Inflationary pressures have been building in Central and Eastern Europe
Staff Writer |
More comprehensive data revealed that the Central and Eastern European (CEE) economy lost steam in the first quarter on the heels of a breakneck growth spurt last year.
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Growth in the region clocked in at 4.4% annually in the first quarter, down a notch from last month’s estimate and notably slower than the 4.9% expansion recorded in the fourth quarter of last year.
By all accounts, however, growth in Q1 was still healthy; the CEE economy has been experiencing rapid homegrown expansions in both consumer spending and fixed investment amid labor shortages and cheap financing, respectively.
Moreover, stronger absorption of EU development funds has brought about an investment boom in much of the region. On the flipside, however, a slowdown in the Eurozone hit the region’s external sector at the outset of the year as demand waned for CEE-originating wares.
Low unemployment, upbeat wage growth and the ongoing surge of domestic and EU-linked investment are expected to drive another strong outturn for the CEE economy this year.
That said, regional growth is seen ticking down from last year’s one-decade high as demand from the Eurozone, the region’s largest trading partner, cools.
Moreover, the impact of earlier fiscal stimulus measures is expected to increasingly fade, and rising inflation could take a bite out of consumption.
All told, regional growth is seen clocking in at 4.0% this year, up 0.1 percentage points from last month’s forecast. Regional growth is seen easing to 3.3% next year.
Deteriorating global trade relations are increasing risks to the CEE economy’s growth trajectory. In late June, U.S. President Donald Trump proposed implementing tariffs on European Union-built automobiles, an escalation to a tit-for-tat tariff conflict following the U.S.’s imposition of tariffs on aluminum and steel.
If implemented, the tariffs could stifle one of the region’s most important industries.
According to a preliminary estimate produced by FocusEconomics, inflation climbed for a third straight month in May to land at 2.6% (April: 2.4%). Higher prices were recorded in all but 1 of the region’s 11 economies, namely Slovakia.
Across the region, inflationary pressures have been building in line with this year’s rapid rise in global oil prices. Improving consumer spending dynamics throughout the CEE economy have also lent upward support.
Preliminary data for June puts inflation at 2.7%, again ticking higher on rising fuel costs.
Despite this year’s steady rise, still-low inflation has given policymakers in the region room to keep their respective monetary policies accommodative.
By and large, the region’s central banks appear set to put off their tightening cycles until necessary in the interest of spurring the ongoing investment boom.
In Poland and Hungary, inflation remains below the midpoint of each central bank’s target, which pushed officials to leave rates unchanged at their June meetings.
Meanwhile, in the Czech Republic, inflation exceeded the CNB’s 2.0% target in May, prompting officials to hike the policy rate by 25 basis points.
Amid ascending pump prices and robust consumer-spending gains, inflation across the CEE economy is seen averaging 2.5% this year, unchanged from last month’s forecast. Next year, inflation is seen stable at 2.5%. ■