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OeNB Report 2023/6: Economic Trends in CESEE

Editorial

Stability and security are the guiding principles of the Oesterreichische Nationalbank (OeNB). That means that we are determined to continue informing you on topical economic developments in Central, Eastern and Southeastern Europe (CESEE) – now and for many years to come. At the same time we are aware that, as Heraclitus put it, nothing is permanent except change. In this spirit, we are happy to announce that this issue of Focus on European Economic Integration (FEEI) marks an important change.

From now on, you will find our regular reporting on macroeconomic and macrofinancial developments in CESEE in the OeNB Reports series, which was introduced earlier this year. Our in-depth analyses of CESEE-relevant topics and one-off studies will be published in the OeNB Bulletin, which will be launched next year. With these changes to our publication outlets, we are responding to a modern and dynamic environment and are reflecting institutional and economic developments in the analyzed countries as well as the recent restructuring of the OeNB’s Economic Analysis and Research Department.

For almost 30 years, the FEEI series and its predecessor, Focus on Transition, have been a channel for communicating the OeNB’s ongoing research on Central, Eastern and Southeastern European countries, thus reflecting our strategic regional research priority. This research priority is well established within the European System of Central Banks and acknowledged by a broader public in the EU, the EU candidates and beyond. The OeNB’s dedication to the CESEE region remains unchanged and we will continue to provide high-quality research and monitoring reports on these countries.

When reviewing the CESEE-related articles published in the Focus on Transition series and, later on, in Focus on European Economic Integration, it becomes clear that the evolution of topics reflects the progress in the economic transition of the analyzed economies. Focus on Transition was first published in 1996. Hence, early contributions centered predominantly on the transition from planned to market economies, with a focus on monetary policy and exchange rate regimes, central bank independence, exchange rate convertibility and developments, current account imbalances and capital account liberalization, as well as banking sector developments and the early EU enlargement plans. In the run-up to the EU’s Eastern enlargement, the view on economic integration and convergence was broadened to include topics such as business cycle correlations, demand and supply shocks, the role of FDI and, in particular, the role of Austrian banks in the region. In 2004, when the first CESEE countries became members of the EU, Focus on Transition was renamed into Focus on European Economic Integration.

We marked the 20th anniversary of East-West integration in Europe with a FEEI Special Issue in 2009 – a year which also brought a switch from semiannual to quarterly publication in the FEEI series. But more important than this frequency change, topics became more diverse, reflecting the diversity of the region. Further, more attention was devoted to the financial sector as the Great Financial Crisis revealed its importance for macroeconomic developments. Candidate countries and potential candidates received greater attention and topics moved strongly toward financial stability, fiscal sustainability, crisis and policy spillovers and structural issues such as trade, labor markets and competitiveness. Increasingly, also research on individuals’ financial behavior, perceptions and expectations took center stage, drawing from evidence from the OeNB Euro Survey. Since 2007, results from this survey have helped us build an in-house database that allows us to analyze – at the household level – the use of foreign currencies (in particular the euro), euro adoption expectations, lending and saving decisions, inflation and inflation expectations, foreign currency lending, overindebtedness and loan arrears, nonbank lending and contingent liabilities, the role of trust and perceptions of public debt.

While the first phase of transition may be well over, the CESEE countries continue to be of particular relevance for Austria, especially its banking sector, and therefore also for the OeNB. And they continue to undergo highly interesting and relevant developments which are still under-researched. We are therefore committed to our strategic research priority, and we are looking forward to exploring new topics in the context of European integration, economic convergence, financial stability and households’ financial behavior in the CESEE region.

We are excited to enter a new phase of presenting our research findings and economic assessments on the CESEE region and we hope to count you among our valued readers for many years to come.

From now on, you will find our CESEE-specific analyses and reports on the CESEE pages of our website.

Julia Wörz
Head of the Central, Eastern and Southeastern Europe Section

Some success in taming inflation but stalling general economic recovery


Compiled by Josef Schreiner
1

1 Regional overview

As we approach the end of 2023, the economies of Central, Eastern and Southeastern Europe (CESEE) are still very busy absorbing the two major shocks of the past years – the pandemic and the Russian war of aggression against Ukraine – as well as the inflation wave unleashed by those events. While CESEE EU member states have made some progress tackling the challenges from inflation, the general economic recovery remains slow and uneven.

Economic activity still falls short of its pre-pandemic path as output has not yet returned to a stable upward trajectory. Average quarterly GDP growth in the CESEE EU members jumped from – 0.7% in the final quarter of 2022 to 0.8% in the first quarter of 2023, only to dip back to –0.6% in the second quarter of 2023. The most recent negative reading is entirely attributable to the Polish economy. For a while now, regional variations have been large, and growth outcomes over the first two quarters of 2023 ranged from an average growth rate of more than 1% (quarter on quarter) in Slovenia and Croatia to negative readings in Hungary and Poland. Hungary has been in recession since the third quarter of 2022 and in particular Poland’s economic activity has been very volatile (growth readings have oscillated between large positive and large negative figures for several quarters already).

Table 1

Real GDP growth  
2020 2021 2022 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Q2 2023
Period-on-period change in %
Slovakia –3.3 4.8 1.8 0.6 0.5 0.3 0.1 0.3 0.2 0.2 0.5
Slovenia –4.2 8.2 2.5 2.3 1.3 0.0 0.5 –0.5 0.7 0.2 1.1
Bulgaria –4.0 7.6 3.4 1.9 1.5 0.4 0.7 0.5 0.5 0.4 0.4
Croatia –8.5 13.1 6.2 2.3 2.2 2.4 1.2 –0.5 0.5 1.3 1.1
Czechia –5.5 3.6 2.4 1.8 0.8 0.6 0.2 –0.2 –0.4 0.1 –0.0
Hungary –4.5 7.1 4.6 1.4 2.5 1.4 1.0 –0.9 –0.9 –0.3 –0.2
Poland –2.0 6.9 5.1 2.2 1.9 3.2 –1.4 1.2 –2.0 1.6 –2.2
Romania –3.7 5.7 4.6 1.1 0.4 2.7 0.3 0.8 1.1 –1.0 1.7
CESEE average 1 –3.5 6.5 4.3 1.7 1.4 2.2 –0.3 0.5 –0.7 0.5 –0.5
Euro area –6.1 5.6 3.3 2.1 0.5 0.6 0.8 0.3 –0.1 0.1 0.1
Source: Eurostat, national statistical offices.
1 Average weighted with GDP at PPP.

Weak private consumption and a turning inventory cycle are weighing on growth

A stronger recovery was held back by two factors in particular: weak private consumption and a strong drawdown of stocks. Stock changes lowered GDP growth as the unusually high inventories that had been built up in 2021 and early 2022 in response to supply chain issues were being depleted.

Private consumption suffered from spiraling price increases that weighed on sentiment and purchasing power. The support from fiscal transfers and the spending of remaining pandemic-related savings as well as buoyant labor markets were not strong enough to prevent real consumption expenditure from declining. The period from the second quarter of 2022 to the first quarter of 2023 brought real wage decreases in almost all countries of the region, which erased a full three years of wage advances.

Labor market remains strong

Real wages, however, started to rise again in the second quarter of 2023 as inflation trended down and as nominal wage growth accelerated. At an average 13% in the second quarter of 2023, wage growth returned to the heights observed in 2018. These strong dynamics were supported by labor markets that remained largely unaffected by the broader economic slump. At 3.8% in August 2023, the unemployment rate stood only marginally above its pre-pandemic low (3.6% in December 2019), and a broader measure of the labor market slack – i.e. the share of persons with an unmet need for employment in the extended labor force – even beat its end-2019 record-low reading. Employment growth did deteriorate to some extent, but employment rates and activity rates kept up rather well and continued to hover around historical highs in most observed CESEE countries in mid-2023. Consequently, reported labor shortages stayed at a high level, especially in construction.

Chart 1

Investments are moderately supporting the economy

Investment spending also proved resilient. Real gross fixed capital formation advanced by some 4% to 5% on average in the CESEE region during the first half of 2023, thereby contributing moderately to GDP growth. Investment benefited from disbursements from two overlapping EU financial programming periods and from the distribution of funds from the Recovery and Resilience Facility. This bolstered construction output, especially in Slovenia and Romania. The support from EU funds, however, was uneven across the region. While Romania has already received EUR 7.3 billion in loans and grants from the facility, no disbursements have yet been made to Poland and Hungary (due to ongoing discussions with the European Commission on issues such as the rule of law in these countries).

Investment in machinery also held up rather well throughout most of CESEE. This came somewhat surprisingly as nominal interest rates rose, lending conditions became stricter and uncertainties regarding export opportunities intensified. It needs to be borne in mind, however, that real interest rates remained negative throughout the first half of 2023 and that high profitability provided sources for internal financing. Moreover, above-average capacity utilization in some countries and/or efforts to save (increasingly scarce) labor may have stimulated some more investment spending as well.

Fiscal policy moderately supported GDP growth in the first half of 2023 as some measures to address the cost-of-living crisis were still in place in most countries. The support was based on governments using up the fiscal space created by inflation pushing up budgetary revenues, while substantially higher borrowing costs since the monetary policy U-turn were only slowly feeding through into debt-servicing costs.

Most momentum is coming from the external sector

The most important pillar of growth in the first half of 2023 was net exports. Given the weakness of international and domestic demand, both import and export dynamics decelerated markedly. However, import demand already dipped into the red at the beginning of 2023 (in some cases quite substantially so), while exports withstood the international headwinds somewhat better and only started to contract moderately in the second quarter of 2023. Moreover, a contraction in exports was seen in fewer countries than a contraction in imports.

Private consumption will probably pick up in the second half of 2023

In the second half of 2023, private consumption growth will probably pick up somewhat again as consumers have increasingly recovered from the price spikes, wages keep rising amid tight labor markets and as policymakers are determined to compensate households for their losses in purchasing power. The fiscal space to do so, however, is narrowing, as primary balances continue to push up debt ratios (that are already high in some cases), financing debt has become increasingly expensive and higher wage demands in the public sector and higher expenditure on defense could fuel spending. Meanwhile, the EU’s Stability and Growth Pact is set to be reactivated from 2024 onward, with new excessive deficit procedures likely to be launched in spring 2024, adding consolidation pressure on fiscal policies.

But the economy in general will remain weak for the remainder of the year

The outlook for investment is mixed, with positive impulses from EU fund disbursements, on the one hand, and restrictive financing conditions, on the other. Furthermore, challenges for the export-oriented sectors loom large, as the international environment is weakening and global geopolitical uncertainties are intensifying. The International Monetary Fund (IMF) recently revised downward its projections for the global economy, and medium-term projections are at their lowest in decades. Global trade volumes were down 3.2% already in July 2023 – the steepest drop since the early months of the pandemic – and are not expected to recover anytime soon. This reflects increasing geoeconomic fragmentation and the effects of synchronized monetary tightening across most economies. Growth outcomes in 2023 are expected to be especially dim for Germany, an economy central to many CESEE countries’ growth models. This bodes ill for external growth impulses and suggests that the CESEE region’s economies will not pick up any notable steam throughout the remainder of 2023. In fact, GDP projections have been revised downward since summer and most forecasting institutions currently expect an average annual growth rate of well below 1% in the region for 2023.

Chart 2

Chart 3

Industry and retail trade are in recession

Readily available high-frequency indicators support this picture: Production in the strongly export-oriented (and energy-intensive) industrial sector of the CESEE region has already been declining since February (–3% regional average in August 2023), with sales in domestic markets stagnating and sales in export markets declining strongly. Available purchasing managers’ indices for the region are well below the 50-point threshold and reflect deteriorating new orders, both domestic and foreign. The weakness in the manufacturing sector is set to last as it is based on several factors, including the post-pandemic shift in consumption back toward services, weaker demand stemming from a higher cost of living, tighter credit conditions and general uncertainty amid intensified fragmentation and current geopolitical turbulences. Retail sales have also been contracting for some months already, but the contraction moderated more recently (–1.8% on average in August 2023). Construction was the only sector to report an ongoing increase in production (+4.9% in August on average).

