The Central, Eastern, and South Eastern European (CESEE) countries have been navigating economic challenges as they face the repercussions of geoeconomic shocks. Last year, the region experienced a recovery with growth rising from 0.8 percent in 2023 to 2.5 percent in 2024. This recovery was driven by domestic demand while net exports became a hindrance.
The growth momentum is showing signs of weakening due to geoeconomic fragmentation linked to Russia's war in Ukraine and trade policy uncertainty. A baseline forecast anticipates moderate growth in 2025 at around 3 percent, supported by some remaining pent-up demand. However, the cyclical recovery appears to have largely run its course.
Not all CESEE countries are facing identical challenges. Nations such as Albania, Croatia, Montenegro, Bosnia and Herzegovina are benefiting from remittances, EU support, and tourism revenues which provide some insulation from external risks. Conversely, others are impacted by strong nominal wage growth over recent years.
The region faces vulnerabilities amid geoeconomic fragmentation including rising labor and energy costs affecting competitiveness, high trade openness exposing them to external demand shocks during de-globalization periods, and limited room for accommodative macroeconomic policies.
Export growth has stalled with net exports subtracting about half a percentage point from GDP growth last year. Cost pressures could dampen export growth if the Real Effective Exchange Rate continues appreciating as it has over the past five years.
The CESEE region's integration into global value chains exposes it to shifting trade dynamics. An IMF study indicates that Chinese EV imports could significantly impact CESEE economies through supply chains.
Policymakers are advised to reduce uncertainty through clear communication while reinforcing fundamentals and pursuing sustainable macroeconomic policies. Fiscal consolidation is necessary but not sufficient given long-term fiscal spending needs related to aging populations, security concerns, and climate issues.
Monetary policy should cautiously move away from its restrictive stance due to concerns about inflation persistence especially where inflation expectations exceed targets and wage growth lacks productivity support.
Growth-oriented reforms alongside moderation in public sector wage increases are crucial for signaling private sector adjustments. Accelerating structural reforms is essential for raising growth potential and strengthening economic resilience across the region.
New assessments on national structural reform priorities show that the CESEE region lags behind European and global peers in governance and trade-related barriers among other areas despite healthy banking sectors. Addressing these gaps could unlock investment opportunities with minimal fiscal costs.
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