OeNB Report 2025/8: Economic trends in CESEE EU member states

Recovery progressed in 2024, but international environment deteriorated significantly in early 2025

1 Regional overview

The EU member states of Central, Eastern and Southeastern Europe (CESEE) largely digested the economic shocks following Russia’s invasion of Ukraine as well as the accompanying wave of inflation and found its way back to a growth path. ^{1 , 2 , 3} Average annual growth increased from 0.8% in 2023 to 2% in 2024, with growth rates ranging from 0.5% in Hungary to 3.8% in Croatia. The recovery, however, remained uneven and often somewhat anemic, burdened by industrial recession and weakening international demand for the products of the region.

New challenges arose in early 2025

The start to 2025 was not quite what the region had hoped for either. The new US administration’s tougher stance on Ukraine and Europe in general raised security concerns and demands for a rearmament of Europe. The need for higher military spending is coming up against already strained budgets and tight (global) financing conditions. Trade policy uncertainty has also been on the rise since the US elections (see chart 1) and it did not take long before the first forecasting institutions started to revise their growth projections for the region downward. They did so mainly on account of a slower than expected recovery in some of the advanced economies in Europe, which would put a further burden on CESEE’s manufacturing, exports and already sluggish investment.

Moreover, progress on disinflation has stalled and inflation has edged upward, in some cases beyond inflation targets. Services inflation remained notably above levels prior to the inflation surge and food and energy prices have seen an uptick since the second half of 2024. This could lead to further diverging monetary policy stances between CESEE and the euro area with potential impacts on financial assets, exchange rates and capital flows.

And then came liberation day…

The announcement of “reciprocal” tariffs on US imports on April 2, 2025, sent markets into turmoil. As uncertainty soared – the trade policy uncertainty index rose almost vertically – commodity (oil and copper, often considered a proxy for the health of global industry) and equity prices went down, and currency prices adjusted. In the first few trading days after the announcement, the Polish zloty lost 2.4% against the dollar, the Hungarian forint was down by 1.7% and the Czech koruna depreciated by 0.4% against the dollar. The region’s equity indexes lost between 4.3% in Bulgaria and 10.4% in Poland. After reciprocal tariffs had been suspended for 90 days on April 9, 2025, most CESEE financial market segments recovered losses (to some extent). By contrast, safe haven assets such as the dollar and US treasuries continued to weaken.

Chart 1

CESEE countries are exposed to US tariffs to varying degrees

As most CESEE economies are small and very open, escalating protectionism could be detrimental to economic activity in CESEE. The good news is that CESEE economies are generally less exposed to US final demand than their Western European peers (for whom US final demand accounted for 3.6% of total domestic demand in 2020). However, the potential impacts are still substantial in several cases. Among CESEE economies, Hungary is most dependent on US final demand in terms of domestic value added (3.2%), followed by Slovakia (2.9%) and Slovenia (2.8%). In contrast, Croatia (1.7%) and Romania (1.6%) are the least exposed economies in the CESEE region and among the least affected countries of the EU-27.

Effective tariffs for individual CESEE countries also deviate noticeably from the uniform tariff of 10% currently applied to the European Union. This is due to the different product structures of CESEE countries’ exports to the US and the applicable product-specific tariffs or tariff exemptions. Slovenia, Croatia and Hungary feature lower effective tariff rates due to the strong presence of (still) tariff-exempted pharmaceuticals in their exports to the US. In Poland, Czechia and Romania, by contrast, effective tariff rates are noticeably higher than the uniform 10%. This is due to strong exports of vehicles to the US, where a tariff of 25% applies. In Slovakia, where vehicles account for more than three quarters of all exports to the US, the effective tariff rate reaches close to 25%.

Economic performance will certainly be impacted by protectionism

On top of the direct impacts of tariffs, the indirect effects through a shock to economic activity in important trading partner countries of CESEE, most importantly Germany, must not be neglected. Taken together, direct and indirect effects of the new trading regime as well as the uncertainty caused by erratic policy changes will undoubtedly lead to further downward corrections of growth forecasts for the CESEE region. First available analyses estimated the average reduction in GDP growth at around 0.3 percentage points for 2025. In 2026, the impact should be mitigated to some extent by the expected fiscal stimulus in Germany. As the specific design of the tariff system is still very much in a state of flux, however, effects could deviate substantially from those preliminary estimates.

In the second half of 2024, growth was below average and strongly driven by consumption

What was the economic situation in CESEE when the shock hit? As mentioned above, CESEE economies recovered in the second half of 2024, but at 1.3% annual GDP growth in the third and 2.5% in the fourth quarter of 2024 growth rates remained below pre-pandemic averages.

Growth was mostly driven by consumption, while investments and especially net exports disappointed (see chart 2). Strong household spending was based on strong labor markets and rising wages, with the structurally tight labor market remaining the backbone for dynamics in the CESEE economies also in the second half of 2024.