Sentiment remains depressed despite some recent improvements

Sentiment readings continue to be well below long-term averages, with sentiment among consumers being especially dim. However, consumer sentiment has been brightening since late 2022, mirroring labor market resilience and the ebbing of the energy crisis. More recently, this positive momentum has also been supported by improving expectations concerning future price developments and income (as e.g. exemplified by a higher propensity to make major purchases and/or to save over the coming 12 months). Industrial, services and retail sentiment, however, have only stabilized, but have failed to embark on a clear upward trajectory yet.

Inflation is on a clear downward trend

The average inflation rate in CESEE fell to 8.4% in September 2023 – the lowest level recorded since February 2022 – compared with almost 17% at the beginning of the year. The observed downward movement was strongly influenced by declining energy and food prices and a positive base effect, which ensured a more broad-based decline in price pressure. In September 2023, for instance, core inflation also declined noticeably (to an average of 9.3%) and the share and the combined weight of items with rising inflation rates in the total consumption basket fell to below 20% (from more than 50% at the beginning of 2023). However, core inflation remains above headline inflation, given a slow pass-through of decreasing energy prices into retail prices, particularly services.

Chart 4

Inflation rates in the region are set to fall further. Cyclical demand pressure on prices has already weakened significantly and falling inflation expectations are supporting the restrictive monetary policy stance. According to the European Commission, price expectations among consumers at the 12-month horizon are currently at a lower level than before the outbreak of the COVID-19 pandemic and the associated onset of the current inflation wave. Moreover, producer price inflation is on a clear downward trend. In fact, the domestic producer price index decreased by an average of 2.4% in August 2023 amid lower prices for intermediate goods and energy and a base effect. This confirms a general reduction in upstream price pressures and the fading of external supply shocks. The Global Supply Chain Pressure Index provided by the Fed New York, for example, has fallen considerably over the past 12 months and stood below its long-term average in September 2023.

Still, inflation targets are out of reach in the near term

At the same time, the recovery in real incomes, strong labor markets and stubbornly high services prices could slow the pace of disinflation and keep inflation targets out of reach for the time being. A decomposition of quarterly national accounts data shows that the contribution of labor costs to the annual change in the gross value added (GVA) deflator already increased in the second quarter of 2023. In many cases, labor cost overtook profits as the single most important contributor to deflator changes. Yet, the relative level of unit labor cost (ULC) is still broadly in line with historical averages in most countries and there is generally still no evidence that wage-price spirals, in which prices and wages accelerate together for a sustained period, have taken hold.

Nevertheless, first CESEE central banks started cutting policy rates

Some CESEE central banks consider the disinflation path sustainable enough to reverse initial interest rate hikes. The Hungarian central bank, for example, lowered its effective key interest rate (O/N deposit rate) in five steps from 18% in May to 13% in October 2023, thereby bringing it in line with the base rate. This signals the end of the 12-month emergency rate period and the return of the base rate as the policy rate. In October 2022, the central bank hiked rates by 500 basis points in response to forint weakness (the currency reached levels of about HUF 430 per EUR back then). This – together with an improving current account balance – brought the forint back on an appreciation path. After reaching its strongest level in 2023 at about HUF 370 per EUR in summer, however, monetary easing, coupled with external factors such as a higher oil price and general risk aversion, pushed the currency back to about HUF 390 per EUR in October 2023. This corresponds to a depreciation of about 5% against the euro over the past four months.

The Polish central bank also cut its key interest rate – surprisingly sharply for many market participants – by 75 basis points to 6% at the beginning of September 2023. This decision was based on unexpectedly weak demand as well as declining inflation expectations and producer price pressures, which could allow inflation to return to its target faster. In reaction to this decision, the Polish złoti lost around 3.5% of its value against the euro. Downward pressure on the currency combined with the risk of rising fuel prices after the election on October 15 could reduce the policy space going forward. (Retail fuel prices in Poland have decreased substantially compared to other countries, as Poland’s dominant petrol retailer, which accounts for close to two-thirds of the market, is state controlled.) In fact, the Polish central bank already opted for a much smaller rate cut in October (–25 basis points to 5.75%). In response to this decision, the złoti strengthened again and recovered the losses after the previous rate cut.

Chart 5

Chart 6

The Romanian central bank has kept rates steady so far to offset underlying inflationary pressures. Romania’s GDP growth has still been running at close to 3% (the highest number in the region) in the second quarter and core inflation is proving stickier than in other CESEE countries (in fact, it increased somewhat in August 2023). The Romanian leu has been largely stable in recent months, with negative factors affecting currency developments, such as the high current account deficit or the slow progress in budget consolidation, canceling out positive factors, such as the continued interest of international investors in Romanian government bonds.

In Czechia, the policy rate has also remained unchanged at 7% since mid-2022. At the past two meetings, all members of the Bank Board of the Czech National Bank (CNB) expressed unanimous support for rate stability. The Czech koruna depreciated and lost around 5% of its value against the euro over the past six months. The latest trigger for the depreciation was the CNB’s decision to formally end its intervention regime, even though the CNB had not intervened in real terms since autumn 2022.

Financing conditions remain very tight

While, recently, the monetary stance has been loosened somewhat by weakening currencies (also with respect to the EUR/USD exchange rate), financing conditions remained very tight. Interest rates for newly extended loans to the private sector increased significantly between mid-2021 and the end of 2022 and stabilized at a high level thereafter. This was also accompanied by some increases in the average interest rate on the outstanding loan portfolio. The extent of these increases, however, differed across the region.

Since mid-2021, strong interest rate increases have also been observed for new deposits with agreed maturities. This contrasts with demand deposits and deposits redeemable at notice, which continue to bear very low interest. The widening spread triggered some shift from demand deposits to deposits with agreed maturities, especially in the corporate sector. However, most households still have demand deposits.

Surveys like the European Investment Bank’s CESEE Bank Lending Survey suggest that credit supply conditions have been deteriorating steadily since mid-2022 for a multitude of reasons, including the war in Ukraine, higher inflation and, consequently, higher interest rates and the slowdown of economic momentum. All credit segments have been affected by tighter credit standards, especially regarding longer-term lending. While credit demand has been more resilient than supply so far, it is increasingly being driven by short-term demand for working capital. At the same time, uncertainty and the weak economic outlook are negatively influencing loan demand for fixed investments. Among households, housing market prospects as well as non-housing-related consumption expenditures are expected to drag down demand further.

Credit growth decelerated noticeably

Against this backdrop, credit dynamics in the CESEE region decelerated notably in the review period. Since the beginning of the year, growth of credit to the private sector decreased by an average 3.7 percentage points, driven by an especially strong weakening of growth of credit to corporates. On the level of individual countries, the deterioration was especially strong in Slovenia and Romania. In Poland, the stock of private sector credit has even been decreasing since April 2023.

Chart 7

Banking sectors benefit from the prevailing interest rate environment

Banking sector performance in the region, however, has so far not suffered from the reduced credit momentum. To the contrary, the developments in lending and deposit rates as outlined above – i.e. the strong rise in lending rates coupled with a weak transmission of monetary policy signals to sight deposit rates – have positively impacted performance indicators. In particular, the widening interest rate spread between loans and deposits favored banks’ net interest margins, which in turn boosted banking sector profitability. The average return on assets in the region climbed to 1.6% in mid-2023, a level that is far above its long-term average. Moreover, the rise in interest rates on the outstanding loan portfolio has not yet negatively impacted nonperforming loan (NPL) ratios, which continued to hover around historical lows in many CESEE countries. It needs to be noted, though, that the share of so-called “stage 2” loans, for which banks are less certain of credit quality, is well above NPL ratios (e.g. for Czechia, Croatia and Hungary). Therefore, banks seem to have taken some precautionary measures: In countries with a larger increase in interest rates on the outstanding loan portfolio, banks tended to increase provisioning for foul loans to above longer-term averages. Even if more substantial loan defaults were to occur, banks would have adequate capital buffers to cope with the situation. In fact, tier 1 capital ratios have increased over the past 12 months and frequently reached levels of about 20% and above in the second quarter of 2023.

Chart 8

Chart 9

Improvements in trade balances boosted current accounts

The combined current and capital accounts displayed a favorable trend throughout the region in the first half of 2023. On average, the external balances improved by more than 2 percentage points of GDP between the fourth quarter of 2022 and the second quarter of 2023 (four-quarter moving sums). This positive momentum was largely based on improvements in the trade balance, reflecting satisfactory export growth, while imports performed poorly as lower energy prices dampened their value and weak domestic demand weighed on their volume. Higher inflows via the capital account further bolstered the external accounts in Bulgaria, Croatia and Czechia. Factors that weigh on the balance of payments included higher outflows of primary income (mainly repatriated FDI earnings amid generally strong corporate profits) and – in the case of Hungary and Poland – lower inflows via the capital account. The latter were related to ongoing disputes between Hungary and Poland with the European Commission on the disbursement of EU funds.

All of the above resulted in combined current and capital account balances returning into surplus in Slovenia, Bulgaria and Croatia and to a balanced position in Poland. The other countries continued to report deficits ranging from –3.3% of GDP in Czechia to –5.5% of GDP in Romania.

Net FDI inflows covered large parts of the remaining current account shortfalls in Czechia and Romania but not in Hungary and Slovakia, where FDI inflows decelerated – as was the case throughout most of the region. This development was very much driven by lower inflows of intercompany loans, partly in response to a narrowing interest rate differential between CESEE and (Western European) direct investor countries. Unlike the other countries of the region, however, Hungary and Slovakia also experienced some genuine disinvestment (amid a general weakening of FDI equity inflows into CESEE).

Chart 10

2 Croatia: slow transmission of monetary policy hinders the fight against inflation

As in many other European countries, the macroeconomic situation in Croatia remains challenging, with decelerating economic growth and decelerating but still elevated inflation.

GDP growth in Croatia gradually slowed to 2.7% in the first half of 2023 (versus 8.2% in the first half of 2022). The largest positive contribution to growth came from net exports, as imports shrank in year-on-year terms, while exports continued to grow. Private consumption and gross fixed capital investments also continued to grow, albeit at a slower pace than in 2022.

Several factors still supported economic growth during the first half of 2023: The tourist season, for one, did not seem to be substantially affected by the difficult economic environment. Numbers of monthly tourist arrivals closely tracked those of the record year 2019. Moreover, the labor market remained resilient in the first half of 2023, with a low and stable unemployment rate and a mildly increasing employment rate. Average monthly gross wages grew by roughly 6% year on year in real terms. The government’s anti-inflation packages have also supported the private sector. On October 1, 2023, the fifth package (worth roughly 0.7% of 2022 GDP) entered into force. Most of the money is allocated to reducing the cost of energy, the remainder to supporting vulnerable groups. The government also announced that it had agreed, with the retail sector, that prices for 30 essential products would be reduced and, with banks, that deposit interest rates would be increased.

The latter is good news, given that an analysis by the Croatian central bank 2 has shown that the transmission of ECB policy rates to private sector interest rates has been among the weakest in the euro area in Croatia. The analysis presented several potential explanatory factors, including lower risk premia from euro adoption and an ample liquidity surplus in the banking sector.

Weak interest rate transmission has likely supported growth but hindered the fight against high inflation. It is likely the reason why, contrary to most other CESEE countries, growth of loans to households has not slowed down in Croatia so far. Growth of loans to nonfinancial corporations (NFCs) remains very high but has decelerated compared to end-2022. This, coupled with increases in residential real estate prices, led the Croatian National Bank (HNB) to announce an additional increase in the countercyclical capital buffer from 1% to 1.5% from June 30, 2024.

