Despite a challenging international environment, growth is accelerating across most of Central, Eastern, and Southeast Europe, according to the latest Summer Forecast from the Vienna Institute for International Economic Studies (wiiw). This growth is primarily fueled by a significant increase in real wages, leading to higher private consumption, while EU member states show resilience amid Germany's economic downturn.
"The sharp rise in real wages is the main driver of growth, stimulating private consumption, even though a significant portion of the additional disposable income is being saved," explains Vasily Astrov, economist at wiiw and lead author of the Summer Forecast.
The industrial sector in the EU member countries within the region remains in recession, largely due to the severe crisis in German industry. "This limits the growth prospects of all countries within the industrial cluster surrounding Germany," Astrov noted.
The wiiw forecasts an average growth of 2.6% for the EU members of the region in 2024, increasing to 3% in 2025. This outpaces the euro area, which is projected to grow by 0.6% this year and 1.6% next year. Slovenia and the Visegrád states—Poland, Czechia, Slovakia, and Hungary—are expected to grow by an average of 2.6% this year, accelerating to 3.1% in 2025. Poland leads growth among the Eastern EU members, with expected growth rates of 3.3% this year and 3.6% next year.
Slower growth is anticipated in the Baltic states and Czechia, with Estonia’s economy expected to expand by only 0.2% in 2024. The Southeast European EU members are forecast to see robust growth of 3.0% in 2024, bolstered by NextGenerationEU coronavirus recovery funds and, in Croatia's case, a thriving tourism sector.
The Western Balkans are projected to grow by an average of 3.2% this year, with Turkey expected to expand by 3.4%. Some of the strongest growth is in the small Western Balkan economies; Montenegro, Albania, Kosovo, and Serbia are projected to be among the five fastest-growing countries this year, along with Kazakhstan, the only Eurasian economy included in the report.
Ukraine's recovery is anticipated to slow, with a revised growth forecast of 2.7% for 2024, down by 0.5 percentage points from the Spring Forecast. "Half of Ukraine’s energy infrastructure has already been destroyed in Russian missile attacks, and the destruction is ongoing. Without electricity, the Ukrainian economy will struggle to recover," said Olga Pindyuk, Ukraine expert at wiiw.
Conversely, Russia's growth forecast has been revised upward by 0.4 percentage points to 3.2% for 2024, driven by substantial government spending on the war, which constitutes about a third of the federal budget. "This is leading to a redistribution from the top to the bottom, fostering sympathy for the war among the population," said Astrov, wiiw’s Russia expert.
The prospect of US sanctions against third-country banks assisting Russia in bypassing Western sanctions is beginning to impact Russian imports, especially for dual-use goods like microchips. "Ultimately, ways will be found to circumvent these sanctions, but they will make it more expensive and difficult for Russia to procure such important high-tech components from the West," Astrov said.
Geopolitical risks remain a significant concern. "A Donald Trump victory in the US presidential election in November could intensify the trade war between the US and China, and possibly also start one with the EU. This would hit the small, open economies of Central Eastern Europe particularly hard," warned Astrov. Additionally, a potential far-right government in France led by Marine Le Pen's National Rally could complicate Western support for Ukraine.
"This concern is particularly relevant for Ukraine, as a new government in Paris led by right-wing populists could severely hinder the country from receiving the Western support it urgently needs," states the report.