Chart 2

Not only have the crises of recent years left labor markets largely unscathed, in many respects they are tighter than they were before the pandemic. The unemployment rate has been falling since September 2024 and reached an average 3.6% in February 2025, a reading on par with the all-time low of early 2020. A broader measure of labor market slack – i.e. the share of persons with an unmet need for employment in the extended labor force – has been consistently below pre-pandemic levels throughout 2024. Surveys show that labor shortages continue to be an important factor limiting production. This is particularly true for construction, where labor shortages are an even more important impediment for businesses than missing demand.

Labor markets are slowly starting to cool

However, there are also some indications that labor market conditions are slowly starting to cool. The second half of 2024 witnessed some moderation in nominal wage advances (to an average 10.7% year on year) and, due to stalling disinflation, also in real wage growth (to an average 7.5%). Moreover, perceived labor shortages came down somewhat from exceptionally high levels and employment growth has lost some steam after the very favorable readings of the first half of 2024.

Consumers have already begun to become a bit more pessimistic about the future general economic situation, prices and unemployment. Overall sentiment, however, has remained stable due to a favorable assessment of households’ financial positions, reflecting not only wage growth but also high saving rates over the past years. High-frequency activity indicators for consumption have evolved unevenly in early 2025. While retail sales have continued to grow at a robust 3% annually, the production of services has declined (see chart 3). The average contraction of –7.6% in January 2025, however, was at least partly related to an unfavorable base effect.

Public consumption supports economic activity as deficits rise further

Another factor supporting growth – besides labor market buoyancy – was loose fiscal policy. Public consumption on average contributed 0.5 percentage points to growth in the second half of 2024. Government expenditure outgrew government revenue on the back of higher spending on social benefits and public wages, reflecting the electoral cycle to some extent. The region, on average, has also upped its defense spending by some 0.3 percentage points of GDP in 2024, with the highest increases in Poland (+0.9 percentage points), Czechia (+0.7 percentage points) and Romania (+0.7 percentage points). At the same time, subsidies were notably lower after the last remaining measures to control inflation expired. Budget deficits for 2024 came in between 0.9% of GDP in Slovenia and 9.3% of GDP in Romania, and Hungary, Poland, Slovakia and Romania are undergoing excessive deficit procedures.

Competitiveness issues and weak international demand keep industry in recession

As far as the other sectors of the economy are concerned, construction seems to have come out of recession in January 2025, but industrial recession goes on. Industrial production has been contracting since January 2023 without any clear sign of improvement (see chart 3). The recession was led by energy intensive sectors (chemicals, plastics, metals) in the early phase of the downturn, before electrical equipment, machinery and especially motor vehicles took the lead in recent months. New orders have been weakening for more than two years, with export order books being particularly depleted. The recession is proving to be so stubborn as there is more to it than just weak international demand, however. The region’s industry is struggling with increasing problems in terms of price competitiveness as productivity problems are amplified by strong wage growth. Moreover, pronounced inflation differentials between CESEE countries and important trading partner countries (especially the euro area) pushed up real effective exchange rates by about 10% between late 2022 and mid-2023. Although disinflation and nominal depreciation have occurred in some countries in the meantime, real exchange rates have remained at a high level to date. In some cases, CESEE’s industry also shows an unfavorable production specialization pattern.

Chart 3

Missing international demand for CESEE products was also reflected in strong increases in inventories and meager fixed capital formation. While stock changes have contributed a full 1.8 percentage points to average GDP growth in the second half of 2024, investments have shaved off –0.6 percentage points from output growth.

Industrial recession is mirrored in declining investments and shrinking exports

In surveys conducted over the course of 2024, companies turned increasingly bearish on investment and reported to focus investment spending more on rationalization measures than on extension. By the final quarter of 2024, all individual components weighed on aggregate investment, with investment in construction declining by an average 6.6% and investment in machinery shrinking by 0.6%. The decline was partly related to lower public sector investment spending as budget balances were stretched and as EU transfers tailed off. The fact that corporate profitability and capacity utilization have been weakening for about one and a half years has tightened the brakes on investment even further.

The immediate future for capital formation in the region is somewhat unclear. Surveys suggest a higher willingness to invest for 2025 compared to 2024, EU payments should pick up and increased spending on defense should also be reflected in investment figures, at least to some extent. At the same time, the unfolding trade war has created huge uncertainty which is toxic for long-term-oriented investment decisions. Moreover, tariffs will certainly further weaken the price competitiveness of the CESEE region.

The most important factor weighing on growth was net exports. Despite a revival of world trade in the second half of 2024, growth of real exports was negative in half of the CESEE countries and ground to a halt for the region on average in the fourth quarter of 2024. At the same time, real import growth decelerated too, but on average remained clearly positive. This rendered the external sector’s contribution to GDP growth negative after it had supported growth for the previous two years. The region’s combined current and capital account balance also deteriorated over the review period and turned into a (moderate) deficit of –0.2% of GDP in the fourth quarter of 2024. While the trade balance was responsible for the brunt of the deterioration, lower capital transfers also weighed on the capital account. However, the external deficit was fully covered by FDI inflows.