The banking sector profited from higher interest rates and weak transmission. When looking at GDP growth from the output side, the agriculture, manufacturing and wholesale and retail trade sectors contracted in the first half of 2023. However, the sector of professional, scientific and technical activities and the financial sector expanded at a very fast rate and made the largest positive contributions to overall growth. The banking sector’s return on assets (RoA) was 1.9% in the first half of 2023, 0.7 percentage points higher than in the first half of 2022. This was almost exclusively due to a strong increase of net interest income. Strong profitability was accompanied by stable asset quality metrics and a declining tier 1 capital ratio (22.6% at mid-2023). 3

It is positive that inflation has decelerated compared to its peak of 13% in November 2022. However, the deceleration largely took place until May 2023 and since then inflation has been fluctuating around the same elevated level. HICP inflation was 7.4% year on year in September 2023. That was the second highest level in the euro area, following Slovakia. The HNB’s latest projections predicted HICP inflation at 7.7% for 2023 and 3.9% for 2024.

Table 2

Main economic indicators: Croatia  
2020 2021 2022 Q1 22 Q2 22 Q3 22 Q4 22 Q1 23 Q2 23
Year-on-year change of the period total in %
GDP at constant prices –8.5 13.1 6.2 7.8 8.7 5.3 3.5 2.8 2.7
Private consumption –5.1 9.9 5.1 6.2 7.5 5.4 1.3 1.3 2.3
Public consumption 4.3 3.0 3.2 5.7 –2.5 1.9 7.6 2.2 0.3
Gross fixed capital formation –5.0 4.7 5.8 2.0 3.9 8.0 9.6 3.9 3.2
Exports of goods and services –23.3 36.4 25.4 27.8 40.3 23.3 14.2 4.8 –1.6
Imports of goods and services –12.4 17.6 25.0 29.5 26.5 30.5 14.6 –0.8 –3.6
Contribution to GDP growth in percentage points
Domestic demand –3.1 6.5 6.4 14.1 5.5 2.2 5.1 0.6 1.2
Net exports of goods and services –5.4 6.6 –0.2 –6.3 3.2 3.1 –1.7 2.3 1.5
Exports of goods and services –11.8 15.1 13.0 9.4 17.2 17.7 6.8 1.9 –0.9
Imports of goods and services 6.3 –8.5 –13.2 –15.7 –14.0 –14.6 –8.5 0.4 2.4
Year-on-year change of the 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 6.6 4.9 8.2 8.3 5.1 8.8 9.9
Labor productivity in manufacturing (real, per hour) –1.9 4.2 1.2 4.3 0.3 0.7 –0.3 1.0 3.6
Labor costs in manufacturing (nominal, per hour) 0.3 3.4 7.9 9.4 8.5 9.0 4.7 9.9 13.9
Producer price index (PPI) in industry –3.2 11.7 25.8 25.1 32.5 30.2 15.6 9.2 –0.7
Consumer price index (here: CPI) 0.0 2.7 10.7 6.4 10.8 12.6 12.8 11.6 8.5
EUR per 1 HRK, + = HRK appreciation –1.6 0.1 –0.1 0.4 –0.1 –0.3 –0.3 .. ..
Period average levels
Unemployment rate (ILO definition, %, 15–64 years) 7.6 7.6 7.1 7.2 7.4 6.8 6.8 7.4 5.7
Employment rate (%, 15–64 years) 62.0 63.4 65.0 64.2 64.9 65.1 65.6 64.6 66.0
Key interest rate per annum (%) .. .. .. .. .. .. .. .. ..
HRK per 1 EUR 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 sector 1 2.8 2.4 10.4 3.9 7.2 10.4 10.4 9.4 8.7
of which:
loans to households 1.6 4.1 5.3 4.0 5.1 4.9 5.3 5.8 6.1
loans to nonbank corporations 4.8 –0.1 18.6 3.6 10.4 19.5 18.6 14.9 12.5
Share of foreign currency loans in total loans
to the nonbank private sector
52.0 52.2 58.1 52.1 52.5 55.1 58.1 0.2 0.4
Return on assets (banking sector) 0.6 1.2 1.0 1.2 1.2 1.3 1.0 1.6 1.9
Tier 1 capital ratio (banking sector) 25.0 25.4 24.2 25.2 24.6 23.5 24.2 23.0 22.6
NPL ratio (banking sector) 5.4 4.3 3.0 4.2 3.8 3.3 3.0 3.2 3.0
% of GDP
General government revenues 46.8 46.2 45.2            
General government expenditures 54.1 48.7 44.8            
General government balance –7.3 –2.5 0.4            
Primary balance –5.3 –0.9 1.8            
Gross public debt 87.0 78.4 68.4            
% of GDP
Debt of nonfinancial corporations (nonconsolidated) 12.3 11.0 10.2            
Debt of households and NPISHs 2 (nonconsolidated) 5.0 4.5 4.1            
% of GDP (based on EUR), period total
Goods balance –17.5 –19.6 –27.1 –29.0 –27.1 –26.1 –26.5 –26.1 –25.1
Services balance 10.5 16.8 20.8 4.5 17.1 46.3 10.0 6.8 18.0
Primary income 2.0 0.0 0.2 0.8 –0.3 –1.7 2.5 1.6 0.8
Secondary income 4.1 3.7 3.2 3.4 3.1 2.8 3.5 2.8 3.4
Current account balance –1.0 1.0 –2.8 –20.3 –7.2 21.2 –10.4 –14.8 –2.9
Capital account balance 2.1 2.4 2.5 2.1 2.1 2.0 3.8 2.7 6.3
Foreign direct investment (net) 3 –1.5 –5.2 –5.5 –6.9 –3.9 –4.5 –6.8 –3.2 –0.9
% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt 79.6 76.8 74.0 80.2 79.8 75.1 74.0 82.0 79.4
Gross official reserves (excluding gold) 37.6 42.9 41.5 40.1 40.4 40.5 41.5 4.5 4.1
Months of imports of goods and services
Gross official reserves (excluding gold) 9.3 9.8 7.5 8.6 8.1 7.6 7.5 0.8 0.8
EUR million, period total
GDP at current prices 50,453 58,306 66,946 14,376 16,879 18,817 16,874 16,713 18,797
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 Slovakia: new government will face a significant fiscal consolidation challenge

After modest GDP growth of 1.7% in 2022, the expansion of the Slovak economy slowed down further in the first half of 2023 (1.3% year on year). However, the composition of economic growth underwent a dramatic shift. In contrast to the previous two years, net exports replaced domestic demand in the growth driving seat. Paradoxically, this occurred despite a considerable year-on-year contraction of Slovak exports which reflected the challenging foreign demand environment. However, since the decline of exports was significantly outpaced by the shrinkage of imports, net exports contributed 9.2 percentage points to GDP growth in the first half of 2023. Domestic demand, in contrast, put a significant drag on growth (–7.9 percentage points contribution), particularly private consumption and changes in inventories. After a relatively robust expansion in 2022, household consumption has been contracting at a strong pace this year as consumers grapple with high inflation and have cut their spending. Private consumption thus chopped off nearly 2 percentage points from GDP growth in the first six months of this year, government spending subtracted almost another percentage point. Yet on the back of continued dynamic nominal wage growth, consumer demand is likely to strengthen as inflation slows down. Fixed investments contributed 1.6 percentage points to GDP growth in the first half of 2023 but were significantly boosted by EU funds. In contrast, the slowdown in the real estate market and subdued domestic and foreign demand put a damper on (construction) investments. Against this backdrop, senior representatives of the current caretaker government warned that one of the reasons for Slovakia’s feeble growth is its extensive reliance on EU funds, too little investment of resources originating within the country and the failure to invest in national priorities and projects with good quality 4 . Strikingly, amid weak demand, falling prices and relaxed supply chain frictions, changes in inventories provided the strongest (negative) contribution to growth.

The labor market fared better than the growth performance of the Slovak economy would lead us to expect. The unemployment rate has followed a gradual downward trend for 2.5 years. It has thus declined from its pandemic peak of more than 7% in March 2021 to 5.8% in August 2023, levels last seen before the outbreak of the pandemic. In parallel, employment has continued to rise slightly and – with 72% of the total adult population in employment – shows the highest reading in Slovakia’s modern history. While the average number of hours per employee has recovered since the pandemic-related trough in 2020, it is still well below the pre-pandemic level. In fact, average number of working hours per employee appear to have trended down for more than a decade. Hence, for various supply- and demand-side reasons, more and more people are employed yet they tend to work shorter hours. Against this background, labor cost increases have continued to outpace (negative) productivity growth in 2023, thus further raising unit labor cost.

Yet, growth in nominal wages has kept on lagging significantly behind the increasing cost of living. After headline inflation had continuously headed upward and peaked at 15.4% in February 2023 – levels unseen since mid-2000 – it has dropped sharply since, reaching 9% in September 2023. The easing of headline inflation is mainly ascribable to a significant slowdown in price hikes for processed and unprocessed food. In addition, weak consumer demand and rising interest rates have also dampened general price pressures. As a result, core inflation declined noticeably from more than 15% in February to still significantly elevated 9.2% in September.

According to Slovakia’s fiscal council RRZ, the general government deficit is currently estimated to come in at 5.7% of GDP in 2023, a value that is better than the one approved by parliament (6.4% of GDP) and the one expected by the finance ministry (6.8% of GDP). Government debt is expected to reach slightly below 57% of GDP by end-2023. Against this backdrop, whatever coalition comes in after the general election that took place on September 20 will face a great challenge of consolidating public finances. The RRZ estimates that consolidation measures worth at least 0.75% of GDP annually need to be implemented to stabilize the debt-to-GDP ratio just above 60% by 2027.

