global energy crisis disrupted the recovery in Bulgaria. While industrial production started to shrink in the second half of 2022, the labor market is lagging behind the cycle. Real GDP is expected to slow down considerably in 2023 in line with weak external demand and rising borrowing costs. GDP estimates range between 0.4% and 2.5%.

The snap general election on April 2, 2023, the fifth in two years, produced yet another highly fragmented parliament with little chance to form a regular government. If the political parties cannot form a temporary technocratic cabinet with a specific agenda, then Kremlin-friendly President Radev will continue ruling through caretaker governments until the next snap vote, which is likely to be held together with the local elections in autumn. Bulgaria’s prolonged political deadlock has already forced the country to delay its target date for adopting the euro until 2025. The uncertainty has also hampered Bulgaria’s ability to harness EU post-pandemic recovery funds by delaying significant reforms and infrastructure investments and in turn slowing down economic convergence.

In the absence of a formal 2023 budget bill, the generous support measures for households and firms are still in force. They are mostly untargeted and distorting price signals – and they are increasingly jeopardizing the path to sound public ­finances. While the debt-to-GDP ratio is low, spending pressures related to aging, health and education, as well as infrastructure and the green transition, are mounting. Moreover, rising interest rates and sovereign spreads and the short tenor of public debt have increased the public debt interest burden.

Table 4: Main economic indicators: Bulgaria  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	–4.0	7.6	3.4	8.6	10.2	4.4	3.9	2.9	2.6
Private consumption	–0.6	8.8	4.8	9.8	8.9	5.5	2.1	4.2	6.8
Public consumption	8.3	0.4	6.5	2.9	2.3	6.6	11.6	3.8	4.5
Gross fixed capital formation	0.6	–8.3	–4.3	–11.9	–13.0	–7.4	–11.0	–3.3	2.4
Exports of goods and services	–10.4	11.0	8.3	9.6	9.4	4.8	8.9	9.7	9.4
Imports of goods and services	–4.3	10.9	10.5	13.0	3.9	12.3	12.3	9.2	8.5
	Contribution to GDP growth in percentage points
Domestic demand	0.1	7.4	4.6	10.2	7.3	9.6	6.1	1.7	2.5
Net exports of goods and services	–4.0	0.2	–1.2	–1.6	2.9	–5.2	–2.2	1.2	0.1
Exports of goods and services	–6.6	6.2	5.1	5.4	5.1	3.9	6.0	5.9	4.4
Imports of goods and services	2.6	–5.9	–6.3	–7.0	–2.1	–9.1	–8.2	–4.7	–4.3
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	8.9	3.8	15.6	5.0	2.3	10.3	17.9	16.1	18.8
Unit labor costs in manufacturing (nominal, per hour)	1.6	–1.9	3.8	4.7	3.1	3.0	–1.6	4.5	9.1
Labor productivity in manufacturing (real, per hour)	3.7	8.8	13.6	10.5	9.3	14.5	17.2	13.6	9.5
Labor costs in manufacturing (nominal, per hour)	5.2	7.0	17.9	15.7	12.7	17.9	15.4	18.8	19.5
Producer price index (PPI) in industry	–2.0	15.5	38.3	17.4	28.9	33.9	40.2	50.2	28.8
Consumer price index (here: HICP)	1.2	2.8	13.0	2.9	6.0	8.9	13.4	15.2	14.5
EUR per 1 BGN, + = BGN appreciation	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	5.2	5.3	4.3	4.6	4.6	5.0	4.7	3.7	3.9
Employment rate (%, 15–64 years)	68.5	68.2	70.4	69.5	68.5	68.4	69.8	71.9	71.5
Key interest rate per annum (%)1	..	..	..	..	..	..	..	..	..
BGN per 1 EUR	2.0	2.0	2.0	2.0	2.0	2.0	2.0	2.0	2.0
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector2	4.3	8.6	12.7	7.5	8.6	10.6	12.5	13.5	12.7
of which: loans to households	6.6	13.4	14.6	11.8	13.4	14.1	14.7	15.2	14.6
loans to nonbank corporations	2.9	5.5	11.4	4.8	5.5	8.4	10.9	12.2	11.4
	%
Share of foreign currency loans in total loans to the nonbank private sector	31.9	29.3	26.2	30.2	29.3	29.0	28.4	27.3	26.2
Return on assets (banking sector)	0.7	1.1	1.4	1.1	1.1	1.6	1.5	1.4	1.4
Tier 1 capital ratio (banking sector)	22.1	22.0	20.5	21.8	22.0	21.4	20.7	20.1	20.5
NPL ratio (banking sector)	4.3	3.7	2.8	3.8	3.7	3.3	3.1	3.1	2.8
	% of GDP
General government revenues	37.7	37.7	38.5	..	..	..	..	..	..
General government expenditures	41.5	41.5	41.3	..	..	..	..	..	..
General government balance	–3.8	–3.8	–2.8	..	..	..	..	..	..
Primary balance	–3.3	–3.3	–2.3	..	..	..	..	..	..
Gross public debt	24.5	24.5	22.9	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	77.1	69.3	60.2	..	..	..	..	..	..
Debt of households and NPISHs3 (nonconsolidated)	24.3	23.8	22.8	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	–3.2	–4.1	–5.8	–2.9	–6.4	–5.8	–3.8	–5.4	–7.8
Services balance	5.1	5.7	6.3	7.9	4.5	5.4	6.4	8.4	4.8
Primary income	–3.5	–3.3	–2.9	–4.2	–3.2	–4.8	0.4	–4.1	–3.0
Secondary income	1.6	1.2	1.7	1.8	0.9	1.0	1.5	1.5	2.3
Current account balance	0.0	–0.5	–0.7	2.5	–4.1	–4.2	4.6	0.4	–3.6
Capital account balance	1.4	0.7	0.9	0.6	–0.4	–2.3	0.0	–0.4	5.3
Foreign direct investment (net)4	–4.5	–1.4	–2.4	–2.2	0.9	–7.0	2.7	–2.7	–3.0
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	63.8	58.4	52.5	60.5	58.4	56.0	54.0	54.5	52.5
Gross official reserves (excluding gold)	46.8	45.7	42.8	44.9	45.7	41.6	40.3	42.9	42.8
	Months of imports of goods and services
Gross official reserves (excluding gold)	10.4	9.2	7.6	9.3	9.2	8.0	7.4	7.6	7.6
	EUR million, period total
GDP at current prices	61,639	71,077	84,561	19,515	20,518	17,248	20,075	22,987	24,251
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Not available in a currency board regime.
2 Foreign currency component at constant exchange rates.
3 Nonprofit institutions serving households.
4 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

5 Croatia: smooth transition into the euro area amid slowing growth

At the same time, the geopolitical and economic environment remains challenging. Croatia’s impressive post-pandemic economic expansion has gradually weakened. GDP growth decelerated notably to 4.6% year on year in the second half of 2022 (6.3% for the full-year 2022). Private consumption growth slowed in the second half of the year, while growth of gross fixed capital formation accelerated strongly. Both components made roughly similar contributions to GDP growth. A relatively strong positive contribution came from changes in inventories. Net exports made a negative contribution in the second half of 2022 as the surplus in the services balance could not keep up with rising deficits in the goods balance. On the output side, all sectors except manufacturing expanded in the second half of the year.

CPI inflation was 11.7% year on year in February 2023 – the strongest contributions came from services and processed food items, while tax changes had a dampening effect. During 2022, the government passed two large policy packages to mitigate the effects of higher inflation (worth roughly 6% of 2021 GDP). On April 1, 2023, another policy package worth EUR 1.7 billion (around 2.5% of 2022 GDP) entered into force. The lion’s share (EUR 1.2 billion) has been allocated to energy price caps, the remainder to various measures to support the most vulnerable citizens and to subsidies. To help finance the packages, the government introduced a tax on excess corporate profits generated in 2022, which will bring in roughly 0.3% of GDP in additional revenues according to estimates by the Ministry of Finance.

Croatia’s public sector gross debt in euro has remained roughly unchanged compared to a year ago. However, in relative terms, indebtedness continued to decline to 70% of GDP, helped by strong economic growth. With these debt levels, Croatia broadly mirrors the EU average, while it has the third-highest public debt level among the CESEE EU member states. The budget deficit for 2022 came in at 1.6% of GDP and is expected to increase to 2.3% of GDP in 2023.