Inflation has resumed on a slow but steady upward trend

The rapid disinflationary process that CESEE had experienced since early 2023 came to a halt in the first half of 2024 and inflation has since resumed a slow but steady upward trend. The average inflation rate for the CESEE region came in at 4.3% in March 2024, up 1.1 percentage points from its trough in June 2024 (see chart 4). Special factors such as tax and administered price adjustments at the turn of the year explain some of the price rises, but price pressures went up in many parts of the economy. The share of items with rising inflation rates in the consumption basket has been above 50% for four months already. At the beginning of 2024, this share was still around 20%.

Chart 4

Among the individual components of the HICP, food and energy prices stand out. They added a further 1.1 percentage points and 0.2 percentage points respectively to headline inflation since June 2024. Services also contributed significantly to inflation due to persistently strong wage trends. Industrial goods were the only category to see a steady decline in inflation rates, reflecting falling producer prices over the course of 2024.

Against this backdrop, core inflation developed somewhat more favorably than headline inflation. At 4.4% in March 2025, however, it still turned out 0.2 percentage points higher than in June 2024.

Several countries miss their inflation targets

At the country level, too, the unabated stream of positive news concerning inflation came to a halt. Most countries reported renewed price pressures and the right calibration of monetary policy has become more challenging. In Czechia, consumer price inflation (CPI) edged up from 2% in June 2024 to 2.7% in March 2025 but stayed within the central bank’s target of 2% ± 1 percentage point. In Poland, price growth accelerated more strongly to 4.9% (CPI) in March 2025, noticeably above the target of 2.5% ± 1 percentage point. In Hungary, CPI inflation rose to 5.6% in February before going back to 4.7% in March. This is somewhat closer to, but still noticeably above its target (3% ± 1 percentage point). Romania was the only country with independent monetary policy where CPI inflation remained roughly unchanged. At an elevated 4.9% in March, however, it stood clearly above the target of 2.5% ± 1 percentage point.

Central banks mostly stay on hold

Recent price trends have made the central banks of the inflation-targeting countries in the region more cautious about their next steps in the cycle of interest rate cuts. Their caution is clearly warranted for a number of reasons: (1) central banks expect some further temporary increase in inflation this year, (2) the fiscal stance is rather loose in some countries, (3) the external monetary policy environment has become more accommodative, and – very recently – (4) changes in trade policies introduced a major element of uncertainty for future financial market, inflation and activity developments. The Czech National Bank (CNB) was the only monetary institution in CESEE that kept cutting during the review period. It lowered its key rate by 25 basis points in November 2024 and February 2025 to 3.75% (see chart 5). The CNB argues that the real interest rate remains well above zero, but admits that the degree of monetary policy restriction is gradually diminishing and that there are some longer-term inflation risks. Poland, Romania and Hungary all remained on hold.

Chart 5

Swift credit momentum in a highly profitable banking environment

Monetary easing since mid-2023, however, has stimulated credit markets. Credit demand has strengthened significantly on the back of consumer credit and mortgages as well as working capital needs for corporates, despite the overall weak investment environment. In the second half of 2024, credit supply conditions also turned positive after two years of decreasing appetite of banks to provide credit. This translated into a relatively swift credit momentum. Loans to the private sector advanced by an average of 8% in February 2025, the highest reading in more than two years. The growth of loans to households outpaced the growth of loans to corporates, the gap between the two, however, narrowed substantially over the past six months.

Banking sectors are generally in good shape, as improving asset quality and high interest margins bolstered profitability. At 1.6% in 2024, the average return on assets was exceptionally high by historical standards. At the end of 2024, nonperforming loans were down by 0.4 percentage points in Poland and 0.3 percentage points respectively in Bulgaria and Croatia, while they remained broadly unchanged (at a low level) in the other countries. Tier1 capital ratios remained above euro area averages in all countries of the region.

2 Croatia: still standing out given higher growth and higher inflation

Croatia’s economic performance continued to deviate from the euro area average with higher growth, higher overall inflation and stronger house price dynamics and lending to households.

GDP grew by 3.8% year on year in 2024 – more than in 2023 (3.3%) and much more than the euro area on average (0.9%). In the second half of the year, growth rates and developments of subcomponents of GDP were similar to those in the first half of the year. GDP growth remained driven by domestic demand, most of all private consumption but also strong gross fixed capital formation. The contribution from government consumption was higher in the second half of the year. Net exports made a strong, negative contribution to growth in all quarters. On the output side, wholesale and retail trade and construction remained the strongest growth drivers. The manufacturing sector contracted in the first half of the year and then stabilized, making it the only sector with a negative contribution to the annual growth rate.