Table 3

Main economic indicators: Slovakia  
2020 2021 2022 Q1 22 Q2 22 Q3 22 Q4 22 Q1 23 Q2 23
Year-on-year change of the period total in %
GDP at constant prices –3.3 4.8 1.8 3.1 1.4 1.5 1.2 0.5 1.5
Private consumption –1.1 2.6 5.5 9.8 4.6 3.2 4.9 –2.2 –3.6
Public consumption –0.6 4.2 –4.2 –2.4 –8.1 –3.1 –3.3 –5.8 –2.2
Gross fixed capital formation –10.9 3.5 4.5 4.8 –5.9 6.6 10.4 5.7 12.4
Exports of goods and services –6.3 10.5 3.0 –2.5 2.6 9.4 3.2 –3.7 –0.8
Imports of goods and services –8.1 11.7 4.2 1.7 0.1 7.4 7.8 –12.3 –8.0
Contribution to GDP growth in percentage points
Domestic demand –5.0 5.7 2.9 7.5 –0.9 –0.1 5.6 –9.0 –6.1
Net exports of goods and services 1.6 –0.9 –1.2 –4.3 2.3 1.5 –4.4 9.5 7.6
Exports of goods and services –5.8 8.9 2.8 –2.3 2.4 7.2 3.0 –3.5 –0.8
Imports of goods and services 7.5 –9.8 –3.9 –2.1 –0.1 –5.7 –7.4 13.1 8.4
Year-on-year change of the period average in %
Unit labor costs in the whole economy
(nominal, per person)
5.6 1.3 5.9 4.7 6.1 7.9 5.3 8.4 7.8
Unit labor costs in manufacturing (nominal, per hour) 1.5 –3.1 10.0 11.9 12.9 3.4 12.4 12.9 6.2
Labor productivity in manufacturing (real, per hour) 2.7 9.1 –1.2 –0.1 –0.9 3.5 –6.8 –4.2 1.1
Labor costs in manufacturing (nominal, per hour) 3.6 6.4 8.5 11.8 11.9 7.0 4.7 8.1 7.4
Producer price index (PPI) in industry –0.5 6.8 27.8 24.4 30.6 31.0 25.0 20.1 9.4
Consumer price index (here: HICP) 2.0 2.8 12.1 8.5 11.8 13.3 14.9 15.1 12.5
EUR per 1 SKK, + = SKK appreciation .. .. .. .. .. .. .. .. ..
Period average levels
Unemployment rate (ILO definition, %, 15–64 years) 6.8 6.9 6.2 6.4 6.2 6.1 6.1 6.3 5.8
Employment rate (%, 15–64 years) 67.5 69.5 71.4 70.6 71.4 71.6 71.8 71.3 72.0
Key interest rate per annum (%) 0.0 0.0 0.6 0.0 0.0 0.5 1.8 2.8 3.7
SKK per 1 EUR .. .. .. .. .. .. .. .. ..
Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector 1 4.5 7.3 10.5 8.9 11.7 12.0 10.5 8.8 7.0
of which:
loans to households 6.1 8.8 10.3 10.5 11.3 11.1 10.3 8.4 6.4
loans to nonbank corporations 1.4 4.3 10.8 5.5 12.6 13.9 10.8 9.6 8.3
Share of foreign currency loans in total loans to the
nonbank private sector
0.1 0.1 0.1 0.1 0.1 0.0 0.1 0.1 0.0
Return on assets (banking sector) 0.5 0.7 0.8 0.5 0.7 0.7 0.8 0.8 1.0
Tier 1 capital ratio (banking sector) 18.1 18.5 18.0 18.1 17.8 17.8 18.0 18.1 18.1
NPL ratio (banking sector) 2.3 1.9 1.7 1.9 1.9 1.8 1.7 1.7 1.8
% 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) 54.4 51.7 50.3            
Debt of households and NPISHs 2 (nonconsolidated) 46.5 47.0 47.1            
% of GDP (based on EUR), period total
Goods balance 1.1 –0.5 –6.0 –6.6 –4.2 –4.7 –8.7 0.6 3.2
Services balance 1.0 0.5 0.3 0.5 0.1 0.2 0.6 0.9 0.7
Primary income –0.8 –1.5 –1.7 –0.9 –1.8 –1.6 –2.3 –2.6 –2.2
Secondary income –0.7 –1.0 –0.8 –1.5 –0.9 –1.2 0.3 –1.2 –0.7
Current account balance 0.6 –2.5 –8.2 –8.4 –6.8 –7.3 –10.0 –2.3 1.0
Capital account balance 0.8 1.3 1.2 –0.1 0.9 1.1 2.7 –0.8 0.5
Foreign direct investment (net) 3 2.6 0.3 –2.1 –1.7 –2.1 –2.9 –1.7 3.0 –1.8
% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt 119.6 132.7 103.1 139.0 127.3 109.6 103.1 101.5 100.1
Gross official reserves (excluding gold) 6.5 6.8 7.2 6.9 7.7 7.5 7.2 8.5 8.2
Months of imports of goods and services
Gross official reserves (excluding gold) 0.9 0.9 0.8 0.9 0.9 0.9 0.8 1.0 1.0
EUR million, period total
GDP at current prices 93,444 100,256 109,645 24,554 27,265 28,983 28,843 27,610 30,343
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 s+maller than net accumulation of liabilities (net inflow of capital).

4 Slovenia: early-August floods burden budget, but may support investments in the medium term

During the first half of 2023, Slovenia’s GDP grew by 1.1% year on year, weakening from 2.5% registered for 2022 (which was revised down from the preliminary 5.4%). GDP expansion during the first half of 2023 was supported by a large contribution of net real exports, primarily on the back of a sharp contraction of imports as household consumption growth slowed and inventories faltered. Investment growth strengthened notably compared to the second half of 2022, and also public consumption recovered. Household consumption growth was suppressed by weak consumer confidence and the fading of the stimulus effect of previously accumulated savings, though real wage growth started to recover. Public consumption growth was lifted by the second phase of wage increases in the public sector agreed in autumn 2022. The biggest boost to the acceleration of investment growth came from nondwelling construction activity, in part supported by public investment projects, while investments in machinery and (nontransport) equipment contracted sharply, reflecting falling capacity utilization rates, rapidly deteriorating export expectations, tightening financing conditions and a weak corporate loan market.

In response to the devastating damage caused by heavy rains in early August 2023 (currently estimated at around 15% of GDP), the government has announced various measures to facilitate the cleanup and reconstruction (e.g. furlough subsidies, a one-year loan moratorium, tax waivers and the possibility of faster hiring of foreign workers for companies; a lump-sum solidarity aid, a waiver of energy bills, a subsidy for emergency apartment rent and a one-year loan moratorium for households). Financing will be channeled through a special reconstruction fund, which will be funded by the budget (including a temporary profit and income tax surcharge for companies and individuals to be paid in 2024 and 2025, respectively), a special bank tax for a period of five years, the EU’s Solidarity Fund and the country’s NextGeneration EU grants and loans. The measures are expected to lead to an increase in the planned general government budget deficit for 2023 to 4.5% of GDP (up from 4.1% of GDP expected in the spring forecast). Also, the deficit for 2024 was revised up to 3.8% of GDP from the original 2.8% of GDP due to flood reconstruction expenditure (without which the deficit would stay below 3% of GDP, according to the finance ministry).

Increased interest rates and the tightening of banks’ lending standards continued to suppress lending growth to corporates and households during the reporting period: The outstanding amount of loans to nonbank corporations contracted by more than 5% in August 2023 compared to the same month of 2022, and the growth rate of loans to households more than halved from December to 3.4%. (The slowdown was most pronounced for housing loans, while the growth of consumption loans picked up, presumably partly in response to the easing of restrictions on consumer lending by the central bank as of July 2023). Despite slowing lending activity, rising interest rates mitigated banks’ income risk and contributed to a significant improvement in their net interest income and after-tax profits during the first half of 2023. This also had a positive impact on capital adequacy while the ratio of nonperforming exposures in general continued to decline modestly.

HICP inflation had gradually slowed during the reporting period to 5.7% in July 2023 before it edged up to 7.1% in September. The deceleration (and the uptick till September) was driven by energy and unprocessed food prices; core inflation excluding these two categories receded less and fell continuously to 7.3% in September 2023 (after 8.3% in July). However, the stability of services price inflation at slightly above 8%, the pickup of nominal wage and ULC growth during the first half of 2023 along with some rise In households’ inflation expectations in the third quarter of 2023 may forebode a deceleration of the disinflationary process.

Unfavorable trends in the balance of payments turned around in early 2023 and the country’s net lending position vis-à-vis the rest of the world returned into positive territory. The improvement was driven by the goods and services balance as global energy and food prices receded, global supply chain pressures continued to ease and domestic demand weakened.

Table 4

Main economic indicators: Slovenia  
2020 2021 2022 Q1 22 Q2 22 Q3 22 Q4 22 Q1 23 Q2 23
Year-on-year change of the period total in %
GDP at constant prices –4.2 8.2 2.5 5.0 4.4 0.9 –0.2 0.8 1.4
Private consumption –6.5 10.3 3.6 9.6 7.7 –1.2 0.2 2.9 –1.5
Public consumption 4.2 6.1 –0.5 2.2 –0.6 –2.1 –1.6 –0.9 3.2
Gross fixed capital formation –7.2 12.6 3.5 6.6 3.4 3.8 0.7 7.7 9.8
Exports of goods and services –8.5 14.5 7.2 7.8 10.2 12.7 –1.3 2.2 –1.7
Imports of goods and services –9.1 17.8 9.0 16.4 11.1 11.4 –1.1 –2.8 –8.1
Contribution to GDP growth in percentage points
Domestic demand –3.9 9.2 3.5 10.8 4.4 –0.6 0.1 –3.7 –4.6
Net exports of goods and services –0.3 –1.0 –1.0 –5.7 –0.0 1.6 –0.3 4.4 5.9
Exports of goods and services –7.1 11.3 6.0 6.6 8.6 10.3 –1.1 2.0 –1.5
Imports of goods and services 6.8 –12.2 –7.0 –12.4 –8.6 –8.7 0.8 2.5 7.4
Year-on-year change of the period average in %
Unit labor costs in the whole economy
(nominal, per person)
7.5 1.0 5.2 1.0 2.5 7.9 10.2 13.7 13.5
Unit labor costs in manufacturing (nominal, per hour) 6.7 –3.1 2.4 –3.4 2.8 –0.7 10.7 12.7 14.2
Labor productivity in manufacturing (real, per hour) –3.2 9.9 5.0 10.1 6.6 4.7 –1.1 –4.4 –0.8
Labor costs in manufacturing (nominal, per hour) 3.1 6.8 7.4 6.4 9.6 4.0 9.6 7.7 13.3
Producer price index (PPI) in industry –0.3 5.5 19.6 15.6 21.7 21.2 19.9 15.5 7.1
Consumer price index (here: HICP) –0.3 2.0 9.3 6.3 9.0 11.3 10.6 9.9 7.9
EUR per 1 SIT, + = SIT appreciation .. .. .. .. .. .. .. .. ..
Period average levels
Unemployment rate (ILO definition, %, 15–64 years) 5.0 4.8 4.0 4.3 4.2 4.0 3.4 3.7 3.5
Employment rate (%, 15–64 years) 70.9 71.5 73.1 72.5 73.1 73.9 73.0 71.5 73.1
Key interest rate per annum (%) 0.0 0.0 0.6 0.0 0.0 0.5 1.8 2.8 3.7
SIT per 1 EUR .. .. .. .. .. .. .. .. ..
Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector 1 –1.0 5.6 10.4 8.0 10.4 12.8 10.4 3.4 1.8
of which:
loans to households 0.1 5.0 7.5 6.7 7.9 8.2 7.5 6.0 4.0
loans to nonbank corporations –2.2 6.2 13.4 9.4 13.2 17.6 13.4 0.7 –0.4
Share of foreign currency loans in total loans to the
nonbank private sector
1.4 1.1 0.8 1.0 1.0 0.9 0.8 0.8 0.8
Return on assets (banking sector) 1.0 1.1 1.0 0.7 0.8 0.5 1.0 4.0 1.8
Tier 1 capital ratio (banking sector, consolidated) 16.7 16.9 16.2 15.7 15.7 15.5 16.2 16.7 ..
NPL ratio (banking sector) 1.9 0.8 0.7 0.9 0.8 0.8 0.7 0.7 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) 47.7 46.1 44.5            
Debt of households and NPISHs 2 (nonconsolidated) 27.7 26.3 25.9            
% of GDP (based on EUR), period total
Goods balance 5.0 1.7 –4.0 –4.3 –4.3 –2.7 –5.0 0.9 3.5
Services balance 4.4 4.7 6.3 4.6 6.2 7.5 6.6 5.5 6.0
Primary income –0.8 –1.7 –1.7 –1.3 –1.6 –2.7 –1.3 –1.2 –0.9
Secondary income –1.0 –0.9 –0.9 –1.1 –1.0 –0.9 –0.8 –1.0 –1.4
Current account balance 7.6 3.8 –0.4 –2.0 –0.7 1.2 –0.5 4.2 7.1
Capital account balance –0.5 0.1 –0.5 –0.3 –0.3 –0.1 –1.0 –0.7 –0.2
Foreign direct investment (net) 3 0.6 –0.8 –2.1 –2.8 –1.9 –2.1 –1.8 –2.5 –1.7
% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt 102.0 97.2 91.0 97.1 94.6 93.0 91.0 93.8 92.9
Gross official reserves (excluding gold) 1.9 3.5 3.4 3.6 3.6 3.6 3.4 3.4 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 0.4 0.5 0.5
EUR million, period total
GDP at current prices 47,045 52,279 57,038 12,807 14,486 14,907 14,839 14,358 16,061
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).