The Croatian National Bank announced an increase in the countercyclical ­capital buffer from 0.5% to 1% from December 31, 2023. It noted that cyclical risks are increasing due to continued strong growth of residential real estate prices, robust mortgage lending activity and very high growth of corporate lending. The latter slowed down somewhat in the second half of 2022. The banking sector’s return on assets was 1% in 2022, 0.3 percentage points lower than in 2021. This was due to lower net operating income. Banks’ tier 1 capital ratio declined from 25.4% to 24% between end-2021 and end-2022, mainly due to unrealized losses from bond valuations and an increase in risk-weighted assets. The NPL ratio continued to decrease to 3% at end-2022, while the share of stage 2 loans increased in the second half of 2022.

Table 5: Main economic indicators: Croatia  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	–8.6	13.1	6.3	16.7	12.2	7.8	8.7	5.2	4.0
Private consumption	–5.1	9.9	5.1	15.8	7.5	6.2	7.5	5.4	1.3
Public consumption	4.3	3.0	3.0	–4.5	14.3	5.8	–2.2	1.3	6.8
Gross fixed capital formation	–5.0	4.7	5.8	0.7	–5.0	2.0	3.9	8.0	9.6
Exports of goods and services	–23.3	36.4	25.4	53.0	34.4	27.8	40.3	23.3	14.2
Imports of goods and services	–12.4	17.6	25.0	19.8	20.1	29.5	26.5	30.5	14.6
	Contribution to GDP growth in percentage points
Domestic demand	–3.1	6.5	6.5	–3.0	8.8	14.1	5.5	2.1	5.7
Net exports of goods and services	–5.4	6.6	–0.2	19.7	3.4	–6.3	3.2	3.1	–1.7
Exports of goods and services	–11.8	15.1	13.0	28.7	13.7	9.4	17.2	17.7	6.8
Imports of goods and services	6.3	–8.5	–13.2	–9.0	–10.2	–15.7	–14.0	–14.6	–8.5
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	..	..	..	..	..	..	..	..	..
Unit labor costs in manufacturing (nominal, per hour)	2.4	–0.9	6.9	3.5	5.3	4.1	8.3	7.3	8.1
Labor productivity in manufacturing (real, per hour)	–2.5	4.7	0.9	1.8	0.7	4.6	–0.2	1.2	–1.8
Labor costs in manufacturing (nominal, per hour)	–0.4	3.9	7.9	5.4	6.0	9.0	8.1	8.6	6.2
Producer price index (PPI) in industry	–3.2	11.7	25.8	13.1	24.6	25.1	32.5	30.2	15.6
Consumer price index (here: HICP)	0.0	2.7	10.7	3.1	4.6	6.4	10.8	12.6	12.8
EUR per 1 HRK, + = HRK appreciation	–1.6	0.1	–0.1	0.4	0.6	0.4	–0.1	–0.3	–0.3
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	7.6	7.6	7.1	6.3	6.3	7.2	7.4	6.8	6.8
Employment rate (%, 15–64 years)	62.0	63.4	65.0	64.6	64.1	64.2	64.9	65.1	65.6
Key interest rate per annum (%)	..	..	..	..	..	..	..	..	..
HRK per 1 EUR	7.5	7.5	7.5	7.5	7.5	7.5	7.5	7.5	7.5
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	2.8	2.4	10.4	2.8	2.4	3.9	7.2	10.4	10.4
of which: loans to households	1.6	4.1	5.3	4.5	4.1	4.0	5.1	4.9	5.3
loans to nonbank corporations	4.8	-0.1	18.6	0.2	-0.1	3.6	10.4	19.5	18.6
	%
Share of foreign currency loans in total loans to the ­nonbank private sector	52.0	52.2	58.1	51.5	52.2	52.1	52.5	55.1	58.1
Return on assets (banking sector)	0.6	1.2	1.0	1.1	1.2	1.2	1.2	1.3	1.0
Tier 1 capital ratio (banking sector)	25.0	25.4	24.0	25.2	25.4	25.2	24.6	23.5	24.0
NPL ratio (banking sector)	5.4	4.3	3.0	4.7	4.3	4.2	3.8	3.3	3.0
	% of GDP
General government revenues	46.7	46.0	45.7	..	..	..	..	..	..
General government expenditures	54.0	48.5	47.2	..	..	..	..	..	..
General government balance	–7.3	–2.6	–1.6	..	..	..	..	..	..
Primary balance	–5.3	–1.0	–0.3	..	..	..	..	..	..
Gross public debt	87.0	78.4	70.0	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	12.4	11.0	10.1	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	5.0	4.5	4.1	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	–17.6	–19.6	–26.7	–18.5	–20.7	–29.0	–27.0	–25.8	–25.4
Services balance	10.5	16.9	21.0	41.6	8.3	4.7	17.4	46.3	10.5
Primary income	2.5	0.9	0.9	–0.8	2.8	1.6	0.3	–1.1	3.1
Secondary income	4.0	3.6	3.2	3.3	3.0	3.4	3.1	2.8	3.5
Current account balance	–0.5	1.8	–1.6	25.6	–6.6	–19.2	–6.2	22.1	–8.3
Capital account balance	2.1	2.4	2.6	2.2	2.8	2.1	2.1	2.0	4.0
Foreign direct investment (net)3	–1.4	–4.8	–5.6	–7.1	–4.7	–6.8	–4.0	–5.0	–6.7
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	79.6	76.8	74.0	79.8	76.8	80.2	79.8	75.0	73.5
Gross official reserves (excluding gold)	37.6	42.9	41.5	43.6	42.9	40.1	40.4	40.4	41.2
	Months of imports of goods and services
Gross official reserves (excluding gold)	9.3	9.8	7.6	10.3	9.8	8.6	8.1	7.6	7.6
	EUR million, period total
GDP at current prices	50,427	58,269	67,393	16,412	14,823	14,368	16,854	18,922	17,249
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Foreign currency component at constant exchange rates.
2 Nonprofit institutions serving households.
3 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

6 Czechia: economy navigating troubled waters; technical recession amid eye-catching imbalances

The balance of goods and services turned negative in H2 2022, to a large extent owing to high import prices of energy commodities. This, in combination with a rather high primary income deficit on the back of outflowing dividends, brought about an unusually deep current account deficit (6.1% of GDP in 2022). The ­general government deficit came in at 3.6% of GDP in 2022, while public debt ­increased to more than 44% of GDP. Public finances were burdened by permanent tax reductions implemented during the pandemic, expenditures ­related to the war in Ukraine and incoming refugees as well as by the support to households and firms troubled by strong price increases. These factors notwithstanding, the fiscal outcome was not only significantly better than the Treasury had expected but the deficit was also much smaller than in the previous two years. However, important challenges for public finances remain, e.g. relating to demographics and the pension system. The economic slowdown notwithstanding, the labor market remains rather tight. Despite a very moderate increase, the unemployment rate has stayed contained, hovering at or below 2.5%.

Strong and broad-based price growth accelerated almost continuously throughout 2022 with only a slight breather toward the end of the year owing to some easing in the price pressure of both energy and nonenergy imports. These echoed not only the relaxation on the energy markets but also some easing of the frictions in global supply chains as well as a steadily appreciating koruna. HICP inflation thus averaged just short of 15% in 2022. Yet it accelerated again in January 2023 (19.1%) as a result of electricity prices rising to the government price cap after the energy savings tariff was discontinued. In February, both headline and core inflation eased somewhat, inter alia due to some slowdown of service price growth and imputed rents. The CNB has kept its key interest rate unchanged at 7% since June 2022 as the composition of the CNB board shifted to a more dovish stance. In the new makeup a majority of CNB board members prefer rate stability while ­putting more emphasis on the strong exchange rate to rein in inflation. The CNB expects headline inflation to drop to single-digit levels in H2 2023 and to reach the 2% target in H1 2024.