Domestic demand was supported by a strong labor market, with a low unemployment rate (4.6% in February 2025) and high gross real wage growth (+12% year on year in December 2024). The government amended its legislation regarding employment of foreign nationals, partially because of high demand for foreign workers (e.g. in the tourism sector). Changes include, inter alia, greater flexibility for foreign workers to change jobs, longer permit durations (up to three years) and incentives to encourage the return of Croatian emigrants. The latter has also been fostered by new income tax exemptions – effective from January 1, 2025 – for returning Croatians.

HICP inflation reaccelerated in autumn 2024 and stood at 4.3% year on year in March – about the same level as core inflation. Headline inflation accelerated due to base effects related to administered energy prices and food price inflation. Food price increases have caused discontent and consumer boycotts of retailers. As a result, the government has introduced price caps for 70 essential products. Inflation also affects Croatia’s tourism sector, with rapid price increases raising discussions about Croatia’s competitiveness against other Mediterranean destinations. In 2024, tourist arrivals grew by 3.9% year on year (EU-27: 2.2%), nights spent by 1.4% (EU-27: 2.3%).

Since Croatia’s accession to the euro area the fiscal balance has deteriorated. The budget deficit was 2.4% of GDP in 2024. General government gross debt continued to decline. It was 59.7% of GDP in the third quarter of 2024, mildly below 60% of GDP for the first time in roughly 15 years and declined further to 57.6% of GDP in 2024. In the second half of 2024 Fitch, S&P and Moody’s upgraded Croatia to A ratings (A–, A– and A3, respectively).

The Croatian national bank (HNB) assesses that financial stability risks are moderate and stable. Banks’ return on assets (ROA) and Tier 1 capital ratio declined somewhat but remained strong in 2024. The nonperforming loan (NPL) ratio was low and stable. Growth rates of lending to households and house prices were still high. Given cyclical risks, the HNB implemented borrower-based measures. From July 1, 2025, a debt service-to-income limit of 45% will apply for housing loans and of 40% for non-housing loans. The loan-to-value ratio will be limited to 90%. Exemptions can be applied by the banks for 20% of housing and 10% of non-housing loans.

Regarding political news, Mr. Milanović was sworn in for a second five-year term as president of Croatia in mid-February. He won the second round of elections by a landslide. In the past, President Milanović has been a critic of the pro-Ukrainian stance of the Croatian government under Prime Minister Plenković.

3 Slovakia: a blend of recovery signals and ongoing challenges

Slovakia's real GDP grew by 2% in 2024, an improvement from the 1.4% growth in 2023. However, the rate of economic expansion slowed significantly in the latter half of the year. The growth in 2024 was driven by robust domestic demand, contributing 3.4 percentage points, while net exports were a significant damper (–1.4 percentage points). Private consumption was the main driver of domestic demand, despite a strong decline in real wage growth in the second half of the year. Household spending was bolstered by government measures such as energy price caps and pension increases. Additionally, consumers accelerated their purchases in anticipation of a VAT hike in January 2025. However, recent data suggest that household consumption has suffered strongly from downbeat sentiments, sticky inflation and tax hikes as of the beginning of 2025. Retail sales thus dropped sharply in February after 13 months of expansion in a row. Fixed investment negatively impacted GDP growth in 2024, particularly in its second half. Both firms’ investment – especially in machinery – as well as households’ housing investment were sluggish. In addition, EU-funded public investments also decreased from their peak in 2023 on the back of a rather slow drawing of EU funds. Despite a slight recovery in car production toward the end of the year, net exports remained weak due to dull foreign demand, especially from Germany, and a rebound in imports of goods and energy.

Despite the rather moderate growth performance of the economy, the labor market continued its tight course. The unemployment rate, which has followed a downward path since 2013, has kept on falling to new historical lows of just above 5%. Employment has remained broadly stable at a historically high level, notwithstanding a slight softening at the beginning of 2024 due to early retirements. Despite an increasing number of employed foreigners, early retirements in combination with outward-migration and an aging population have brought about a further shrinkage of the labor force. Consequently, the shortage of skilled workers remains high, especially in the construction sector. Yet in the meantime, firms seem more concerned about weak demand than shortage of skilled labor. Nominal and real wage growths remained positive but have dropped significantly.

After inflation had continuously dropped to 2.4% in June 2024 it has been gradually rising since to 4.2% in March 2025, mostly on the back of accelerated global food price inflation and a hike in indirect taxes at the start of the year. Core inflation sped up in parallel from a recent low of 3.4% in April 2024 to 5.2% in March, largely driven by increases in processed food and services prices. These categories have been the main drivers of inflation also in 2025 so far, even though VAT on many food and services items was reduced in January.