5 Bulgaria: lack of policy coordination hampers inflation slowdown

Headline inflation in Bulgaria decelerated from its peak of 15.6% in September 2022 to 6.4% in September 2023 due to declining international energy and food prices and negative base effects. Food and services remained the largest contributors to headline inflation, with their combined share amounting to nearly 80% in August. Food inflation has slowed noticeably over the past six months and energy inflation turned negative in April due to negative base effects – but month-on-month energy prices started to rise again in July 2023. Core inflation slowed only gradually from 13.9% in December 2022 to 8.1% in September 2023 as services price inflation fluctuated around 10% in spring with seasonal peaks around Easter and July 2023.

Inflation dynamics in the coming months will be characterized by opposing forces. On the one hand, the pass-through of declining producer prices, in particular the sharp fall in intermediate goods and energy prices, will dampen inflation. On the other hand, upward price pressures continue to emanate from the domestic macroeconomic environment: Growth rates of unit labor cost slowed down from 13.1% in the first quarter of 2023 to 5.4% in the second quarter of 2023. In a context of increasing labor shortages, productivity increased by 1.6% in the second quarter of 2023 while real wages rose by 4%. As a result, consumer demand growth remained surprisingly robust, partly fueled by still cheap consumer credit.

The Bulgarian central bank (BNB) noted that strongly negative interest rates in the first half of 2023 had a potentially inflationary effect. Spillovers from rising ECB interest rates were counteracted by strong competition in the Bulgarian banking sector and thus proved insufficient to curb consumer credit. As of July 1, 2023, the BNB raised the minimum reserve requirements to 12%. Moreover, fiscal policy continued to have an ambiguous impact on inflation: Untargeted and generous compensations for electricity costs to businesses removed any incentive to reduce electricity consumption, while reduced excise duties and VAT rates on energy commodities and food dampened price pressures. According to the recent inflation forecasts, headline inflation is expected to remain high at around 10% in 2023 and between 4% and 7% in 2024.

After expanding by 3.4% in 2022, economic activity has been cooling down in Bulgaria amid weaker external demand and an inflation-induced slowdown in consumption. In the first half of 2023, real GDP grew by 2.0%. Private consumption growth was weak in the first quarter but recovered in the second quarter, due to improvements in real incomes, somewhat lower inflation and tight labor markets. Government consumption stagnated in the first and declined in the second quarter of 2023 with further fiscal consolidation ahead. Gross fixed capital formation (GFCF) contributed positively to real GDP growth with both the public and private sector supporting growth in similar proportions. GFCF is expected to grow robustly also in the second half of the year, in line with the absorption of EU funds, ending three years of disappointing performance.

Net exports made the largest contribution to real GDP growth as a sharp decline in imports outweighed a weak export performance. The loss of price competitiveness led to a decline in exports of raw materials and electricity after a strong performance in 2022. Manufacturing exports declined due to weak demand in the euro area, while the services trade surplus increased due to higher revenues from ICT exports and tourism. The downward dynamics of imports can mainly be explained by the reduction of large stocks held by companies since the end of 2022.

Recent economic forecasts expect that the slowdown of the Bulgarian economy will continue in the second half of 2023, ranging from 1.3% to 1.7%. The weak outlook for the euro area remains a headwind to industrial production in Bulgaria. Real GDP growth will pick up in 2024, with forecasts ranging from 2.0% to 3.2%, supported by moderating inflation and improving real incomes, stronger foreign demand and an accelerated absorption of EU funds. Downside risks are associated with rising energy prices, weak external demand and geopolitical risks.

Domestic events could also derail the recovery in 2024. Elections in April 2023 resulted in a government, but the two ruling parties have not concluded a formal coalition agreement. Upcoming local elections in October 2023 may increase pressure on the ruling coalition. Moreover, the fiscal position of the general government will continue to deteriorate throughout 2023. Persistently high inflation and the threat of an excessive deficit procedure could derail Bulgaria’s plans to adopt the euro in 2025. Finally, the absorption of EU recovery and resilience funds is expected to be a major driver of investment, but the release of funds is linked to the implementation of challenging structural reforms.

Table 5

Main economic indicators: Bulgaria  
2020 2021 2022 Q1 22 Q2 22 Q3 22 Q4 22 Q1 23 Q2 23
Year-on-year change of the period total in %
GDP at constant prices –4.0 7.6 3.4 4.4 3.9 2.9 2.6 2.1 1.8
Private consumption –0.6 8.8 4.8 5.5 2.1 4.2 6.8 1.5 8.2
Public consumption 8.3 0.4 6.5 6.6 11.6 3.8 4.5 0.1 –8.0
Gross fixed capital formation 0.6 –8.3 –4.3 –7.4 –11.0 –3.3 2.4 5.4 10.8
Exports of goods and services –10.4 11.0 8.3 4.8 8.9 9.7 9.4 2.3 –1.0
Imports of goods and services –4.3 10.9 10.5 12.3 12.3 9.2 8.5 –1.5 –6.9
Contribution to GDP growth in percentage points
Domestic demand 0.1 7.4 4.6 9.6 6.1 1.7 2.5 –0.5 –2.5
Net exports of goods and services –4.0 0.2 –1.2 –5.2 –2.2 1.2 0.1 2.7 4.3
Exports of goods and services –6.6 6.2 5.1 3.9 6.0 5.9 4.4 2.1 –0.5
Imports of goods and services 2.6 –5.9 –6.3 –9.1 –8.2 –4.7 –4.3 0.5 4.8
Year-on-year change of the period average in %
Unit labor costs in the whole economy
(nominal, per person)
8.9 3.8 15.6 10.3 17.9 16.1 18.8 13.6 5.4
Unit labor costs in manufacturing (nominal, per hour) 1.6 –1.9 3.7 3.0 –1.6 4.4 8.8 20.5 28.5
Labor productivity in manufacturing (real, per hour) 3.7 8.7 13.7 14.5 17.2 13.7 9.8 –1.3 –6.6
Labor costs in manufacturing (nominal, per hour) 5.2 6.9 17.9 17.8 15.3 18.8 19.5 18.9 20.1
Producer price index (PPI) in industry –2.0 15.5 38.3 33.9 40.2 50.2 28.8 9.1 –7.3
Consumer price index (here: HICP) 1.2 2.8 13.0 8.9 13.4 15.2 14.5 13.4 8.8
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 5.0 4.7 3.7 3.9 4.5 4.7
Employment rate (%, 15–64 years) 68.5 68.2 70.4 68.4 69.8 71.9 71.5 70.4 70.3
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 sector 2 4.3 8.6 12.7 10.6 12.5 13.5 12.7 11.8 11.9
of which:
loans to households 6.6 13.4 14.6 14.1 14.7 15.2 14.6 14.6 14.0
loans to nonbank corporations 2.9 5.5 11.4 8.4 10.9 12.2 11.4 10.0 10.4
Share of foreign currency loans in total loans to the
nonbank private sector
31.9 29.3 26.2 29.0 28.4 27.3 26.2 25.5 25.3
Return on assets (banking sector) 0.7 1.1 1.4 1.6 1.5 1.4 1.4 2.0 2.1
Tier 1 capital ratio (banking sector) 22.1 22.0 20.5 21.4 20.7 20.1 20.5 20.3 20.2
NPL ratio (banking sector) 4.3 3.7 2.8 3.3 3.1 3.1 2.8 2.5 2.4
% of GDP
General government revenues 37.7 37.7 38.5            
General government expenditures 41.5 41.6 41.3            
General government balance –3.8 –3.9 –2.8            
Primary balance –3.3 –3.4 –2.3            
Gross public debt 24.5 23.9 22.9            
% of GDP
Debt of nonfinancial corporations (nonconsolidated) 76.6 68.8 60.2            
Debt of households and NPISHs 3 (nonconsolidated) 24.3 23.8 22.8            
% of GDP (based on EUR), period total
Goods balance –3.2 –4.1 –5.8 –5.8 –3.8 –5.3 –7.7 –3.4 –2.6
Services balance 5.1 5.7 6.3 5.4 6.4 8.4 4.8 5.9 6.8
Primary income –3.5 –4.7 –2.8 –4.8 0.4 –4.1 –3.0 –4.5 –3.3
Secondary income 1.6 1.2 1.7 1.0 1.5 1.5 2.4 0.5 2.6
Current account balance 0.0 –1.8 –0.6 –4.2 4.5 0.5 –3.5 –1.5 3.5
Capital account balance 1.4 0.7 1.0 –2.3 0.0 –0.4 5.4 1.0 1.4
Foreign direct investment (net) 4 –4.5 –1.8 –2.4 –7.0 2.7 –2.7 –3.0 –8.4 0.5
% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt 63.3 58.0 52.5 56.0 54.0 54.5 52.5 51.6 49.2
Gross official reserves (excluding gold) 46.8 45.7 42.8 41.6 40.3 42.9 42.8 40.7 36.9
Months of imports of goods and services
Gross official reserves (excluding gold) 10.4 9.2 7.6 8.0 7.4 7.6 7.6 7.4 7.0
EUR million, period total
GDP at current prices 61,639 71,077 84,561 17,248 20,075 22,987 24,251 20,437 21,636
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).

6 Czechia: standstill of the economy contrasts with booming labor market

After 2.4% growth in 2022, the Czech economy stagnated in the first two quarters of 2023 in quarter-on-quarter terms and contracted (–0.6%) in year-on-year terms. The frail performance was owed mainly to shrinking private consumption (–2.4 percentage point contribution to GDP expansion in the first half of 2023) while net exports were the major growth driver (3 percentage point contribution in the six months to June 2023). The tense economic situation, in particular high inflation, has forced cautious Czech households to cut down consumption spending and increase savings. As a result, even though the saving rate of Czech households has dropped well below the peak reached during the COVID-19 pandemic (then: 23% of income), it keeps ranging among the highest in the EU (18% in Czechia compared to the EU average of just above 13%). Industry – on which the Czech economy is heavily reliant – paints a telling picture about the state of the economy. Key leading indicators demonstrate the struggle of the manufacturing sector due to feeble domestic demand and, particularly, weak export orders. Industrial production has been virtually stagnant for about three years. New orders in the manufacturing sector have been falling for 19 consecutive months. The deteriorating Purchasing Managers’ Index (PMI) shows that survey respondents have been reporting massive cancellations of orders by clients. Interestingly, the automotive sector has withstood these trends so far. Passenger car production grew by 22% in the first half of 2023. The question is to what extent this boom has been spurred by the completion of backlogs and pent-up or stimulated demand that may lose steam. As a result, in view of the weak domestic and foreign demand compounded by tight monetary policy, fixed investment activity has been subdued, providing a neutral contribution to growth in 2023 thus far. In addition, change in inventories has put a significant drag on growth (–1.8 percentage points in the first half of 2023) on the back of low orders, the prospect of falling prices and easing supply chain shortages. Government spending has had a slightly positive impact on growth this year.

Czechia’s current account deficit, which reached more than 6% of GDP in 2022 and even formidable 13% in the third quarter of 2022, was neutralized in the first half of 2023. This is mainly ascribable to the goods trade balance, which turned into a significant surplus this year. Goods trade benefited from the relaxation of energy import prices on the one hand and relatively buoyant automotive exports in the wake of easing supply chain frictions on the other. Most likely spurred by a continued outflow of dividends, the primary income balance keeps navigating in deeply negative territory thus counterweighing the trade balance surplus within the current account.