Table 6: Main economic indicators: Czechia  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	–5.5	3.6	2.5	3.5	3.6	4.9	3.5	1.6	0.1
Private consumption	–7.2	4.1	–0.9	4.8	8.4	8.3	–0.1	–5.0	–5.5
Public consumption	4.2	1.4	0.6	5.1	0.6	1.3	1.7	–1.6	1.1
Gross fixed capital formation	–6.0	0.8	6.2	1.6	0.7	8.0	7.9	6.8	2.7
Exports of goods and services	–8.0	6.9	5.7	–1.7	–3.4	1.2	1.6	11.1	9.3
Imports of goods and services	–8.2	13.3	5.7	9.8	6.1	5.4	3.0	7.5	6.9
	Contribution to GDP growth in percentage points
Domestic demand	–5.1	7.1	2.3	10.7	10.3	7.8	4.4	–0.7	–1.6
Net exports of goods and services	–0.4	–3.6	0.2	–7.2	–6.7	–2.9	–0.9	2.3	1.8
Exports of goods and services	–5.9	4.8	4.1	–1.1	–2.7	1.0	1.3	7.2	6.6
Imports of goods and services	5.6	–8.4	–4.0	–6.1	–4.0	–3.9	–2.1	–4.9	–4.9
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	7.2	1.8	4.8	3.8	1.3	4.2	2.9	4.6	7.4
Unit labor costs in manufacturing (nominal, per hour)	2.9	–2.6	4.5	5.1	5.7	7.0	7.6	0.7	3.2
Labor productivity in manufacturing (real, per hour)	4.5	4.7	1.8	–0.1	–0.7	–0.4	–0.3	5.5	2.6
Labor costs in manufacturing (nominal, per hour)	7.1	2.4	6.5	4.9	4.9	6.6	7.2	6.2	5.9
Producer price index (PPI) in industry	0.6	6.2	18.6	8.1	11.0	16.4	21.3	20.6	16.2
Consumer price index (here: HICP)	3.3	3.3	14.8	3.3	5.0	10.2	15.0	17.4	16.5
EUR per 1 CZK, + = CZK appreciation	–3.0	3.2	4.4	3.8	5.1	5.8	4.1	3.7	4.1
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	2.6	2.9	2.4	2.8	2.3	2.5	2.4	2.3	2.3
Employment rate (%, 15–64 years)	74.4	74.4	75.5	75.0	75.3	75.0	75.2	75.8	75.8
Key interest rate per annum (%)	0.8	0.9	5.9	0.7	2.4	4.2	5.6	7.0	7.0
CZK per 1 EUR	26.5	25.6	24.6	25.5	25.4	24.6	24.6	24.6	24.4
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	3.0	9.7	6.2	6.3	9.7	10.4	9.2	8.6	6.2
of which: loans to households	6.5	9.9	4.8	9.1	9.9	10.3	8.3	6.5	4.8
loans to nonbank corporations	–1.3	9.4	8.3	2.8	9.4	10.5	10.5	11.6	8.3
	%
Share of foreign currency loans in total loans to the nonbank private sector	14.6	14.6	19.4	14.1	14.6	15.6	17.3	19.4	19.4
Return on assets (banking sector)	0.6	0.8	1.1	0.8	0.8	1.0	1.2	1.2	1.1
Tier 1 capital ratio (banking sector)	23.6	22.8	21.6	23.2	22.8	21.7	20.9	21.1	21.6
NPL ratio (banking sector)	2.6	2.3	1.9	2.5	2.3	2.2	2.0	1.9	1.9
	% of GDP
General government revenues	41.5	41.4	41.0	..	..	..	..	..	..
General government expenditures	47.2	46.5	44.6	..	..	..	..	..	..
General government balance	–5.8	–5.1	–3.6	..	..	..	..	..	..
Primary balance	–4.9	–4.3	–2.4	..	..	..	..	..	..
Gross public debt	37.7	42.0	44.1	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	56.1	53.4	51.5	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	34.0	35.7	33.2	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	4.9	1.2	–1.5	–2.0	–1.7	0.4	–2.2	–2.9	–0.9
Services balance	1.8	1.8	1.3	1.9	1.6	1.6	1.8	1.6	0.3
Primary income	–4.2	–3.3	–5.5	–4.7	–2.9	–1.9	–4.3	–11.2	–4.2
Secondary income	–0.5	–0.5	–0.5	–0.5	–0.2	–1.3	–0.4	–0.4	0.1
Current account balance	2.0	–0.9	–6.1	–5.3	–3.3	–1.2	–5.0	–12.9	–4.7
Capital account balance	1.2	1.6	0.1	2.4	2.1	–0.3	0.9	0.8	–1.0
Foreign direct investment (net)3	–2.6	–0.1	–2.5	–0.7	0.3	–1.1	–1.9	–1.8	–5.1
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	76.3	75.5	66.8	73.8	75.5	77.5	72.9	67.3	66.8
Gross official reserves (excluding gold)	62.5	64.1	47.2	62.8	64.1	62.9	57.7	50.8	47.2
	Months of imports of goods and services
Gross official reserves (excluding gold)	11.9	11.0	7.6	11.0	11.0	10.7	9.6	8.2	7.6
	EUR million, period total
GDP at current prices	215,824	238,361	276,659	61,848	63,500	62,484	68,948	71,573	73,653
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Foreign currency component at constant exchange rates.
2 Nonprofit institutions serving households.
3 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

7 Hungary: tight monetary policy, weakening consumption and global raw material prices to reduce inflation substantially

The budget deficit declined to 6.2% of GDP in 2022, as revenues were supported by strong economic growth and windfall taxes. Expenditure growth was slowed by the postponement of public investment projects and operational savings to accommodate bigger outlays for the utility bill protection scheme. At the end of 2022, the government modified its 2023 budget deficit target from 3.5% to 3.9% of GDP. This mainly reflected the substantial increase in the cost of the various energy subsidy schemes, but pension outlays, interest expenditure and fiscal ­reserves were also set markedly higher than in the original budget.

In mid-December 2022, the European Commission and the Council of the EU approved Hungary’s recovery and resilience plan (RRP) and the Partnership Agreement with Hungary for 2021–2027. At the same time, the Council decided to withhold EUR 6.3 billion of structural funds until Hungary takes additional measures to safeguard the rule of law. Later on, the Commission specified that it would not disburse any of the EUR 22 billion in cohesion funds until some horizontal enabling conditions are met. These issues mainly concern judicial independence, the so-called “child protection” law and serious risks to academic freedom and the right to asylum. Hungary has pledged to implement the necessary legal requirements but lengthy negotiations with the Commission are ongoing.

Inflation continued to accelerate during the reporting period and presumably peaked at 26.2% in January 2023, before easing to 25.8% in February 2023. However, the decline in February was primarily driven by energy and unprocessed food prices, while core inflation edged up further and price pressures remained broad-based. Increasing fuel shortages forced the government to abandon the price cap on automotive fuels in early December 2022. By contrast, the price cap on selected basic food items was extended until end-April 2023, and the government has indicated that the price cap will remain in place until inflation slows significantly. Nevertheless, food price inflation in Hungary kept on rising during the reporting period and has been the highest in the EU since August 2022.

The MNB maintained its strict policy stance. To additionally absorb banking sector liquidity, it restarted regular auctions of 1-week discount bonds and longer-term deposits from late January 2023 and announced a doubling of the mandatory reserve rate to 10% as of April along with abolishing interest on the first 2.5% of the reserve base. The tight monetary policy together with the MNB’s provision of foreign currency to cover FX liquidity needs in connection with energy imports and news about the approval of Hungary’s Partnership Agreement and RRP supported the forint between mid-December 2022 and mid-March 2023, when it temporarily came under pressure following the outbreak of global banking sector risks (Silicon Valley Bank, Credit Suisse).