Slovakia’s general government deficit came in at 5.3% of GDP in 2024, nearly the same as in 2023. A combination of lower revenues and increased healthcare spending counteracted the decline in energy support costs and the consolidation measures adopted in 2024. Mainly due to a significant slowdown in EU-funded investment compared to 2023, the fiscal stance was contractionary by about 2 percentage points of GDP, according to the Slovak central bank. The persistently high deficits pushed general public debt to just under 60% of GDP at the end of 2024, prompting the European Commission to initiate an excessive deficit procedure against Slovakia in July 2024.

4 Slovenia: substantial decline in the budget deficit

GDP growth in Slovenia slowed to 1.6% in 2024, from 2.1% the year before, with the slowdown being more pronounced if adjusted for seasonal and calendar effects (from 2.4% to 1.3%). For the year as a whole, GDP growth was attributable to relatively strong consumption growth while investments and net real exports had a negative effect. However, net exports improved in the second half of the year, supported by the recovery of exports which outpaced the acceleration of import growth. Final consumption growth remained healthy throughout 2024, despite a modest deceleration in the second half. Government consumption was particularly strong, in part due to post-flood reconstruction but also the transformation of supplementary health insurance into a compulsory contribution (suppressing private and boosting public expenditure on healthcare goods and services). Private consumption was supported by strong real wage growth and a slower accumulation of financial assets as the real value of savings had recovered by around mid-2024 following the 2022–2023 period of elevated inflation. The contraction of investment activity intensified in the second half of 2024. This was caused especially by a sharp decline in construction investments (importantly by the general government), but investments in machinery and equipment also declined somewhat more in the second half of 2024 than during the six months before, possibly in part due to increasing international trade policy uncertainties.

The 2024 budget deficit amounted to 0.9% of GDP, down from 2.6% in 2023, and – again, like in previous years – significantly lower than expected by the government a few months before year-end (expectation in October 2024: 2.9% of GDP). The improvement was caused by lower than projected expenditure on investment and other core spending (excluding investment, interest payments, reserves and crisis intervention measures). This outturn prompted the Fiscal Council to repeat its criticism about the systematic over-estimation of expenditures in recent years, which may open up the way for an inappropriate use of budgetary resources (and also reduces the appropriateness of the draft budget for subsequent years). For 2025, the government reckons with a general government deficit of 2.6% of GDP, which seems overestimated considering the 2024 outturn. Nevertheless, increased spending on investments and wages are expected to add to expenditure growth, which is likely to cause an increase in the budget deficit compared to 2024.

In its assessment of Slovenia’s medium-term fiscal-structural plan, the Council of the European Union stated in February 2025 that the full implementation of the plan would help ensuring sound public finances and debt sustainability, while also securing sustainable and inclusive growth. According to the plan, the general government deficit should decline gradually to 1.2% by 2028. Government debt is planned to decrease from 67% of GDP in 2024 to 61.2% of GDP in 2028. Slovenia was also recommended to further implement structural reforms, including of the pension, healthcare and long-term care system.

HICP inflation slowed from 1.6% to 0% between June and October 2024 mainly on the back of decreasing energy price inflation (in part due to a base effect), but services price inflation also moderated. Since then, inflation has picked up again and reached 2.2% in March 2025. Energy prices were again the main factor driving these developments, but food prices (incl alcohol and tobacco) and – to a small extent – non-energy industrial goods also added to the acceleration.

5 Bulgaria: window of opportunity for euro adoption on January 1, 2026

Real GDP growth surprised on the upside at 2.8% in 2024. Growth accelerated in the second half of the year, reaching 4.1% on an annual basis in the fourth quarter. Once again, private consumption was the main driver of GDP growth, together with government consumption and inventory buildup, while net exports and gross fixed capital formation shaved 1.4 percentage points off from GDP growth in the final quarter of 2024.

Strong private consumption was supported by rising real wages, comparatively cheap consumer credit, a hike in the minimum wage and social benefits as well as employment growth, particularly in the service sector. Labor shortages eased slightly in Bulgaria, mainly as a result of lower labor demand in the (export-oriented) manufacturing sector but remained at a very high historical level and continued to exert upward pressure on real wages, in excess of labor productivity growth.

Furthermore, the mix of rising incomes, low interest rates and a lack of investment opportunities continues to fuel a construction boom in larger cities. Euro adoption expectations may provide an additional incentive for households to take out mortgages, which soared by 29% year on year in December 2024. House prices continue to outpace consumer prices, rising by 18% year on year in the fourth quarter of 2024.

While construction continued to grow by 3.5% in 2024, industrial production excluding construction fell by 3.6%. Business confidence indicators have deteriorated, and export order books look rather bleak. Weak external demand and drought-induced lower agricultural harvest as well as rising real imports widened the trade deficit to 5.2% of GDP in 2024. Despite a good tourism season and rising services exports, the current account remained in deficit.