Despite a slight increase during 2023, the unemployment rate remains one of the lowest not only in the EU but worldwide. The extremely tight labor market contrasts with the subdued economic growth and has likely contributed to the inflationary pressure. After HICP inflation had been accelerating for 1.5 years, it peaked at 19.1% in January 2023. Since then, inflation has dropped sharply. While HICP inflation came in at just above 8.3% in September, the CNB’s target index CPI increased by 6.9% in September 2023, still well above CNB’s tolerance band (2% ± 1 percentage point). The deceleration has been driven particularly by a significant moderation of energy and food price inflation. Core inflation has slowed down too from about 15% at the beginning of the year to just above 7% in September 2023, even though price hikes in the service sector appear particularly persistent. The CNB has kept its key interest rate unchanged at 7% since August 2022. Even though the CNB representatives leave all options open, it seems most likely that key interest rates will stay at an elevated level for some time.

The general government aims at a fiscal deficit of CZK 295 billion, approximately 3.6% of GDP, in 2023. While this target looked rather ambitious in light of the fiscal deficit in the first half of the year, higher revenues over the summer have brought the budget back on the envisaged trajectory. The revenue side has been supported lately particularly by EU funds (especially the Recovery and Resilience Facility), dividends from the energy company CEZ and taxation of corporate (windfall) income. Gross public debt is expected to increase slightly to 44.7% of GDP in 2023. On the back of a fiscal consolidation package, which is currently still being debated in parliament, the deficit should narrow to just above 2% of GDP in 2024. Yet, the Czech Fiscal Council has warned that there will be only a minimum improvement in the structural deficit (from 2.3% of GDP in 2023 to 2.2% in 2024) so that pressures on public finances will remain.

Table 6

Main economic indicators: Czechia  
2020 2021 2022 Q1 22 Q2 22 Q3 22 Q4 22 Q1 23 Q2 23
Year-on-year change of the period total in %
GDP at constant prices –5.5 3.6 2.4 5.0 3.4 1.4 –0.1 –0.1 –1.1
Private consumption –7.2 4.1 –0.7 8.3 –0.2 –4.3 –5.3 –5.3 –4.8
Public consumption 4.2 1.4 0.6 1.5 1.7 –1.9 0.9 2.9 2.8
Gross fixed capital formation –6.0 0.8 3.0 5.7 5.2 2.4 –0.6 –1.6 1.3
Exports of goods and services –8.0 6.9 7.2 2.8 3.2 13.1 10.4 7.0 3.0
Imports of goods and services –8.2 13.3 6.3 5.9 3.8 8.0 7.5 3.4 –1.1
Contribution to GDP growth in percentage points
Domestic demand –5.1 7.2 1.5 7.0 3.7 –1.9 –2.2 –3.0 –4.2
Net exports of goods and services –0.4 –3.6 0.9 –2.0 –0.3 3.3 2.1 2.8 3.1
Exports of goods and services –5.9 4.8 5.2 2.3 2.4 8.5 7.4 5.5 2.3
Imports of goods and services 5.6 –8.4 –4.4 –4.3 –2.7 –5.2 –5.3 –2.6 0.8
Year-on-year change of the period average in %
Unit labor costs in the whole economy
(nominal, per person)
7.2 1.8 5.1 4.5 3.2 4.9 7.7 10.0 9.3
Unit labor costs in manufacturing (nominal, per hour) 2.9 1.8 0.1 2.4 2.9 –3.4 –1.0 10.0 6.6
Labor productivity in manufacturing (real, per hour) 4.5 1.2 4.7 2.7 2.7 8.3 5.2 –1.8 1.2
Labor costs in manufacturing (nominal, per hour) 7.2 3.4 4.9 5.1 5.7 4.6 4.2 8.0 7.9
Producer price index (PPI) in industry 0.6 6.2 18.6 16.4 21.3 20.6 16.2 11.3 1.7
Consumer price index (here: HICP) 3.3 3.3 14.8 10.2 15.0 17.4 16.5 18.0 12.6
EUR per 1 CZK, + = CZK appreciation –3.0 3.2 4.4 5.7 4.0 3.7 4.0 3.6 4.5
Period average levels
Unemployment rate (ILO definition, %, 15–64 years) 2.6 2.9 2.3 2.3 2.2 2.3 2.3 2.7 2.6
Employment rate (%, 15–64 years) 74.4 74.4 75.5 75.1 75.3 75.8 75.8 74.5 75.2
Key interest rate per annum (%) 0.8 0.9 5.9 4.2 5.6 7.0 7.0 7.0 7.0
CZK per 1 EUR 26.5 25.6 24.6 24.7 24.6 24.6 24.4 23.8 23.6
Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector 1 3.0 9.7 6.2 10.4 9.2 8.6 6.2 5.4 6.8
of which:
loans to households 6.5 9.9 4.8 10.3 8.3 6.5 4.8 3.6 5.1
loans to nonbank corporations –1.3 9.4 8.3 10.5 10.5 11.6 8.3 7.9 9.0
Share of foreign currency loans in total loans
to the nonbank private sector
14.6 14.6 19.4 15.6 17.3 19.4 19.4 20.3 20.7
Return on assets (banking sector) 0.6 0.8 1.1 1.0 1.2 1.2 1.1 0.9 1.1
Tier 1 capital ratio (banking sector) 23.6 22.8 21.5 21.7 20.9 21.1 21.5 21.8 22.0
NPL ratio (banking sector) 2.6 2.3 1.9 2.2 2.0 1.9 1.9 1.8 1.8
% 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 53.6 51.6            
Debt of households and NPISHs 2 (nonconsolidated) 34.0 35.7 33.2            
% of GDP (based on EUR), period total
Goods balance 4.9 1.1 –1.5 0.4 –2.2 –2.9 –0.9 4.7 4.4
Services balance 1.8 1.7 1.3 1.6 1.8 1.6 0.3 1.1 1.3
Primary income –4.2 –5.1 –5.5 –1.9 –4.3 –11.3 –4.2 –2.6 –7.1
Secondary income –0.5 –0.5 –0.5 –1.3 –0.4 –0.4 0.1 –1.2 –0.2
Current account balance 2.0 –2.8 –6.1 –1.2 –5.0 –13.0 –4.6 2.0 –1.6
Capital account balance 1.2 1.7 0.1 –0.3 0.9 0.8 –1.0 1.0 2.7
Foreign direct investment (net) 3 –2.6 –0.5 –2.5 –1.1 –1.9 –1.8 –5.1 –1.9 –1.4
% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt 76.3 76.3 66.8 77.5 72.9 67.4 66.8 64.8 62.5
Gross official reserves (excluding gold) 62.5 64.1 47.3 62.9 57.7 50.9 47.3 45.1 43.7
Months of imports of goods and services
Gross official reserves (excluding gold) 11.9 11.0 7.6 10.6 9.5 8.2 7.6 7.3 7.3
EUR million, period total
GDP at current prices 215,824 238,361 276,282 62,534 68,834 71,328 73,586 72,099 78,412
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: budget deficit set to increase notably in 2023

In the second quarter of 2023, Hungary’s economy recorded a quarterly contraction for the fourth quarter in a row. The year-on-year contraction accelerated to –2.4%, resulting in a decline of GDP by 1.7% during the first half of 2023 compared to a year earlier. Private consumption fell by 3.4% during the first half of 2023 as high inflation eroded purchasing power, the counterbalancing effect of the withdrawal of savings wore off and employment stagnated. The rate of contraction of investment activity went into double digits amid tight lending conditions, sharply slowing corporate credit activity, high energy prices and the continued delay in the disbursement of EU funds to Hungary. Investments in nondwelling construction contracted by one-quarter but also investments in machinery and nontransport equipment and intellectual property products decreased compared to the first half 2022. The large positive contribution of net exports prevented an even bigger decline in GDP during the first half of 2023. Unfortunately, this came on the back of a major slowdown in import growth as a result of weak domestic demand, while export growth also decelerated sharply compared to the second half of 2022.

In response to underperforming VAT revenues, rising interest costs on government debt, the large burden of energy price subsidies and the supplementary inflation compensation for pensioners in autumn 2023, the government raised its 2023 budget deficit target from 3.9% to 5.2% of GDP in early October 2023. The official deficit target for 2024 has remained 2.9% of GDP. In order to mitigate fiscal pressures, the government has tightened the eligibility rules for the housing subsidy and preferential loan schemes for families (effective from 2024) and secured the ECB’s consent to allow a multiyear period for the central bank to correct its negative capital before a capital injection by the state becomes necessary (under previous rules, the cost of necessary recapitalization in the 2024 budget had been estimated at 0.4% to 0.5% of GDP). In order to mobilize additional funds at lower costs for the financing of the budget deficit, the government has imposed a 13% social contribution tax on capital gains, dividend and interest income (on top of the 15% income tax), except for government securities (and real estate investment fund shares). In addition, it has raised the minimum shares for government securities in mutual funds’ portfolios.

Following its peak in January 2023 at 26.2%, HICP inflation gradually receded to 12.2% by September 2023. The decline was caused mainly by falling energy and food price inflation but was also supported by weak consumption and the year-on-year strengthening of the forint. With effect from the beginning of August, the government abolished the price caps on selected basic food items. At the same time, it introduced mandatory discounts for these items with more stringent conditions than previously applied to the mandatory discounts for a broader group of products that had been introduced at the beginning of June 2023. In addition, an online price-monitoring platform was introduced at the beginning of July 2023, comprising of 62 products under scrutiny.

Falling inflation has been accompanied by gradual monetary easing by the central bank (MNB). Between late May and September 2023, MNB cut its operational policy rate from 18% to 13% and thus brought it into level with the base rate, which became again the policy rate. O/N quick deposit tenders were discontinued at the beginning of October 2023 and mandatory reserves became the main policy instrument. According to the central bank’s latest assessment, inflation will fall back into the bank’s tolerance band (3% ± 1 percentage point) at the beginning of 2025. Tight monetary policy and banks’ lending standards led to a further deceleration of lending activity, in particular to nonbank corporations. Within the household segment, the dynamics of loans for house purchase and other purposes slowed most, while the growth of consumption loans accelerated, possibly in response to households’ deteriorating real income situation. Amid the high interest environment and despite the broadening of the cap on selected interest rates toward the end of 2022, banks’ net interest income improved visibly during the first half of 2023. This, together with lower provisioning costs (mirroring the falling NPL ratio) and despite increased taxation of banks, tripled the unconsolidated net profits of the banking sector.

The combined current and capital account developed favorably in the first half of 2023. On a four-quarter moving sum basis, the deficit decreased from 6% of GDP in the last quarter of 2022 to around 4% by the second quarter of 2023. The improvement was attributable to the goods and services balance, while the deficit on the primary and secondary income balance rose modestly and the capital account surplus halved to its lowest level since 2017.