Table 7: Main economic indicators: Hungary  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	–4.5	7.2	4.6	6.3	7.6	8.2	6.5	4.0	0.4
Private consumption	–1.2	4.6	6.4	6.5	7.7	11.6	8.4	4.7	1.7
Public consumption	–0.5	1.7	0.8	2.9	–3.1	4.3	2.5	–0.6	–2.9
Gross fixed capital formation	–7.1	6.5	1.2	13.3	1.5	10.9	6.1	1.2	–9.0
Exports of goods and services	–6.1	8.8	11.8	2.3	0.5	9.1	9.9	16.4	12.1
Imports of goods and services	–3.9	7.7	11.1	5.6	1.3	10.9	9.5	13.7	10.2
	Contribution to GDP growth in percentage points
Domestic demand	–2.6	6.2	3.9	8.8	8.1	9.9	6.1	2.1	–1.1
Net exports of goods and services	–2.0	1.0	0.7	–2.5	–0.5	–1.6	0.4	1.9	1.5
Exports of goods and services	–5.0	6.9	9.5	1.8	0.4	8.3	8.1	12.5	9.0
Imports of goods and services	3.1	–5.9	–8.8	–4.3	–1.0	–9.9	–7.7	–10.5	–7.5
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	6.8	2.6	11.8	3.3	2.6	12.5	6.7	12.1	15.9
Unit labor costs in manufacturing (nominal, per hour)	8.4	0.1	8.0	9.3	11.2	6.9	7.5	4.9	12.2
Labor productivity in manufacturing (real, per hour)	–0.2	5.9	3.8	0.2	0.5	4.0	2.6	7.2	1.8
Labor costs in manufacturing (nominal, per hour)	7.4	6.8	12.1	9.5	11.7	11.2	10.3	12.4	14.2
Producer price index (PPI) in industry	4.3	13.5	33.4	14.4	20.7	23.4	32.0	41.2	36.9
Consumer price index (here: HICP)	3.4	5.2	15.3	5.0	7.1	8.3	11.0	18.0	23.3
EUR per 1 HUF, + = HUF appreciation	–7.4	–2.0	–8.3	–0.1	–1.0	–0.9	–7.9	–12.3	–11.3
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	4.3	4.1	3.7	3.9	3.7	3.8	3.2	3.7	3.9
Employment rate (%, 15–64 years)	69.7	73.1	74.4	73.6	74.1	74.0	74.3	74.6	74.5
Key interest rate per annum (%)	0.8	1.1	8.0	1.3	2.0	3.1	5.3	10.6	13.0
HUF per 1 EUR	351.2	358.5	390.9	353.9	364.3	364.1	385.3	403.5	410.9
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	11.0	12.1	9.9	11.6	12.1	9.3	10.2	10.8	9.9
of which: loans to households	14.1	14.9	6.3	16.0	14.9	11.0	8.9	7.6	6.3
loans to nonbank corporations	8.8	9.9	12.6	8.3	9.9	7.9	11.3	13.3	12.6
	%
Share of foreign currency loans in total loans to the nonbank private sector	22.3	20.3	23.3	20.3	20.3	21.3	22.3	23.6	23.3
Return on assets (banking sector)	0.4	0.9	0.7	1.2	0.9	1.1	0.6	0.7	0.7
Tier 1 capital ratio (banking sector)	17.4	18.1	16.7	16.6	18.1	17.3	16.7	16.2	16.7
NPL ratio (banking sector)	2.4	1.6	2.0	1.8	1.6	1.6	1.9	2.0	2.0
	% of GDP
General government revenues	43.6	41.2	41.6	..	..	..	..	..	..
General government expenditures	51.1	48.3	47.8	..	..	..	..	..	..
General government balance	–7.5	–7.1	–6.2	..	..	..	..	..	..
Primary balance	–5.2	–4.8	–3.4	..	..	..	..	..	..
Gross public debt	79.3	76.6	73.3	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	68.6	75.8	79.3	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	20.1	20.4	18.1	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	–1.0	–2.9	–8.8	–5.4	–5.8	–7.4	–6.9	–11.3	–9.3
Services balance	2.9	3.2	4.7	4.2	2.7	4.3	4.9	5.7	4.1
Primary income	–2.6	–3.3	–3.1	–3.6	–3.6	–2.1	–3.4	–3.8	–3.1
Secondary income	–0.5	–1.1	–0.9	–0.7	–0.7	–0.6	–1.0	–1.1	–0.9
Current account balance	–1.1	–4.1	–8.1	–5.5	–7.4	–5.7	–6.4	–10.5	–9.3
Capital account balance	2.0	2.5	2.0	1.9	4.2	4.3	2.6	1.0	0.6
Foreign direct investment (net)3	–1.7	–1.9	–2.3	–2.4	–5.2	4.4	–2.7	–8.2	–1.9
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	81.1	84.7	88.2	87.9	84.7	85.6	83.7	85.0	88.2
Gross official reserves (excluding gold)	23.3	21.7	19.8	22.8	21.7	19.8	19.6	20.1	19.8
	Months of imports of goods and services
Gross official reserves (excluding gold)	3.6	3.3	2.5	3.4	3.3	2.9	2.7	2.6	2.5
	EUR million, period total
GDP at current prices	137,723	154,098	169,726	39,852	44,449	37,627	42,129	43,176	46,794
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Foreign currency component at constant exchange rates.
2 Nonprofit institutions serving households.
3 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

8 Poland: sharp slowdown of growth in the wake of weaker consumption

In the second half of 2022, nominal unit labor costs (ULC) of manufacturing gross value added were higher than a year earlier and their increase exceeded that in the euro area by about 6.5 percentage points, while the złoty’s nominal value in euro was weaker by about 3%. Thus, in real (ULC-deflated) terms, the złoty was stronger by about 3.5%. According to HICP (and national CPI) definition, annual headline inflation stood at almost 16% (17.3%) in the final quarter and at 17.2% (18.4%) in February 2023, while core inflation stood at 13.2% (11.3%) and at 13.6% (12.0%), respectively. Within core HICP inflation, nonenergy industrial goods inflation stood below average at 10.3% in February. The Monetary Policy Council (MPC), pursuing a CPI inflation target of 2.5% ± 1 percentage points, has maintained its main policy rate at 6.75% since its hike in September 2022. In early April 2023, the MPC stated that the earlier strong monetary policy tightening will lead to a gradual decline in inflation toward the target and that this disinflation would be faster if supported by an appreciation of the złoty, which, in the MPC’s assessment, would be consistent with the fundamentals of the Polish economy.

Regarding fiscal policy, the 2022 general government deficit rose to 3.7% of GDP and, according to the European Commission staff forecast in November, it will increase further to 5.5% in 2023. Despite increased military expenditure and spending on support for displaced persons from Ukraine, the deficit rise resulted primarily from a decline in the revenue-to-GDP ratio induced by anti-inflationary tax policy. The general government debt ratio declined from 53.6% of GDP at end-2021 to 49.1% at end-2022.

Table 8: Main economic indicators: Poland  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	–2.0	6.8	4.9	7.4	9.4	10.5	5.2	4.4	0.5
Private consumption	–3.4	6.3	3.0	4.6	8.3	6.5	6.3	0.7	–1.4
Public consumption	4.9	5.0	–0.3	5.0	5.7	0.8	1.1	0.5	–2.6
Gross fixed capital formation	–2.3	2.1	4.5	5.8	5.7	7.1	9.1	1.6	2.6
Exports of goods and services	–1.1	12.5	4.5	8.0	7.3	4.5	5.2	6.8	1.7
Imports of goods and services	–2.4	16.1	5.5	13.4	12.4	9.5	7.0	6.0	0.1
	Contribution to GDP growth in percentage points
Domestic demand	–2.6	7.9	5.2	9.5	11.4	13.0	5.9	3.9	–0.3
Net exports of goods and services	0.6	–1.0	–0.4	–2.2	–2.0	–2.6	–0.7	0.5	0.9
Exports of goods and services	–0.6	6.6	2.6	4.3	3.9	3.0	3.3	3.8	0.8
Imports of goods and services	1.2	–7.6	–3.0	–6.5	–5.9	–5.5	–4.0	–3.3	0.1
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	7.5	–0.8	9.8	–2.6	–1.6	1.7	10.6	13.9	13.3
Unit labor costs in manufacturing (nominal, per hour)	4.7	–4.6	1.8	0.9	–0.8	–1.6	2.1	2.6	4.3
Labor productivity in manufacturing (real, per hour)	1.9	12.9	8.7	8.8	10.3	12.7	9.7	9.0	4.1
Labor costs in manufacturing (nominal, per hour)	6.2	8.0	10.8	9.8	9.4	10.9	12.1	11.7	8.6
Producer price index (PPI) in industry	–0.5	8.1	23.7	9.6	13.6	18.5	25.3	27.5	23.7
Consumer price index (here: HICP)	3.7	5.2	13.2	5.1	7.3	9.0	12.8	14.9	15.9
EUR per 1 PLN, + = PLN appreciation	–3.3	–2.6	–2.6	–2.8	–2.4	–1.6	–2.5	–3.8	–2.3
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	3.2	3.4	3.0	3.1	2.9	3.2	2.7	3.0	2.9
Employment rate (%, 15–64 years)	68.7	70.3	71.4	71.0	71.0	71.0	71.4	71.2	71.8
Key interest rate per annum (%)	0.5	0.3	5.3	0.1	1.1	2.7	5.1	6.5	6.8
PLN per 1 EUR	4.4	4.6	4.7	4.6	4.6	4.6	4.6	4.7	4.7
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	–1.2	5.0	0.8	2.6	5.0	6.1	6.1	4.8	0.8
of which: loans to households	1.6	4.2	–4.7	4.0	4.2	3.1	0.4	–2.5	–4.7
loans to nonbank corporations	–6.0	6.5	10.8	–0.1	6.5	11.7	16.9	18.5	10.8
	%
Share of foreign currency loans in total loans to the nonbank private sector	19.6	17.5	18.5	18.0	17.5	17.6	17.7	19.0	18.5
Return on assets (banking sector)	0.0	0.2	0.5	0.5	0.2	1.0	0.8	0.3	0.5
Tier 1 capital ratio (banking sector)	18.5	17.4	17.6	18.0	17.4	16.7	17.0	16.4	17.6
NPL ratio (banking sector)	7.0	5.8	5.4	6.3	5.8	5.7	5.6	5.7	5.4
	% of GDP
General government revenues	41.3	42.3	39.8	..	..	..	..	..	..
General government expenditures	48.2	44.1	43.5	..	..	..	..	..	..
General government balance	–6.9	–1.8	–3.7	..	..	..	..	..	..
Primary balance	–5.6	–0.7	–2.1	..	..	..	..	..	..
Gross public debt	57.2	53.6	49.1	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	44.9	43.4	0.0	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	33.7	32.1	0.0	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	1.3	–1.3	–3.7	–2.7	–3.6	–4.2	–3.6	–4.0	–3.1
Services balance	4.4	4.7	5.6	4.6	4.2	5.2	6.6	5.8	4.9
Primary income	–3.8	–4.7	–4.5	–5.5	–3.1	–4.7	–5.5	–5.0	–3.1
Secondary income	0.5	–0.1	–0.3	0.2	–0.3	–0.3	–0.4	–0.4	–0.1
Current account balance	2.4	–1.4	–3.0	–3.5	–2.7	–4.1	–3.0	–3.7	–1.4
Capital account balance	1.4	0.7	0.3	1.0	0.8	–0.5	0.5	0.8	0.3
Foreign direct investment (net)3	–2.4	–4.1	–4.0	–5.9	–2.9	–7.7	–3.1	–4.4	–1.3
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	58.5	56.2	53.0	57.1	56.2	55.1	54.9	53.9	53.0
Gross official reserves (excluding gold)	21.7	23.4	22.0	23.8	23.4	21.8	22.0	22.5	22.0
	Months of imports of goods and services
Gross official reserves (excluding gold)	5.5	5.2	4.3	5.5	5.2	4.6	4.5	4.4	4.3
	EUR million, period total
GDP at current prices	526,034	574,543	654,275	145,387	161,418	149,585	155,613	164,229	184,849
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Foreign currency component at constant exchange rates.
2 Nonprofit institutions serving households.
3 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