Gross fixed capital formation declined by 1.1% in 2024. The weak interim government was unable to implement urgent reforms. As a result, Bulgaria failed to receive any payments under the Recovery and Resilience Facility (RRF) in 2024. In addition, political uncertainty and the lack of reforms also discouraged FDI inflows.

Disinflation continued in the second half of 2024 driven by negative base effects, before inflation stabilized at around 2.1%. Core inflation fell to 2.9%. A rise in administered prices and the expiration of various VAT reductions have pushed inflation up to 4% and core inflation to 4.4% in March 2025. Unit labor costs and rising energy costs pushed up domestic producer prices by 19% in February 2025, particularly in the mining, food and manufacturing industries. These dynamics may potentially jeopardize Bulgaria’s aspiration to accede the Economic and Monetary Union (EMU) in 2026.

After the seventh snap election in three years, Bulgaria has a three-party minority government led by GERB-SDS since mid-January 2025. According to Prime Minister Jeliazkov, the government does not consider itself a reform government, but a government of smooth transition that will lead Bulgaria into the euro area.

Since the turn of the year Bulgaria has numerically met the price criterion for EMU entry. In February 2025, the government requested an extraordinary convergence report, and in March the budget for 2025 was approved, targeting a deficit of 3% of GDP in 2025 and 2026. But the road to euro adoption is likely to be bumpy. Russia has intensified its hybrid influence, spreading misinformation about the euro and the functioning of the Eurosystem. This fuels the tug-of-war between pro-European forces and those (pro-Russian) parties or interest groups that want to prevent euro area accession or at least try to delay effects they perceive as economically unfavorable: e.g. transparency, tax enforcement, effective measures against corruption and money laundering, and the exchange of cash hoards of questionable origin.

Talk of reform fatigue and the fact that the new government canceled some projects that were part of its recovery and resilience plan (RRP) bodes ill for Bulgaria’s potential growth and income convergence prospects and renders fiscal reform, aging and the greening of the economy more painful in the future. Moreover, some RRP funds that are not claimed in time can no longer be deferred but will be forfeited.

6 Czechia: tentative signs of economic recovery

After showing only hesitant signs of recovery in the first half of 2024, Czechia’s economic growth has gathered pace lately. Real GDP thus expanded by 1.1% in 2024 – not a dizzying figure, but a notable improvement from the mild contraction in 2023. This growth was driven primarily by government and recovering private consumption. While the latter benefited from improving real disposable incomes, the pace of consumption growth remained restrained, reflecting consumers’ cautious sentiment. While investment was bolstered by easing financial conditions and stronger use of EU funds, weak external demand and high geopolitical uncertainty among other factors counteracted these gains. Consequently, the contribution of fixed capital formation to growth was uneven throughout the year, slightly positive only in the third quarter. Changes in inventories also dragged on growth for most of the year as firms unwound a significant portion of the previously amassed stocks. Additions to inventories turned significantly positive again in the last quarter of 2024. While net exports played a significant role in driving economic expansion throughout 2024, their positive impact gradually diminished and turned negative in the final quarter. This reflects a robust increase in domestic demand as well as the weakness in foreign export markets.

The labor market has remained tight, with unemployment having been broadly stable, at one of the lowest levels in the EU, and slightly rising employment figures. This is because mounting challenges in manufacturing have been offset by labor demand in the service and construction sectors. Consequently, nominal wage growth remained buoyant, despite a marked slowdown over the last two years.

Since its previous low in June 2024 (2.2%), inflation edged up toward – and by end-2024 even beyond – the upper tolerance boundary (2% ± 1 percentage point) of the Czech National Bank (CNB). The acceleration was mainly due to a notable increase in administered prices and, to a lesser extent, processed food prices. The former was driven, inter alia, by rises in the administered component of energy prices, water supply and sewage collection charges, and the reinstatement of the fee for renewable energy sources. Inflation eased slightly since the beginning of 2025 (2.7% in March), primarily due to a sharp decline in administered price inflation, although rising food prices thwarted this trend. Core inflation picked up in parallel, from 2.6% in June 2024 to 3.5% in March 2025, driven by vigorous growth in prices of services and processed food. Reflecting the ups and downs of the disinflation path, the CNB continued its easing trend by lowering policy rates in November (25 basis points) before pausing its year-long streak of interest rate cuts in December. Despite another 25 basis point cut in February, the CNB has embarked on a vigilant approach reflecting renewed inflation risks.

The general government deficit in 2024 came in at 2.2% of GDP, not only lower than the envisaged 2.5% of GDP in the revised budget following the devastating floods last September, but also significantly narrower than in 2023 (3.8% of GDP). This was due to higher tax and insurance premium collections, moderate growth in overall expenditures as well as some unrealized spending especially on flood repairs. The fiscal impulse was somewhat contractionary (about –0.5 percentage points on GDP growth according to the CNB). Compared to 2023, gross public debt increased by about 1 percentage point to 43.6% of GDP in 2024.