Table 7

Main economic indicators: Hungary  
2020 2021 2022 Q1 22 Q2 22 Q3 22 Q4 22 Q1 23 Q2 23
Year-on-year change of the period total in %
GDP at constant prices –4.5 7.1 4.6 7.9 6.7 4.3 0.2 –0.9 –2.4
Private consumption –1.2 4.6 6.5 11.9 8.2 4.6 2.3 –4.3 –3.3
Public consumption –0.3 1.8 3.0 6.5 4.9 1.7 –0.9 –2.8 3.3
Gross fixed capital formation –7.1 5.8 0.1 9.7 4.9 0.1 –10.0 –3.9 –15.2
Exports of goods and services –6.1 8.3 12.6 9.7 10.5 17.6 12.7 6.6 0.3
Imports of goods and services –3.9 7.3 11.6 11.5 10.2 13.9 10.8 2.3 –6.0
Contribution to GDP growth in percentage points
Domestic demand –2.6 6.2 3.7 9.5 6.3 1.7 –1.3 –4.6 –8.4
Net exports of goods and services –2.0 0.9 0.8 –1.6 0.4 2.6 1.5 3.7 6.0
Exports of goods and services –5.0 6.5 10.1 8.8 8.6 13.3 9.4 6.8 0.1
Imports of goods and services 3.1 –5.6 –9.3 –10.4 –8.2 –10.7 –8.0 –3.1 5.9
Year-on-year change of the period average in %
Unit labor costs in the whole economy
(nominal, per person)
6.8 2.9 12.0 13.2 6.7 11.9 16.3 11.5 19.9
Unit labor costs in manufacturing (nominal, per hour) 8.4 0.2 7.8 6.8 7.6 4.8 11.8 25.3 24.9
Labor productivity in manufacturing (real, per hour) –0.2 5.9 4.2 4.4 2.7 7.4 2.5 –3.4 –3.2
Labor costs in manufacturing (nominal, per hour) 7.4 6.9 12.4 11.5 10.6 12.5 14.6 21.0 20.9
Producer price index (PPI) in industry 4.3 13.5 33.4 23.4 32.0 41.2 36.9 27.2 10.2
Consumer price index (here: HICP) 3.4 5.2 15.3 8.3 11.0 18.0 23.3 25.9 22.1
EUR per 1 HUF, + = HUF appreciation –7.4 –2.0 –8.4 –0.9 –8.1 –12.3 –11.3 –6.2 3.6
Period average levels
Unemployment rate (ILO definition, %, 15–64 years) 4.3 4.1 3.7 3.8 3.2 3.7 3.9 4.1 3.9
Employment rate (%, 15–64 years) 69.7 73.1 74.4 74.0 74.3 74.6 74.5 74.3 74.7
Key interest rate per annum (%) 0.8 1.1 8.0 3.1 5.3 10.6 13.0 13.0 13.0
HUF per 1 EUR 351.3 358.5 391.3 364.6 385.8 403.4 410.8 388.7 372.6
Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector 1 11.0 12.1 9.9 9.3 10.2 10.8 9.9 11.0 8.9
of which:
loans to households 14.1 14.9 6.3 11.0 8.9 7.6 6.3 6.8 4.6
loans to nonbank corporations 8.8 9.9 12.6 7.9 11.3 13.3 12.6 14.0 12.0
Share of foreign currency loans in total loans to the
nonbank private sector
22.3 20.3 23.3 21.3 22.3 23.6 23.3 23.7 24.1
Return on assets (banking sector) 0.4 0.9 0.7 1.1 0.6 0.7 0.7 1.3 1.9
Tier 1 capital ratio (banking sector) 17.4 18.1 17.5 17.3 16.7 16.2 17.5 16.3 16.7
NPL ratio (banking sector) 2.4 1.6 2.0 1.6 1.9 2.0 2.0 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) 68.7 76.8 80.1            
Debt of households and NPISHs 2 (nonconsolidated) 20.1 20.4 18.3            
% of GDP (based on EUR), period total
Goods balance –1.0 –2.9 –9.0 –7.5 –7.0 –11.6 –9.7 –1.9 1.8
Services balance 2.9 3.1 4.8 4.3 4.9 5.8 4.1 5.2 4.9
Primary income –2.6 –3.4 –3.2 –2.1 –3.3 –4.0 –3.3 –3.3 –4.3
Secondary income –0.5 –1.0 –0.8 –0.4 –0.7 –1.1 –0.9 –1.4 –1.0
Current account balance –1.1 –4.2 –8.3 –5.7 –6.2 –10.9 –9.8 –1.5 1.4
Capital account balance 2.1 2.5 2.2 4.5 2.8 1.0 0.8 1.1 1.1
Foreign direct investment (net) 3 –1.6 –2.1 –2.8 3.8 –2.7 –8.4 –3.1 6.4 2.5
% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt 81.2 84.9 89.2 85.8 83.7 85.3 89.2 94.7 93.4
Gross official reserves (excluding gold) 23.3 21.8 19.9 19.8 19.6 20.1 19.9 20.1 19.4
Months of imports of goods and services
Gross official reserves (excluding gold) 3.6 3.3 2.5 2.9 2.7 2.6 2.5 2.5 2.6
EUR million, period total
GDP at current prices 137,723 153,941 168,405 37,566 42,349 42,554 45,936 39,847 49,886
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: signs of incipient recovery prompted rate cuts

Poland’s GDP contracted by about 1% year on year in the first half of 2023, after more than 5% growth in 2022. The quarter-on-quarter pattern shows a recovery in the first quarter of 2023 after a contraction in the fourth quarter of 2022 but further shrinking in the second quarter of 2023. It further shows that the quarterly decline of private consumption already bottomed out in the fourth quarter of 2022 with very weak growth thereafter, while the shrinkage of real exports aggravated in the first half of 2023 and inventory change rendered a more negative contribution to growth due to slower inventory buildup. As real imports shrank even more than exports on the back of weak domestic demand, net exports rendered a positive contribution to GDP growth.

As a result, in year-on-year terms, private consumption contracted even more strongly during the first half of 2023 and export growth turned negative in the second quarter. In contrast, gross fixed capital formation growth accelerated both in quarter-on-quarter and year-on-year terms. Private consumption contraction reflects the annual decline of both, the real wage sum and real gross retirement pensions for several quarters up to the first quarter of 2023. Next to first signs of growth in these income indicators in the second quarter of 2023, consumer confidence improved, too. Fixed investment was mainly driven by corporate investment on the back of the still sound, albeit slightly deteriorating, financial position indicated by e.g. sales profitability, the share of profitable enterprises and corporate liquidity. Residential investment, however, shrank, as indicated e.g. by the number of dwellings under construction, which mirrored the nominal decline in housing loans.

In the first half of 2023, corresponding to the sizable positive contribution of net exports to annual growth, the surplus of the goods and services balance in the balance of payments increased strongly from a year earlier to 7.2% of GDP and the combined current and capital account deficit turned positive to reach 1.1% of GDP. Net FDI inflows declined but continued to be substantial at 3.2% of GDP.

On average in this period, nominal ULC of manufacturing gross value added was higher than a year earlier and its increase exceeded that in the euro area by more than 8 percentage points, while the złoty’s nominal value in euro was roughly unchanged. Thus, in real (ULC-deflated) terms, the złoty was more than 8% stronger than a year earlier. After nominal appreciation against the euro from February to July by about 6.5%, the złoty depreciated by 3.5% until September, settling at 4.6 złoty for one euro.

According to HICP (and national CPI) definition, annual headline inflation declined from 15.9% (17.3%) in the fourth quarter of 2022 to 12.5% (13.1%) in the second quarter of 2023 and stood at 7.7% (8.2%) in September 2023, while core inflation came down to 8.7% (8.4%). Within core HICP, nonenergy industrial goods inflation stood at 5.7% in September, while the annual change in manufacturing PPI was negative from May onward, reaching –5.5% in September. The Monetary Policy Council (MPC), pursuing a CPI inflation target of 2.5% ± 1 percentage point, lowered its main policy rate to 6% in September and 5.75% in early October 2023, after holding this key rate at 6.75% for about a year. In early October 2023, the MPC stated that incoming data confirmed weak demand and lower cost pressure, that the time lags in monetary transmission and current interest rates would lead to meeting the inflation target in the medium term, and that disinflation would be faster if supported by an appreciation of the złoty, which, in the MPC’s assessment, would be consistent with the economic fundamentals.

Based on the government’s convergence program, the European Commission staff forecast, in May, that the general government deficit would rise to 5.6% of GDP in 2023 (from 3.7% of GDP in 2022), while general government debt would rise to 50.5% of GDP at end-2023. The rise in the deficit stems from the higher expenditure-to-GDP ratio despite the phasing out of COVID‑19 measures. Expenditures rose as a result of (1) the indexation of pensions, (2) inflation-driven higher public consumption via both wages and purchases, (3) higher defense spending, (4) higher spending on healthcare and (5) extraordinary aid granted to farmers.

Table 8

Main economic indicators: Poland  
2020 2021 2022 Q1 22 Q2 22 Q3 22 Q4 22 Q1 23 Q2 23
Year-on-year change of the period total in %
GDP at constant prices –2.0 6.9 5.1 10.7 5.5 4.8 0.7 –0.1 –1.4
Private consumption –3.4 6.1 3.3 6.5 6.7 1.1 –1.0 –2.6 –3.1
Public consumption 4.9 5.0 –2.0 1.5 1.9 0.7 –9.7 –0.4 1.9
Gross fixed capital formation –2.3 1.2 5.0 7.7 9.5 2.3 3.1 6.1 8.2
Exports of goods and services –1.1 12.3 6.2 5.5 6.2 8.6 4.5 3.0 –3.0
Imports of goods and services –2.4 16.1 6.2 8.4 7.9 7.5 1.3 –4.3 –8.1
Contribution to GDP growth in percentage points
Domestic demand –2.6 8.0 4.9 12.1 6.1 4.1 –1.0 –4.6 –4.5
Net exports of goods and services 0.6 –1.1 0.2 –1.4 –0.6 0.7 1.7 4.5 3.1
Exports of goods and services –0.6 6.5 3.6 3.5 3.9 4.8 2.2 1.9 –1.8
Imports of goods and services 1.2 –7.6 –3.3 –4.9 –4.5 –4.1 –0.5 2.6 4.9
Year-on-year change of the period average in %
Unit labor costs in the whole economy
(nominal, per person)
7.5 0.3 7.9 1.2 9.8 11.6 9.5 15.5 16.1
Unit labor costs in manufacturing (nominal, per hour) 4.7 –4.6 1.8 –1.5 2.2 2.5 4.3 11.9 11.6
Labor productivity in manufacturing (real, per hour) 1.8 12.9 8.8 12.6 9.7 9.1 4.3 –1.4 –0.4
Labor costs in manufacturing (nominal, per hour) 6.2 8.0 10.9 10.9 12.1 11.8 8.8 10.3 11.2
Producer price index (PPI) in industry –0.5 8.1 23.8 18.5 25.3 27.5 23.7 18.9 5.0
Consumer price index (here: HICP) 3.7 5.2 13.2 9.0 12.8 14.9 15.9 16.1 12.5
EUR per 1 PLN, + = PLN appreciation –3.3 –2.7 –2.6 –1.7 –2.6 –3.7 –2.3 –1.8 2.5
Period average levels
Unemployment rate (ILO definition, %, 15–64 years) 3.2 3.4 3.0 3.2 2.7 3.0 2.9 3.0 2.6
Employment rate (%, 15–64 years) 68.7 70.3 71.4 71.0 71.4 71.2 71.8 72.0 72.1
Key interest rate per annum (%) 0.5 0.3 5.3 2.7 5.1 6.5 6.8 6.8 6.8
PLN per 1 EUR 4.4 4.6 4.7 4.6 4.6 4.7 4.7 4.7 4.5
Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector 1 –1.2 5.0 0.8 6.1 6.1 4.8 0.8 0.2 –0.3
of which:
loans to households 1.6 4.2 –4.7 3.1 0.4 –2.5 –4.7 –5.4 –4.5
loans to nonbank corporations –6.0 6.5 10.8 11.7 16.9 18.5 10.8 9.9 6.5
Share of foreign currency loans in total loans to the
nonbank private sector
19.6 17.5 18.5 17.6 17.7 19.0 18.5 18.6 17.7
Return on assets (banking sector) –0.0 0.2 0.4 1.0 0.8 0.3 0.4 1.3 1.1
Tier 1 capital ratio (banking sector) 18.5 17.4 18.3 16.7 17.1 16.4 18.3 18.5 19.7
NPL ratio (banking sector) 7.0 5.8 5.5 5.7 5.6 5.7 5.5 5.4 5.6
% 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 43.3 40.3            
Debt of households and NPISHs 2 (nonconsolidated) 33.7 32.0 26.5            
% of GDP (based on EUR), period total
Goods balance 1.3 –1.3 –3.7 –4.2 –3.5 –4.1 –3.1 1.8 1.6
Services balance 4.4 4.6 5.6 5.1 6.5 5.7 4.9 5.5 5.5
Primary income –3.8 –4.5 –3.9 –4.4 –4.7 –4.3 –2.6 –4.1 –5.9
Secondary income 0.5 –0.1 –0.3 –0.3 –0.4 –0.4 –0.1 –0.2 –0.6
Current account balance 2.4 –1.3 –2.4 –3.7 –2.1 –3.1 –0.9 3.0 0.7
Capital account balance 1.8 0.7 0.5 –0.7 1.3 1.6 –0.1 –2.6 1.0
Foreign direct investment (net) 3 –2.4 –3.8 –3.6 –7.1 –3.4 –3.8 –0.9 –5.4 –1.1
% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt 58.5 56.0 52.7 55.1 55.0 54.1 52.7 52.4 53.1
Gross official reserves (excluding gold) 21.7 23.4 21.9 21.8 22.1 22.6 21.9 21.2 21.7
Months of imports of goods and services
Gross official reserves (excluding gold) 5.5 5.2 4.3 4.6 4.5 4.5 4.3 4.2 4.5
EUR million, period total
GDP at current prices 526,034 576,150 656,534 150,159 156,076 165,363 184,936 170,001 177,822
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 growth relatively robust, but marked twin deficits persist

Despite a challenging external environment, Romania’s economic activity continued to grow in the first half of 2023. In quarter-on-quarter terms, GDP expanded at a similar speed as in the second half of 2022, when growth started to decelerate. Year-on-year growth rates, on the other hand, have come down somewhat this year.