9 Romania: economic activity stays resilient, but current account deficit widens further

In the second half of 2022, gross fixed capital formation became the most important growth driver supported by partly EU-funded public investments. Alongside, construction output showed double-digit growth. It is also worth mentioning that substantial investments in the areas of electromobility, electricity storage facilities and solar panels have been launched or announced recently. While domestic credit growth slowed down, it was still positive in real terms within the segment of nonbank corporations, but considerably below the inflation rate in the household segment. Private consumption continued to expand, even though real wage growth remained negative in the second half of 2022 and the unemployment rate edged up in the final quarter. Consumer demand benefited from the energy capping scheme (that was extended until March 2025) and the mild winter that limited utility bills. Net exports contributed negatively to GDP growth in second half of 2022, but the negative contribution decreased in the final quarter. Industrial production continued to shrink in the second half of 2022, as particularly energy-intensive sectors (such as metals and chemistry) were hit by high energy costs. Yet, supply chain bottlenecks in the automotive industry have eased. Meanwhile, unit labor costs in the manufacturing sector grew considerably and the Romanian leu tended to appreciate slightly against the euro in the second half of 2022.

Consumer price inflation stood at 16.4% at end-2022 and came down to 15.5% in February 2023. Remarkably, the National Bank of Romania’s (NBR) estimates that the annual inflation rate would have been about 11 percentage points higher without the energy price capping scheme at end-2022. While headline inflation rate started to decline, core inflation was still rising and reached 15% in February 2023. Against this background, the NBR hiked its key policy rate further to 7% in January 2023, and then left it unchanged at the subsequent two board meetings. The NBR currently projects inflation to go down to 7% at end-2023 and to 4.2% at end-2024. Hence, the central bank assumes that inflation will remain above the upper bound of the inflation target variation band of 2.5% ± 1 percentage point until the end of its forecast horizon. After the general government budget deficit fell to still high 6.2% of GDP in ESA 2010 terms, the budget plan for 2023 envisages a further gradual decline of the budget deficit to 4.4%. Within the framework of the excessive deficit procedure, Romania should put an end to the excessive deficit situation by 2024.

The current account deficit widened to 9.3% of GDP in 2022, compared to 7.2% of GDP in 2021 and 8.2% recorded in the four quarters up to mid-2022. Looking at the full-year comparison, the widening of the deficit was driven by the goods balance and the primary income balance (mainly related to outflows of ­reinvested earnings and dividends). In the fourth quarter, both items tentatively improved compared to the third quarter. Also, the capital account surplus rose in the fourth quarter thanks to increasing EU fund inflows. Nevertheless, the net borrowing position from current and capital accounts remained clearly negative in the fourth quarter as well as over the whole year (6.8% of GDP). Net FDI inflows stayed at an elevated level and covered half of this position in 2022.

Table 9: Main economic indicators: Romania  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	–3.7	5.9	4.8	6.7	2.4	6.3	5.1	3.8	4.6
Private consumption	–3.7	8.0	5.6	9.4	9.8	7.1	7.8	2.8	5.1
Public consumption	0.6	2.0	–3.2	–2.0	4.7	–2.4	0.1	2.6	–7.0
Gross fixed capital formation	1.4	2.0	8.8	–1.8	–6.5	1.4	2.7	11.4	16.2
Exports of goods and services	–9.4	12.8	8.0	7.2	7.9	8.6	9.5	12.9	1.7
Imports of goods and services	–5.8	15.4	9.8	11.5	8.4	10.4	7.0	18.2	3.3
	Contribution to GDP growth in percentage points
Domestic demand	–2.2	7.3	5.5	7.5	3.1	6.9	3.9	6.8	3.1
Net exports of goods and services	–1.5	–1.5	–0.8	–2.1	–0.5	–1.8	0.3	–3.1	–0.5
Exports of goods and services	–3.8	4.6	3.5	2.5	2.8	4.7	4.3	4.2	0.5
Imports of goods and services	2.3	–6.2	–4.3	–4.6	–3.3	–6.5	–4.0	–7.3	–0.9
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	5.5	–2.0	5.6	–3.1	–0.1	3.4	3.5	8.2	8.8
Unit labor costs in manufacturing (nominal, per hour)	7.7	3.9	14.5	9.1	12.4	11.7	15.1	13.8	17.1
Labor productivity in manufacturing (real, per hour)	0.4	3.1	–1.6	0.3	–4.0	–0.1	–2.5	–0.6	–2.9
Labor costs in manufacturing (nominal, per hour)	8.1	7.1	12.7	9.4	7.9	11.6	12.2	13.1	13.7
Producer price index (PPI) in industry	0.0	14.9	44.7	16.4	30.8	46.2	47.3	50.5	36.2
Consumer price index (here: HICP)	2.3	4.1	12.0	4.3	6.6	8.2	12.4	13.3	14.1
EUR per 1 RON, + = RON appreciation	–1.9	–1.7	–0.2	–1.8	–1.6	–1.4	–0.4	0.4	0.6
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	5.2	5.6	5.6	5.3	5.9	6.0	5.3	5.4	5.8
Employment rate (%, 15–64 years)	65.6	61.9	63.0	62.3	62.1	62.4	63.5	63.4	62.8
Key interest rate per annum (%)	1.9	1.4	4.3	1.3	1.6	2.3	3.4	5.1	6.5
RON per 1 EUR	4.8	4.9	4.9	4.9	4.9	4.9	4.9	4.9	4.9
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	4.8	14.2	12.0	12.7	14.2	15.2	17.1	15.7	12.0
of which: loans to households	4.2	9.3	4.3	8.8	9.3	9.3	8.6	6.3	4.3
loans to nonbank corporations	5.5	19.8	20.0	17.3	19.8	21.7	26.4	25.7	20.0
	%
Share of foreign currency loans in total loans to the nonbank private sector	30.5	27.6	31.2	28.4	27.6	27.3	28.0	29.4	31.2
Return on assets (banking sector)	1.0	1.4	1.5	1.5	1.4	1.2	1.5	1.5	1.5
Tier 1 capital ratio (banking sector)	23.2	20.9	18.8	21.4	20.9	19.0	18.9	18.8	18.8
NPL ratio (banking sector)	3.8	3.4	2.7	3.7	3.4	3.3	3.0	2.8	2.7
	% of GDP
General government revenues	32.3	32.7	33.5	..	..	..	..	..	..
General government expenditures	41.5	39.8	39.7	..	..	..	..	..	..
General government balance	–9.2	–7.1	–6.2	..	..	..	..	..	..
Primary balance	–8.0	–6.0	–5.0	..	..	..	..	..	..
Gross public debt	46.9	48.6	47.3	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	33.0	33.1	30.9	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	16.0	15.7	13.8	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	–8.6	–9.6	–11.3	–9.4	–9.2	–12.2	–11.4	–11.7	–10.2
Services balance	4.3	3.9	4.4	3.5	4.0	4.4	5.0	4.1	4.1
Primary income	–1.5	–2.0	–3.0	–2.7	–1.8	–2.2	–3.7	–4.0	–2.1
Secondary income	0.9	0.4	0.7	0.8	0.3	0.4	0.7	0.8	0.6
Current account balance	–4.9	–7.2	–9.3	–7.8	–6.6	–9.5	–9.4	–10.7	–7.6
Capital account balance	1.9	2.2	2.4	1.5	4.1	1.0	2.1	1.5	4.5
Foreign direct investment (net)3	–1.3	–3.7	–3.4	–4.1	–3.5	–5.3	–2.3	–3.9	–2.5
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	57.6	56.6	49.8	56.7	56.6	54.7	52.6	50.4	49.8
Gross official reserves (excluding gold)	17.0	16.8	16.3	17.5	16.8	16.1	16.1	16.0	16.3
	Months of imports of goods and services
Gross official reserves (excluding gold)	4.9	4.3	4.0	4.7	4.3	4.1	4.0	3.9	4.0
	EUR million, period total
GDP at current prices	220,325	241,099	286,526	65,854	72,934	54,572	67,066	79,062	85,825
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Foreign currency component at constant exchange rates.
2 Nonprofit institutions serving households.
3 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