7 Hungary: weak growth, reaccelerating inflation and overshooting fiscal deficit

Hungarian GDP grew by 0.5% year on year in 2024, following the 0.8% contraction in the year before. Following an initial recovery during the first half of 2024, the growth performance disappointed in the second half of the year when GDP contracted both in year-on-year terms and compared to the first half. Household consumption and the buildup of inventories supported GDP. The former benefited from strong albeit slowing real wage growth and increased borrowing by households (despite some deterioration in consumer confidence). Inventory buildup may in part have reflected ongoing large investment projects which are expected to be finished in 2025. During the second half of 2024, investment activity contracted even more than during the first half. The worsening of industrial confidence, in particular the deterioration of the export outlook, and the postponement/cancellation of public investment projects (with significant EU funds still blocked) probably played a role. The contribution of net real exports turned negative during the second half of 2024, mainly on the back of weak export performance.

In late 2024, parliament adopted the general government budget for 2025 with a deficit of 3.7% of GDP. The budget includes various measures to please the electorate ahead of parliamentary elections in spring 2026 (e.g. doubling the family tax benefit by the beginning of 2026 in two steps, a new interest-free credit facility for young workers without tertiary education, expansion of preferential housing credit and subsidy facilities, selective public sector wage hikes). In February 2025, the list of electoral gifts was expanded by life-long personal income tax exemption for mothers raising two or three children and a partial VAT refund for pensioners’ purchase of vegetables, fruits and milk products. The major risks surrounding the achievement of the deficit targets concern weaker than expected GDP growth, higher than expected expenditure on goods, services and pensions amid higher than expected inflation and higher interest payments, if interest rates do not decline in line with assumptions. Moreover, global energy price developments remain a risk-factor given untargeted household energy price subsidies.

HICP inflation started to accelerate in the final quarter of 2024 and reached 5.7% in January and February 2025, before going back somewhat to 4.8% in March. The acceleration was driven mainly by prices for energy and food, but also for services. The hike in indirect taxes on fuel, the increase in bank fees in response to the hike in the financial transaction tax and the reversal of telecom price discounts played an important role. Elevated price pressure in labor-intensive services segments also likely reflected the 9% hike in minimum wages at the beginning of 2025. In response to rising prices, the government expanded the food price monitoring system, introduced a cap on retailers’ profit margins for 30 groups of food staples and threatened to introduce price caps (including the reversal of recent price increases) for bank fees and telecom services. Rising inflation and inflation expectations prompted Magyar Nemzeti Bank (MNB) to leave its policy rate unchanged since September 2024. Also, the new governor of MNB, who took office at the beginning of March 2025, reiterated that achieving price stability is a top priority. In its latest inflation report (March 2025), MNB raised its inflation forecast, with risks tilted further to the upside, and shifted back the achievement of the inflation target of 3% by one year to early 2027.

8 Poland: unfreezing of energy prices lifted inflation

In 2024, GDP recovered by 2.9%, with a volatile pattern of 1.5% to 2.0% in the first and third and almost 4% in the second and fourth quarter in seasonal-and-working-day-adjusted year-on-year terms. Quarter-on-quarter growth, too, was unstable, with 0.1% to 0.8% in the odd and almost 1.5% in the even quarters. In each quarter, annual growth stemmed primarily from growth of domestic demand (excluding inventory). In the second half of the year, inventory change added positively to growth due to restocking. By contrast, the contribution of real exports was rather small in the first half and negative in the second half of the year, despite some revival in quarter-on-quarter terms in the final quarter. Growth of real imports exceeded that of real exports in each quarter, on the back of domestic demand and the zloty’s real appreciation.

Regarding domestic demand, in the second half of the year, private consumption growth was in line with that of GDP, and public consumption showed strong, albeit declining growth, while fixed-investment growth grounded to halt, despite some revival in quarter-on-quarter terms in the final quarter. Private consumption grew on the back of double-digit real gross retirement pension increases and strong rises of both the nominal and real wage sums, even if employment declined slightly. Consumer confidence slightly deteriorated in the second half of the year, after having improved substantially since end-2022. Fixed-investment growth slowed markedly, as absorption of EU funds under the new facilities was not yet in full swing. This factor dampened both public sector and business investment, with the latter further weakened by lower and less broad-based business profitability. Industrial confidence and the assessment of export order-book levels slightly deteriorated in the second half of the year. On a positive note, residential investment recovered in 2024, lifted by the government’s new mortgage program.

Throughout 2024, the surplus in the balance of payments for goods and services was lower than a year earlier, which is in line with the negative growth contribution of the external balance. In 2024, the surplus stood at 4.0% of GDP and the combined current and capital account surplus declined to 0.5% of GDP, while net FDI inflows halved to 1.2% of GDP.