Even though real wage growth was slightly negative until March 2023, private consumption grew strongly in the first quarter before decelerating in the second quarter. Meanwhile, the labor market has remained relatively robust. As gross fixed capital formation continued to grow vividly, it became the most important growth driver in the second quarter. Brisk construction activity, particularly in the context of EU-funded infrastructure projects, as well as equipment purchases in the area of renewable energy contributed to the remarkable performance of investments. In an overall lending slowdown, year-on-year nominal growth of domestic credit came to a standstill in theouseholdd sector, while the credit stock vis-à-vis nonbank corporations still showed double-digit year-on-year growth. Both real export and import growth turned negative in the second quarter of 2023. As the decline in exports was below the import contraction, the contribution of net exports became slightly positive in this quarter. Subdued export dynamics amid dwindling external demand were also reflected in a continued contraction in industrial production, where the weakness became broader based beyond energy-intensive industries. As regards external price competitiveness it should be noted that unit labor cost increases in the manufacturing sector accelerated markedly in the first half of 2023, while the Romanian leu stayed largely unchanged vis-à-vis the euro. After the minimum wage was increased by 17.6% as of January 2023, it was hiked again by 10% as of October 2023.

The net lending position from the current account deficit has remained large but narrowed noticeably to 6.4% of GDP in the first half of 2023 from almost 10% in the first half of 2022, mainly due to a smaller deficit in the goods balance. The net lending position from the current and capital account deficit (including EU fund inflows) came down to 5.1% of GDP, 43% of which were financed by net FDI inflows. Strong portfolio inflows related to large-scale sovereign Eurobond issuances, contributed to financing the current account gap and lifted gross official FX reserves, but are also reflected in a rising gross external debt ratio.

Consumer price inflation went down from 16.4% at end-2022 to 9.2% in September 2023. Core inflation declined as well but remained clearly above headline inflation (10.7% in September 2023). After having hiked its key policy rate to 7% in January 2023, the National Bank of Romania (NBR) has left it unchanged. The NBR currently projects inflation to fall to 7.5% at end-2023 and to 3.8% in mid-2025. 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.

The government adopted a corrective fiscal package in September, that includes measures to broaden the tax base, new excise duties, a special tax on immovable and movable assets of high value, an increase in the microenterprise tax and a turnover tax for large enterprises and banks. The government now expects the deficit to decrease below 5.5% of GDP (compared to the 4.4% of GDP originally planned). The government also said that it will try to convince the European Commission to accept a higher deficit. Romania has been subject to an excessive deficit procedure. According to the corresponding Council recommendation adopted in June 2021, Romania should reach a deficit of 4.4% of GDP in 2023 and 2.9% in 2024. In the framework of its Article IV mission that ended in early October 2023, IMF staff projected a deficit of 6% of GDP for this year and just above 5% of GDP for 2024. It specified that the fiscal package was a step in the right direction, but further adjustment was needed.

Table 9

Main economic indicators: Romania  
2020 2021 2022 Q1 22 Q2 22 Q3 22 Q4 22 Q1 23 Q2 23
Year-on-year change of the period total in %
GDP at constant prices –3.7 5.7 4.6 4.6 4.5 3.9 5.3 1.0 2.7
Private consumption –3.9 7.2 6.9 7.0 8.4 4.1 8.3 1.2 5.3
Public consumption 1.1 1.8 3.1 4.1 0.8 1.6 5.5 5.2 1.8
Gross fixed capital formation 1.1 2.9 5.6 –7.5 –1.6 10.3 14.2 13.3 13.3
Exports of goods and services –9.5 12.6 9.6 5.8 9.6 14.3 8.5 1.8 0.6
Imports of goods and services –5.2 14.8 9.9 2.7 6.0 21.6 9.3 2.3 0.9
Contribution to GDP growth in percentage points
Domestic demand –2.2 7.2 5.3 3.3 3.3 7.7 5.9 1.5 2.8
Net exports of goods and services –1.5 –1.5 –0.7 1.3 1.2 –3.8 –0.7 –0.5 –0.2
Exports of goods and services –3.8 4.6 3.9 3.2 4.2 5.1 3.0 1.0 0.3
Imports of goods and services 2.3 –6.1 –4.6 –1.9 –3.0 –8.9 –3.6 –1.5 –0.5
Year-on-year change of the period average in %
Unit labor costs in the whole economy
(nominal, per person)
5.5 1.4 2.7 1.9 0.1 4.6 5.1 14.2 15.3
Unit labor costs in manufacturing (nominal, per hour) 7.7 3.9 14.5 11.8 15.0 13.8 17.1 20.5 24.0
Labor productivity in manufacturing (real, per hour) 0.4 3.1 –1.6 –0.1 –2.5 –0.6 –2.9 –3.3 –6.0
Labor costs in manufacturing (nominal, per hour) 8.1 7.1 12.7 11.6 12.1 13.1 13.7 16.5 16.6
Producer price index (PPI) in industry –0.0 14.9 44.7 46.2 47.3 50.5 36.2 19.5 7.6
Consumer price index (here: HICP) 2.3 4.1 12.0 8.2 12.4 13.3 14.1 13.0 9.8
EUR per 1 RON, + = RON appreciation –1.9 –1.7 –0.2 –1.4 –0.4 0.4 0.6 0.5 –0.1
Period average levels
Unemployment rate (ILO definition, %, 15–64 years) 5.2 5.6 5.6 6.0 5.3 5.4 5.8 .. 5.4
Employment rate (%, 15–64 years) 65.6 61.9 63.0 62.4 63.5 63.4 62.8 .. 63.0
Key interest rate per annum (%) 1.9 1.4 4.3 2.3 3.4 5.1 6.5 7.0 7.0
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 sector 1 4.8 14.2 12.1 15.2 17.1 15.7 12.1 10.2 6.4
of which:
loans to households 4.2 9.3 4.3 9.3 8.6 6.3 4.3 2.1 0.1
loans to nonbank corporations 5.5 19.8 20.0 21.7 26.4 25.7 20.0 18.2 12.2
Share of foreign currency loans in total loans to the
nonbank private sector
30.5 27.6 31.1 27.3 28.0 29.4 31.1 32.2 32.1
Return on assets (banking sector) 1.0 1.4 1.5 1.2 1.5 1.5 1.5 1.9 1.9
Tier 1 capital ratio (banking sector) 23.2 20.9 20.5 19.0 18.9 18.8 20.5 18.8 19.7
NPL ratio (banking sector) 3.8 3.4 2.7 3.3 3.0 2.8 2.7 2.7 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 31.0            
Debt of households and NPISHs 2 (nonconsolidated) 16.0 15.7 13.8            
% of GDP (based on EUR), period total
Goods balance –8.6 –9.6 –11.3 –12.3 –11.5 –11.7 –10.2 –10.2 –8.6
Services balance 4.3 3.9 4.4 4.2 4.9 4.0 4.7 5.9 4.5
Primary income –1.5 –2.0 –3.1 –2.4 –3.8 –4.1 –2.1 –2.1 –3.1
Secondary income 0.9 0.4 0.6 0.6 0.6 0.6 0.7 0.4 0.5
Current account balance –4.9 –7.2 –9.3 –10.0 –9.8 –11.2 –6.9 –6.0 –6.7
Capital account balance 1.9 2.2 2.5 1.0 2.1 1.5 4.6 0.8 1.8
Foreign direct investment (net) 3 –1.3 –3.7 –3.4 –5.3 –2.3 –3.9 –2.5 –3.4 –1.1
% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt 57.6 56.5 50.6 54.7 52.6 51.0 50.6 51.5 52.2
Gross official reserves (excluding gold) 17.0 16.8 16.3 16.1 16.2 16.1 16.3 18.0 17.5
Months of imports of goods and services
Gross official reserves (excluding gold) 4.9 4.3 3.9 4.1 4.0 3.9 3.9 4.4 4.4
EUR million, period total
GDP at current prices 220,320 241,443 285,993 54,593 67,106 79,014 85,280 64,745 76,222
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).

Focus on the Western Balkans

Housing markets and house price expectations

Compiled by Elisabeth Beckmann and Antje Hildebrandt 5

This report continues the analysis 6 of property markets in the Western Balkans 7 and shifts the focus from slow-moving structural features to indicators that are faster-moving and influenced by cyclical factors. First, we provide an overview of the economic importance of housing markets in the Western Balkans and compare the Western Balkan economies with EU countries in Central, Eastern and Southeastern Europe (CESEE EU 8 ). Second, we show data on house price dynamics. Third, we combine the evidence from official statistics with survey data on households’ expectations regarding property price developments and study within-country heterogeneities in expectations.

1 The economic importance of housing markets in the Western Balkans

Homeownership rates are particularly high in the Western Balkan countries as well as in the CESEE EU countries. In all of these countries, the share of owner-occupied housing stood above the EU-27 average of 69.1% in 2022 (according to data published by Eurostat). In Kosovo, Albania and Romania, owner-occupied housing was an almost universal phenomenon, whereas with shares of 77.1% and 75.4%, respectively, homeownership rates were comparably low in Czechia and Slovenia (chart 1). The high share of owner-occupied housing highlights the importance of housing markets for households. Further indicators underline the exceptional importance of housing markets for the economies of the Western Balkans in general. Moreover, housing market developments have a sizable impact not only on the economy in general but also on the banking sector.

Chart 1

Looking at the production side, gross value added of construction as a share of total gross value added reached outstandingly high levels of above 10% in Albania and Kosovo in 2022, almost twice as high as in other Western Balkan and CESEE EU countries (chart 2). The high share of construction in value added can partly be explained by a booming construction sector, particularly in Albania. Moreover, both countries receive substantial remittances (particularly Kosovo with personal remittances as a share of GDP of above 17% in 2022 according to the World Bank 9 ), from which a large part flows into the construction sector. This is also the case in other Western Balkan countries, for example in Montenegro, but other economic activities are playing a larger role (e.g. tourism in Montenegro) and are making the countries less dependent on the construction sector.

Chart 2

On the expenditure side, gross fixed capital formation of dwellings (i.e. housing investment) as a share of GDP plays an important role in Albania, with a share of almost 12% in 2022. In the remaining Western Balkan countries, housing investments were much less relevant (no data available for Kosovo and Montenegro), and also in the CESEE EU countries, the shares ranged only between 2% to 5% (chart 3).

Chart 3