10 Türkiye: fragile economy hit by earthquake as country awaits election outcome

Both headline and core inflation decelerated from their peaks of 85% and 79%, respectively, in October to 55% and 57%, respectively, in February. In parallel, the Turkish central bank (TCMB) delivered policy rate cuts by 150 basis points each in October and November (to 9%) and another one in February to 8.5%, implying a large negative real key rate. While the lira depreciated by 10% in nominal terms against the euro from August to February, it appreciated by about 11% in real (CPI-deflated) terms. Lira stabilization without interest rate hikes resulted (1) from the continuous requirement for exporters to sell part of their FX revenues to the central bank, (2) from government financing and guarantees for new exchange rate-linked lira deposits stemming from converted FX deposits and (3) from regulatory measures to foster “liraization” of banks’ assets and liabilities. Initially, reserve requirement ratios and requirements to hold lira (government) securities depended inversely on a bank’s share of converted deposits in its total FX deposits. From 2023, required securities maintenance depended inversely on a bank’s compliance (or overcompliance) with the new 60% target share of lira deposits. As a result, in the second half of 2022, the correction of banks’ negative on-balance sheet net FX position continued, lowering their need for entering swaps with the central bank by selling FX initially (given the ban on contracting foreign swap partners). In parallel, nonfinancial corporations reduced their overall negative on-balance sheet net FX position further and their positive short-term on-balance net FX position rose moderately again.

The general government fiscal deficit increased to 3.5% of GDP in 2022, up from 1.1% of GDP in 2021. In the wake of the earthquake and related to upcoming elections, the deficit will likely rise further.

Table 10: Main economic indicators: Türkiye  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	1.9	11.3	5.6	7.9	9.6	7.6	7.9	4.1	3.5
Private consumption	3.3	15.3	19.6	9.4	20.5	20.7	22.3	20.3	16.0
Public consumption	2.5	2.6	5.1	8.0	1.3	4.5	1.6	4.6	9.0
Gross fixed capital formation	7.4	7.4	2.8	–1.3	2.1	4.5	5.3	–0.9	2.6
Exports of goods and services	–14.4	24.9	9.1	25.9	21.6	14.3	16.4	12.4	–3.2
Imports of goods and services	6.7	2.4	7.9	–8.7	3.2	2.2	5.8	11.9	10.2
	Contribution to GDP growth in percentage points
Domestic demand	4.1	11.4	13.4	6.3	12.7	14.2	15.1	12.6	12.2
Net exports of goods and services	–5.4	5.0	0.5	7.4	4.4	3.0	2.8	0.5	–3.4
Exports of goods and services	–3.8	5.6	2.3	5.3	5.2	3.5	4.1	3.0	–0.9
Imports of goods and services	–1.6	–0.6	–1.8	2.1	–0.8	–0.5	–1.3	–2.5	–2.5
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	..	..	..	..	..	..	..	..	..
Unit labor costs in manufacturing (nominal, per hour)	10.0	19.1	74.3	29.2	26.7	48.4	53.8	93.7	100.0
Labor productivity in manufacturing (real, per hour)	8.3	–0.2	–0.5	–1.1	3.3	2.1	2.6	–1.0	–5.2
Labor costs in manufacturing (nominal, per hour)	18.9	19.1	73.8	27.8	30.9	51.4	57.8	91.9	89.7
Producer price index (PPI) in industry	12.2	43.9	128.5	44.8	60.6	104.7	131.0	146.7	127.7
Consumer price index (here: HICP)	12.3	19.6	72.3	19.2	25.9	54.8	74.1	81.0	77.3
EUR per 1 TRY, + = TRY appreciation	–21.0	–23.2	–39.8	–15.9	–26.4	–43.1	–39.8	–44.3	–32.8
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	13.4	12.2	10.7	11.9	11.2	11.8	10.4	10.3	10.3
Employment rate (%, 15–64 years)	47.5	50.3	52.8	51.6	51.7	50.8	53.0	53.5	54.0
Key interest rate per annum (%)	10.2	17.8	12.9	18.9	15.9	14.0	14.0	13.4	10.2
TRY per 1 EUR	8.0	10.5	17.4	10.1	12.8	15.7	16.8	18.1	19.0
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	4.3	8.6	12.7	14.5	36.1	45.1	60.4	68.7	56.3
of which: loans to households	6.6	13.4	14.6	15.9	20.4	22.7	37.5	42.0	55.4
loans to nonbank corporations	2.9	5.5	11.4	14.7	41.9	52.4	67.4	77.5	56.8
	%
Share of foreign currency loans in total loans to the ­nonbank private sector	30.9	38.1	27.7	32.2	38.1	37.0	33.9	31.1	27.7
Return on assets (banking sector)	1.0	1.3	3.8	1.1	1.3	2.6	3.3	3.5	3.8
Tier 1 capital ratio (banking sector)	14.1	13.2	15.3	12.9	13.2	15.4	13.6	14.4	15.3
NPL ratio (banking sector)	4.4	3.4	2.2	3.8	3.4	3.0	2.7	2.4	2.2
	% of GDP
General government revenues	31.2	31.4	32.1	..	..	..	..	..	..
General government expenditures	35.9	32.5	35.6	..	..	..	..	..	..
General government balance	–4.7	–1.1	–3.5	..	..	..	..	..	..
Primary balance	–1.6	2.1	–0.8	..	..	..	..	..	..
Gross public debt	39.7	41.8	39.4	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	..	..	..	..	..	..	..	..	..
Debt of households and NPISHs1 (nonconsolidated)	..	..	..	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	–5.3	–3.6	–10.0	–3.2	–4.2	–11.8	–9.0	–11.4	–8.4
Services balance	1.6	3.2	5.7	5.3	3.9	3.5	5.3	8.4	4.8
Primary income	–1.3	–1.4	–0.9	–1.1	–1.2	–1.3	–1.2	–0.9	–0.6
Secondary income	0.0	0.1	0.0	0.1	0.1	–0.2	–0.1	0.0	0.1
Current account balance	–5.0	–1.7	–5.4	1.1	–1.4	–9.9	–5.1	–3.8	–4.1
Capital account balance	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Foreign direct investment (net)2	–0.6	–0.8	–0.9	–1.4	–0.6	–0.4	–1.8	–0.7	–0.8
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	51.3	50.8	44.0	53.0	50.8	51.6	51.1	51.0	44.0
Gross official reserves (excluding gold)	6.5	9.3	9.1	10.7	9.3	8.3	7.5	8.9	9.1
	Months of imports of goods and services
Gross official reserves (excluding gold)	2.4	3.2	2.6	3.8	3.2	2.6	2.2	2.5	2.6
	EUR million, period total
GDP at current prices	625,392	687,929	853,070	191,802	182,302	160,450	203,933	236,083	252,605
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Nonprofit institutions serving households.
2 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

11 Russia: high oil revenues keep recession relatively mild despite severe Western sanctions

Russia’s GDP contracted by 2.1% in 2022. Driving forces of the drop in economic activity were the decline of private consumption (–1.4%) and the substantial shrinkage of inventories (following a major buildup in the previous year). On the other hand, economic activity was supported by government consumption (+2.8%) and fixed investment (+3.3%, notably boosted by public investment in transportation infrastructure, enterprise restructuring and increased arms production).

Partly supported by continuing capital controls, the ruble’s exchange rate remained relatively high until November (around RUB 60 per USD), before losing about 20% of its value in late 2022 and early 2023. This downward slide was largely caused by the declining Urals oil price (from USD 67 per barrel in November 2022 to USD 50 in January–February 2023), which was mostly triggered by the abovementioned new EU and US oil sanctions. As of late March 2023, the ­ruble had fallen back to its pre-invasion level (of around RUB 76–77 per USD). Inflation continued to decline to 11% in February 2023 (year on year). After ­reducing its key rate to 7.5% in mid-September 2022, the CBR has so far left it at this level.