Although hourly compensation in manufacturing rose less in both the full-year and the second half of 2024, the year-on-year rise of nominal unit labor costs (ULC) in manufacturing was higher, as labor productivity declined slightly. The latter resulted from employment increasing more than gross value added (GVA) in 2024, while it had decreased more than GVA in 2023. Unlike in 2023, the ULC rise in 2024 was clearly stronger than in the euro area. With the zloty’s nominal value in euro being higher than a year ago, the zloty’s real (ULC-deflated) value rose at an almost double-digit rate, eroding external price competitiveness.

According to HICP (and national CPI) definition, annual headline inflation rose from 2.9% (2.5%) in the second quarter to 4.0% (4.8%) in the fourth one and slightly further to 4.4% (4.9%) in March 2025, given, inter alia, the partial unfreezing of energy carriers prices from July 2024 and the increase in natural gas distribution tariffs from January 2025. Core inflation remained close to the second quarter level of 3.8%, reaching 3.9% (3.6%) in March 2025. For non-energy industrial goods inflation remained below 1%, and manufacturing producer price index (PPI) inflation remained negative.

The Monetary Policy Council (MPC), pursuing a medium-term CPI inflation target of 2.5% ±1 percentage point, has maintained its main policy rate at 5.75% since October 2023. In early April, the MPC decided to keep interest rates unchanged, pointing at several uncertainties and judging current interest rates as conducive to meeting the inflation target in the medium-term.

The European Commission staff forecast in mid-November that the government deficit would decline slightly from 5.8% of GDP in 2024 to 5.6% in 2025. At the end of November, the Commission’s assessment concluded that Poland’s new medium-term fiscal-structural plan fulfills the necessary requirements. It endorsed the envisaged path for net expenditures, which shall not exceed 6.3% growth in 2025 (after 12.5% in 2024), implying a deficit of 5.5% of GDP in 2025 and general government debt to rise to 58.4% of GDP at end-2025 from 55.3% at end-2024.

9 Romania: weak growth and large twin deficits

Romania’s economic activity slowed down further in the second half of 2024, bringing full-year GDP growth down to 0.8%. Due to a severe drought, agricultural output fell markedly in the third quarter, but recovered in the final quarter. Agriculture delivered a negative contribution of 0.4 percentage points to GDP growth in 2024.

On the demand side, real wage growth supported private consumption, which remained the main growth driver despite some weakening. Yet, the unemployment rate rose noticeably in the second half of the year. In parallel, the role of loan-financed consumption increased. The robust growth of domestic credit to corporates could not prevent a contraction in gross fixed capital formation. In this respect, a decline of corporates’ own funds and lower FDI inflows as well as feeble EU fund absorption were decisive. Due to delays in reforms and reaching commitments, the third tranche under the EU’s RRF was still not disbursed. After parliamentary elections, the newly formed government signaled to make efforts to get access to these funds. Regarding private investments, it is worth noting that drilling operations for the Neptun Deep offshore gas project have started recently. In addition, projects funded through investments from international companies in a production unit for sustainable aviation fuels as well as in wind and solar electricity generation are either in the implementation or planning phase.

Net exports contributed negatively to GDP growth. The real export contraction deepened in the second half of the year, while import growth decelerated. Exports have been hampered by weak external demand, the drought and external price competitiveness issues. The rise in ULC in the manufacturing sector has remained persistently high alongside an only marginal nominal depreciation of the leu vis-à-vis the euro.

In 2024, the net borrowing position from the current and capital account rose to 7.1% of GDP due to a higher trade deficit, a lower surplus in the services balance and lower inflows of EU funds. Net FDI inflows declined and only made up for 23% of this position, while net portfolio inflows (largely related to sovereign Eurobond issuances) acted as the main external financing source. Sovereign Eurobond as well as local currency bond spreads widened somewhat form late 2024, presumably reflecting political turbulences as well as the macro and fiscal situation coupled with outlook downgrades by rating agencies. Yet, the government tapped the Eurobond market in the first quarter of 2025 and local currency bond spreads came down again.

The budget deficit increased to 9.3% of GDP in 2024. In early February 2025, the Romanian parliament approved the budget for 2025 that targets the reduction of the budget deficit to 7% of GDP in 2025. Yet, Romania’s Fiscal Council estimates the general government budget deficit to decline only to 7.7% of GDP. Fiscal measures include the elimination or reduction of some tax breaks, an increase in the dividend tax rate, the introduction of a tax on special constructions as well as freezes in public wage and pension spending. With respect to the ongoing excessive deficit procedure, the Economic and Financial Affairs Council (ECOFIN) recommended to put an end to the excessive deficit situation by 2030.

After declining markedly, the CPI rate hovered around 5% since summer 2024. Against the background of sticky inflation, the National Bank of Romania left its key policy rate unchanged at 6.5% since August 2024. It expects inflation to fall slightly below the upper bound of the variation band of the target (2.5% ±1 percentage point) in early 2026.