CESEE economies to grow faster than eurozone in 2021


The economies of the 23 countries of Central, Eastern and Southeastern Europe (CESEE) are expected to grow by 5.4% this year, according to the Vienna Institute for International Economic Studies (wiiw).
The growth forecast for 2021 was raised by 1.2 percentage point, compared to the institute’s summer forecast.

The frontrunners are Turkey (9.1%), Montenegro (8.4%) and Moldova (8%), although the latter two are starting from a very low base. This means that in 2021, the CESEE region is likely to grow significantly faster than the eurozone (4.8%). On average, the pre-crisis level of 2019 was already exceeded in the second quarter.

“The strong performance of the Eastern European economies is mainly explained by the less strict COVID rules in many places, and by the fact that the service sector is much smaller than in Western Europe”, says Vasily Astrov, Senior Economist at wiiw and lead author of the Autumn Forecast.

The main driver of growth in CESEE is private consumption. With an average of 14.5%, it expanded massively in the second quarter. Investment also increased by almost 18%, on average, in this period. A good part of this, however, was accounted for by large-scale projects in Estonia. Exports are also picking up markedly on the back of the global upswing and the recovery in tourism. However, industrial production in many countries of the region – as in Western Europe – is also suffering from material shortages (e.g. of semiconductors in the automotive industry).

Employment is again approaching pre-crisis levels in many countries. In Croatia, Latvia, Hungary, Poland and Slovenia, it has already been either reached or exceeded. However, the coronavirus crisis has left scars in the labour markets: underemployment is now higher than before the pandemic. Unemployment also remains a problem in many countries, especially in the Western Balkans. At the same time, there are labour shortages in those sectors that have expanded in the wake of the crisis. This is the case not only in the EU member states of the region, but also in Montenegro, Serbia and Russia.

CESEE economies
Source: Vienna Institute for International Economic Studies (wiiw)

Rising inflation is similarly making itself felt in CESEE. Currently, in most countries of the region, inflation rates are 3 to 4 percentage points higher than at the beginning of the year. However, high inflation should be a transitory phenomenon, wiiw economists argue. Where the euro is used, inflationary pressure is generally lower. Faced with rising inflation, many central banks have already reacted by raising interest rates, and further interest rate steps are likely to follow.

“This should also cool the overheated and primarily credit-financed real-estate markets in many places, some of which are showing signs of bubble formation”, said Astrov. However, the main driver of the property boom in the region has been the European Central Bank’s monetary policy. “For the time being, it will probably remain ultra-expansive”, continues Astrov.

In Czechia and Lithuania, property prices have risen by 16% and 15%, respectively, since the start of the pandemic, and still show an upward trend.

The economic outlook is positive across the board, even though the recovery in CESEE is expected to lose some momentum in 2022 (3.7%) and 2023 (3.5%). The current boom in Turkey should subside. The strongest growth next year will be in Croatia (5%) and Poland (4.9%). After a 4% increase this year, Russia, the largest economy in the region, will also expand more slowly in 2022 (3%) and 2023 (2.8%).

Established in 1972 The Vienna Institute for International Economic Studies (wiiw), conducts research, provides policy recommendations, and publishes books/articles on a wide range of topics related to international economics. According to the 2020 Global Go To Think Tank Index Report wiiw retained number 3 in category ‘Top International Economics Think Tanks’.