The unemployment rate reached a new post-Soviet record low of 3.7% (ILO definition) in January 2023. This i.a. reflects a very tight labor market, after hundreds of thousands left Russia following the start of the Ukraine invasion and the mobilization wave a few months later. Although the average Urals oil price was higher in 2022 than in 2021, the general government balance reverted from a small surplus in 2021 to a deficit of 1.4% of GDP in 2022, on the back of rising budgetary support for strategic enterprises, households and arms production as well as of sharply declining imports and thus import taxes due to Western trade restrictions. The deficit was financed to a larger degree on the domestic debt market, and to a smaller degree by drawing down on the National Wealth Fund. Russia’s low government debt (end-2022: 15.1% of GDP) still provides the authorities with sufficient leeway to take recourse to domestic deficit financing.

The abovementioned substantial dip of the Urals oil price in January–February 2023, combined with (one-off) technical effects of the move to a single tax account system as well as brought-forward VAT refunds, triggered a sharp widening of the budget deficit in those two months. Western oil-related sanctions will likely render the budgetary situation more difficult in 2023. High energy export prices until November 2022 and sharply contracting imports in the wake of sanctions triggered a record current account surplus of 10.2% of GDP in 2022. In the second half-year of 2022, the banking sector managed to offset its initial sanctions-triggered loss and achieve a very modest overall profit of about USD 3 billion in full-year 2022, which is, however, less than one-tenth of the corresponding figure of 2021.

Table 11: Main economic indicators: Russia  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	–2.7	5.6	–2.1	5.0	5.8	3.0	–4.5	–3.5	–2.7
Private consumption	–5.9	9.9	–1.4	9.8	7.8	5.6	–4.4	–3.6	–2.7
Public consumption	1.9	2.9	2.8	2.6	2.4	1.9	2.3	2.4	4.7
Gross fixed capital formation	–4.0	9.1	3.3	11.3	5.9	7.4	2.7	1.8	3.0
Exports of goods and services	–4.2	3.3	–13.9	8.5	6.8	3.6	–15.8	–26.6	–14.6
Imports of goods and services	–11.9	19.1	–15.0	21.6	19.8	1.4	–27.6	–20.5	–11.2
	Contribution to GDP growth in percentage points
Domestic demand	–3.5	8.2	–1.4	7.0	7.7	1.9	–5.9	–0.1	–1.2
Net exports of goods and services	1.1	–2.5	–1.1	–1.3	–1.6	0.8	1.2	–3.9	–1.9
Exports of goods and services	–1.3	1.0	–4.2	2.5	1.9	1.1	–4.8	–8.1	–4.1
Imports of goods and services	2.4	–3.5	3.1	–3.8	–3.5	–0.3	6.0	4.2	2.2
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	..	..	..	..	..	..	..	..	..
Unit labor costs in manufacturing (nominal, per hour)	7.6	3.3	16.5	3.3	4.4	12.0	14.8	18.8	20.5
Labor productivity in manufacturing (real, per hour)	–1.4	7.2	–1.2	7.7	8.1	4.8	–3.3	–2.1	–3.7
Labor costs in manufacturing (nominal, per hour)	5.9	10.9	15.2	11.3	12.8	17.7	11.0	16.4	16.0
Producer price index (PPI) in industry	–3.7	24.6	12.8	28.2	28.3	25.6	21.4	5.2	–1.2
Consumer price index (here: HICP)	3.4	6.7	13.7	6.9	8.3	11.5	16.9	14.4	12.2
EUR per 1 RUB, + = RUB appreciation	–12.3	–5.3	18.1	–0.3	9.3	–8.7	24.3	42.7	28.6
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	5.8	4.8	3.9	4.4	4.3	4.2	3.9	3.9	3.8
Employment rate (%, 15–64 years)	..	..	..	..	..	..	..	..	..
Key interest rate per annum (%)	5.0	5.7	10.6	6.3	7.5	12.7	13.9	8.3	7.5
RUB per 1 EUR	82.6	87.2	73.9	86.6	83.1	98.3	72.0	60.7	64.6
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	9.6	15.3	14.0	13.9	15.3	15.6	11.7	12.1	14.0
of which: loans to households	12.9	22.1	9.4	20.7	22.1	20.3	12.2	10.2	9.4
loans to nonbank corporations	8.0	12.2	16.4	10.8	12.2	13.3	11.4	13.0	16.4
	%
Share of foreign currency loans in total loans to the nonbank private sector	12.6	10.8	7.5	10.8	10.8	11.2	7.3	6.7	7.5
Return on assets (banking sector)	1.9	2.4	0.2	2.6	2.4	–0.8	–2.4	–0.9	0.2
Tier 1 capital ratio (banking sector)	9.7	9.6	10.4	9.8	9.6	..	..	10.6	10.4
NPL ratio (banking sector)	17.1	15.1	15.3	15.8	15.1	..	..	15.9	15.3
	% of GDP
General government revenues	35.5	35.6	34.6	..	..	..	..	..	..
General government expenditures	39.5	34.8	36.0	..	..	..	..	..	..
General government balance	–4.0	0.8	–1.4	..	..	..	..	..	..
Primary balance	..	..	..	..	..	..	..	..	..
Gross public debt	17.6	15.5	15.1	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	..	..	..	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	..	..	..	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	6.3	10.4	13.5	11.3	12.4	20.0	17.4	11.4	8.7
Services balance	–1.1	–1.1	–1.0	–1.4	–1.1	–0.9	–0.6	–1.1	–1.2
Primary income	–2.3	–2.3	–2.0	–2.2	–2.6	–2.0	–2.0	–2.4	–1.5
Secondary income	–0.4	–0.3	–0.4	–0.3	–0.2	–0.3	–0.5	–0.3	–0.3
Current account balance	2.4	6.7	10.2	7.4	8.5	16.8	14.3	7.6	5.6
Capital account balance	0.0	0.0	–0.2	0.0	0.0	0.0	–0.2	–0.3	–0.2
Foreign direct investment (net)3	–0.2	1.4	1.3	0.9	2.7	0.2	2.2	1.6	0.9
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	29.9	27.4	16.5	30.1	27.4	25.4	26.1	22.3	16.5
Gross official reserves (excluding gold)	28.6	28.2	19.3	29.5	28.2	25.9	24.4	21.5	19.3
	Months of imports of goods and services
Gross official reserves (excluding gold)	16.8	16.4	15.0	16.7	16.4	15.0	15.9	15.6	15.0
	EUR million, period total
GDP at current prices	1,301,316	1,558,582	2,162,355	408,332	482,544	370,340	507,680	630,437	653,898
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Foreign currency component at constant exchange rates.
2 Nonprofit institutions serving households.
3 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

Economic trends in the Western Balkans

Relative resilience in the face of post-pandemic and
war-implied challenges, but pockets of vulnerabilities call for continued vigilance ⁴

Economic slowdown caused by global and domestic factors

Table 1: Real GDP growth  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Annual real change in %
Gross domestic product
Albania	–3.3	8.9	4.8	6.9	5.1	7.0	3.1	4.9	4.7
Bosnia and Herzegovina1	–3.0	7.4	3.9	7.6	7.8	5.9	5.8	2.6	1.7
Kosovo	–5.3	10.7	3.5	14.5	7.9	2.2	0.7	3.9	6.8
Montenegro	–15.3	13.0	6.1	27.9	9.3	4.7	13.6	2.8	4.7
North Macedonia	–4.7	3.9	2.1	1.4	1.2	2.2	4.0	2.0	0.6
Serbia	–0.9	7.5	2.3	7.8	7.2	4.1	3.8	1.0	0.4
WB average2	–3.0	7.8	3.2	8.3	6.5	4.5	4.3	2.2	1.9
Source: Eurostat.
1 Expenditure-side data.
2 Average weighted with GDP at PPP.

Domestic demand drove moderate economic growth while net exports lagged behind

Investment made a positive contribution to economic growth in Albania, ­Bosnia and Herzegovina and North Macedonia. In Albania, it was particularly fixed investment which benefited from a booming construction sector and strong FDI inflows heading into the real estate and tourism industry. In Bosnia and ­Herzegovina, capital formation profited from favorable lending activity and stockpiling of inventories. Similarly, an accumulation of inventories was the predominant driver of capital formation in North Macedonia. This was brought about by an ­increase in the import of intermediary goods, raw materials, energy products, ­machinery and equipment, among others. Yet barring this special case, gross ­investment was rather muted in general, suffering from elevated input costs and geopolitical uncertainty, subdued foreign demand and contracting industrial ­production (Montenegro).

