Based in Paris, BNP Paribas' Economic Research Department is composed of economists and statisticians:
The Economic Research department’s mission is to cater to the economic research needs of the clients, business lines and functions of BNP Paribas. Our team of economists and statisticians covers a large number of advanced, developing and emerging countries, the real economy, financial markets and banking. As we foster the sharing of our research output with anyone who is interested in the economic situation or who needs insight into specific economic issues, this website presents our analysis, videos and podcasts.
+33153315932 cynthia.kalasopatanantoine@bnpparibas.com
Earlier this week, Hungary published its GDP data for the first quarter. It fell by 0.2 % compared with the previous quarter after -0.6% in Q4 and -0.8% in Q3. This is not a major surprise given that high frequency indicators such as retail sales and industrial production were already pointing to a weakening in economic activity. Elsewhere, in the region, GDP growth was also soft though we observe a better performance in Czech Republic Romania and Poland. The Hungarian economy is experiencing numerous challenges while some positive developments provide some relief.
Despite the war in Ukraine, Poland’s economic growth was relatively solid in 2022. However, it was erratic with a sharp GDP contraction in Q2 and Q4. For 2023, despite a negative carry-over effect, recession will probably be avoided due to continuous fiscal support. Inflationary pressures remain high in the short term due to wage pressures and the return of the VAT rate on energy to its initial rate. The temporary blocking of European funds since 2022 might, at first glance, raise concerns against a backdrop in which public and external accounts have worsened. However, the inflow of foreign direct investment is a notable shock absorber. In 2022, these flows more than offset the current account deficit.
Economic activity weakened in the third quarter. The outlook remains gloomy in the short term. Last September, the central bank ended its monetary tightening cycle in the face of downside risks to growth. This policy is currently not very consistent with the trajectory of inflation. Meanwhile, fiscal policy was tightened in the second half of the year due to the marked deterioration in budget deficit. The EU’s freezing of funds in 2022, depriving the Hungarian authorities of a source of income, has probably weighed on their decision. While this recalibration limits support for growth, it strengthens the credibility of Hungary’s fiscal policy.
GDP growth was resilient in the first three quarters of 2022 but is expected to slow down significantly in 2023. Inflation will be a key feature to monitor as price stability is one of the economic convergence criteria for Bulgaria’s future entry into the Eurozone in 2024. Another point of concern is that the political scene continues to be subject to uncertainty given the many changes in the government over the past 20 months. Investment has suffered as a result of this situation. However, the commitment of the authorities towards reforms does not appear to have been affected.
For several years, Romania has been running a structural current account deficit. This year, the deficit is expected to worsen and could come close to 10% of GDP after -7.3% in 2021. The deficit had already reached EUR 20.2 billion over the first nine months of the year, well above the figure seen for 2021 as a whole. Romania's deficit is the largest amongst Central European countries. The main reason stems from the deterioration in the energy trade balance, which according to the latest figures reached EUR -4.5 billion for the January-July period. Imports of food and industrial goods have also contributed, but to a lesser degree compared to energy. By contrast, imports of consumer durables have remained soft. Exports were still relatively dynamic (up by a year-on-year rate of 26
The economic slowdown is likely to continue in the coming quarters. Poland is facing several challenges. Firstly, the country is highly dependent on coal imports, and the price of this commodity has soared since the end of 2021. The Central Bank has moved towards a less restrictive monetary policy despite high inflationary pressures. Finally, the moratorium on mortgage repayments in 2022 and 2023 will have a negative impact on banks’ balance sheets in the short term. However, the Polish economy does have numerous strengths and should show resilience.
All growth drivers weakened in the second quarter of 2022. With a high exposure to Russia for its oil and gas supplies, Slovakia could be amongst the most affected Central European countries by the consequences of the war in Ukraine. The steep rise in energy costs, as well as supply disruptions, will have an adverse impact on industrial activity, which has not yet returned to its pre-Covid level. Moreover, inflation has increased rapidly but is still more moderate compared to other countries in the region. Finally, public and external accounts will deteriorate in the short term, but this situation remains manageable.
Economic growth remained very dynamic until the first quarter of this year. Strong wages growth and significant government measures to back up purchasing power over this period have supported consumer spending. Inflation rose sharply in recent months but remained lower compared to other Central European countries, due to a price cap on certain food and energy related goods. Economic growth is expected to slow down significantly in 2023, owing to the deterioration in the international environment, monetary and fiscal tightening from H2 2022. The temporary suspension of European funds presents a serious challenge given that budget and current account deficits have increased and external liquidity has eroded.
The last two quarters have been marked by slower growth in economic activity. This is mainly attributed to weaker levels of consumer spending. Furthermore, the country is still very exposed to supply chain disruptions in the automotive sector to a great extent, which adversely impacts both industrial activity and exports. The expected slowdown in the global economy in 2022 will also affect growth given the country’s high exposure to trade. Inflation has probably not yet peaked, which means that monetary tightening is likely to continue in the short term.
Over the past few weeks, Central Europe has experienced a spike in Government bond yields. Five-year yields have surged respectively by 338 bp in Poland, 331 bp in Hungary, 350 bp in Romania and 216 bp in Czech Republic since January 2022 and are at present similar to 2008 levels. The trend is also the same for 10-year yields. The recent move can be explained to some extent by markets’ overreaction as regards to the relatively high exposure of Central European countries to Russia in terms of exports and energy supply. Moreover, their geographical proximity with Ukraine and Russia have contributed to markets’ perception of higher geopolitical risk. In the meantime, monetary policy tightening, a consequence of higher inflationary pressures (respectively +16