The contribution of public consumption to growth was rather insignificant in most instances or it was slightly negative as earlier pandemic support measures were phased out. While exports of services in the tourism strongholds benefited from a strong tourism season, overall net exports remained subdued in most of the region in 2022, some recovery in Kosovo and Serbia in the second half of the year notwithstanding. This was owed to muted foreign demand in the EU, which is the region’s most important trading partner by far, as well as to the fact that export growth was outpaced by increases in imports (including those of services, e.g. in Albania due to outbound tourism).

Continued labor market tightening, exacerbated by migration and demographic trends

Labor shortages have become more severe in the face of tightening (formal) labor markets exacerbated by outward migration and adverse demographic trends. Labor shortages have been exerting mounting pressure on wages (table 2), especially in the booming sectors. Nominal wage growth accelerated in all WB economies throughout 2022, largely driven by wage hikes in the private sector and amplified by increases in minimum wages. Shortages of skilled labor are increasingly becoming a binding constraint for firms’ ability to do business. Nonetheless, nominal wage hikes mostly did not keep up with accelerated inflation in 2022 so that real wage growth ended up in negative territory except for Serbia and to a lesser extent ­Albania.

Table 2: Labor market  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Annual change in %
Average gross wages – total economy
Albania	2.7	6.3	8.2	6.9	8.4	5.8	7.0	9.2	10.8
Bosnia and Herzegovina	4.0	4.4	11.7	4.5	5.1	8.2	10.7	13.4	14.4
Kosovo	–2.3	3.9	19.8	. .	. .	. .	. .	. .	. .
Montenegro	1.3	1.4	11.3	1.7	1.9	11.3	10.6	11.4	11.8
North Macedonia	8.3	5.7	11.1	4.8	5.4	7.7	10.4	12.0	14.1
Serbia	9.5	9.4	13.8	9.0	11.8	13.4	13.6	14.8	13.4
	%
Unemployment rate1
Albania	12.2	12.1	11.3	11.6	11.9	11.7	11.5	10.8	11.0
Bosnia and Herzegovina	16.2	17.5	15.5	. .	. .	. .	. .	. .	. .
Kosovo	26.0	20.8	0.0	17.7	19.0	16.6	0.0	0.0	0.0
Montenegro	18.4	16.9	15.1	15.0	15.7	17.0	14.9	13.4	14.9
North Macedonia	16.6	15.8	14.6	15.9	15.3	14.9	14.7	14.4	14.2
Serbia	9.5	11.4	9.7	10.8	10.2	11.0	9.2	9.3	9.4
Source: Eurostat, Macrobond, national statistical offices, wiiw.
1 Labor force survey.

Widening external deficits do not appear a major cause for concern

The development of external accounts was inversely reflected by the level of reserves relative to GDP. It declined in all countries in the region (apart from ­Serbia), reflecting the strong increase in the value of imports (relative to exports) among other factors (table 3). In Serbia, in contrast, international reserves recovered to record highs in absolute terms (more than EUR 21 billion by end-February 2023) thanks to strong FDI inflows and higher external borrowing. The latter ­increased particularly after Serbia had sought help from both the IMF and the United Arab Emirates (UAE) in the second half of 2022 to handle its soaring ­market debt costs. As a result, Serbia turned to the IMF and concluded a Stand-by Arrangement (SBA) and obtained a loan at preferential conditions from the UAE.

Table 3: Reserve assets excluding gold  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	End of period, % of GDP
Albania	28.6	31.9	26.6	19.1	21.8	21.0	20.0	19.6	18.5
Bosnia and Herzegovina	39.1	41.1	34.3	27.7	28.1	26.9	25.7	25.0	23.7
Kosovo1	13.3	13.8	13.1	11.1	9.5	9.8	10.7	11.6	8.8
Montenegro	41.5	35.3	31.4	23.4	23.9	23.6	22.4	23.1	20.9
North Macedonia	27.8	28.1	27.0	20.1	18.7	16.5	15.6	18.6	18.3
Serbia	25.1	27.2	28.7	20.3	18.6	15.4	15.6	16.9	19.4
Source: National central banks, IMF.
1 Reserve assets (including gold).

Despite mostly prudent fiscal stance in the region, pockets of fiscal vulnerability remain and need to be addressed

In general, while the revenue side was aided by the still – relatively – robust economic activity in the region, it was particularly driven up by high inflation. To some extent also tax collection improved, most notably in Kosovo, inter alia thanks to the progressing formalization of the economy. Expenditures also increased in nominal terms. On the one hand, this was predominantly attributable to measures aiming to mitigate inflationary pressures on households and firms such as, inter alia, price caps, (energy) subsidies, bonuses, additional pensions and transfers. On the other hand, in most countries, government expenses such as public sector wages and investment costs increased in response to inflationary pressures. In ­contrast, however, in some instances (e.g. in Albania, Kosovo, Montenegro) low execution of public investment plans dampened the expenditure side and thus contributed to a better fiscal outcome.

General government debt relative to GDP declined in most cases, most significantly in Montenegro. In the latter country, this was – despite the highest fiscal deficit in the region – due to strong nominal GDP growth on the one hand and some debt repayment on the other. Yet, the reduction of public debt in Montenegro notwithstanding, it remains the country with the highest debt among its peers. Moreover, from the current budgetary perspective, the expansionary fiscal stance is envisaged to continue in the medium term ⁷ . This does not only elevate the
fiscal risk but also adds to inflationary pressure, especially in a country with no autonomous monetary policy. Notable fiscal vulnerabilities persist – despite some progress – also in Albania, primarily due to high refinancing requirements and exposure to interest and exchange rate risks amid tightening financial conditions as well as energy price volatility. Against this background, it is key to restore fiscal buffers to be able to cope with future shocks. Rather quick and decisive fiscal ­consolidation is also in the cards for Serbia and North Macedonia, in the former under the auspices of the IMF.

Table 4: Fiscal policy indicators  

	2020	2021	2022f	2020	2021	2022f
	General government balance			General government debt
	End of period, % of GDP
Albania	–6.7	–4.5	–3.5	74.5	73.2	69.4
Bosnia and Herzegovina	–5.2	–0.3	–1.0	36.1	34.0	34.0
Kosovo	–7.6	–1.3	–0.5	22.0	21.1	19.6
Montenegro	–11.1	–1.9	–5.6	105.3	82.5	75.5
North Macedonia	–8.3	–5.4	–5.4	51.9	51.8	51.4
Serbia	–8.0	–4.1	–3.9	58.6	57.1	55.2
Ukraine	–5.3	–3.4	–17.0	60.4	49.0	85.0
Source: European Commission (Ameco), Macrobond, national central banks, wiiw.

Gradually moderating yet still high inflation deserves continued vigilance

To prevent a de-anchoring of inflation expectations and to bring inflation back on a downward trajectory, the respective central banks in the three countries with autonomous monetary policy started their monetary policy tightening in March (Albania) and April 2022 (North Macedonia and Serbia), respectively. Since then, key policy rates have been raised in 6 steps (25 or 50 basis points each) from 0.5% to 3% in Albania, in 10 steps (25–75 basis points each) from 1.25% to 5.5% in North Macedonia and in 13 steps (i.e. every month since the start of the cycle, 25–50 basis points each) from 1% to 6% in Serbia (chart 5) ⁹ . In addition, according to the National Bank of Serbia (NBS), it has intervened in the FX market to keep the dinar exchange rate vis-à-vis the euro relatively stable to help contain the ­spillover of rising import prices on domestic prices ¹⁰ . In the three countries without autonomous monetary policy – Bosnia and Herzegovina, Kosovo and Montenegro – the tools to combat inflation are mostly limited to minimum reserve requirements and macroprudential tools. Yet in the current inflationary period none of these tools have been actively used for monetary policy purposes so far. The central banks in the three mentioned WB countries have argued that the current inflation is mainly imported and/or that such instruments are predominantly employed for financial stability objectives. In this context, it is important to again stress the ­crucial role of prudent fiscal policy also in the monetary policy context, especially in countries without autonomous monetary policy.

Looking ahead, inflation is projected to soon start falling noticeably in the ­entire region, including in Serbia, where it has not yet plateaued so far. The ­slowdown is expected to be brought about by weakening global cost-push factors on the back of easing energy and commodity prices as well as global supply chain frictions, among other factors. Moreover, on the domestic front, the impact of tighter monetary policies will take hold and the base effect will start to kick in. Nonetheless, a watchful eye is warranted in light of the persisting geopolitical tensions, rising core inflation, considerably increased inflation expectations in all countries as well as tight labor markets. The risk of potential second-round effects and particularly of wage-price spirals thus needs to be closely monitored ¹¹ .