The emerging economies of Central and Eastern Europe (CEE) are poised to become a new epicenter of economic growth within the European Union. As industrial activity surges and foreign direct investment (FDI) flows into the region, the economic convergence of CEE with Western Europe is set to accelerate, offering substantial business opportunities.

Prospects for Growth in CEE

The economic outlook for CEE countries is notably optimistic. According to analysts from Focus Economics, GDP growth in the region is forecasted at 0.8% for this year, with a more robust 2.8% expected in 2024—nearly triple the growth rate projected for the Eurozone (1.1%). Among the CEE countries, Poland, Romania, and Hungary are expected to lead the charge with rapid economic expansion. These nations have successfully navigated the challenges of the COVID-19 pandemic and the ongoing energy crisis. For instance, Poland’s GDP has grown by an impressive 10.8% since the fourth quarter of 2019, making it the second fastest-growing economy in the EU after Ireland. Romania and Hungary have also outperformed, with growth rates of 7.5% and 5%, respectively, surpassing the EU median.

In contrast, countries like Slovakia and the Baltic States have experienced more modest growth, roughly 3% since the pandemic—comparable to the performance of Western economies like the Netherlands and Italy. Czechia remains the weakest performer in the CEE, struggling to recover from the pandemic, with a forecasted recession in 2023 and slower growth anticipated for 2024.

Industrial Growth and Investment Opportunities

The economic strength of leading CEE countries can be attributed to a significant increase in industrial activity. Strong foreign demand and investment have fueled this surge, compensating for slower domestic consumption growth. Since 2015, industrial production in Poland has soared by over 51%, followed by a 20% increase in Hungary and nearly 10% in Czechia. In contrast, Germany, Europe’s manufacturing powerhouse, has seen relatively flat industrial production over the past seven years.

This industrial growth in CEE is closely linked to advancements in supply chains, particularly in high-tech manufacturing sectors. Poland has emerged as a global leader in electric vehicle battery production, ranking fifth worldwide with exports valued at EUR 6.5 billion in 2021. The region is also seeing increased investment in electronic components and the heat pump industry, further bolstering its industrial output.

Despite the ongoing energy crisis, CEE’s industrial expansion is expected to continue, driven by reshoring trends. Surveys by Maersk and Reuters rank Poland as the second most popular destination for industrial plants in the EU, after Germany. Poland is also the top choice for European companies looking to reshore operations. This is reflected in the economic data, with Poland receiving FDI inflows exceeding 5% of GDP in 2022, nearly double the historical average. Other CEE countries, while showing slower progress, remain attractive investment destinations due to their proximity to key markets and favorable business conditions.

Military Spending and Energy Transition

Military spending is another factor supporting industrial capacity in CEE. Poland’s military expenditure, at 4% of GDP, is the highest in NATO, which could facilitate technology transfer and attract additional US-based investment. However, this also contributes to a higher budget deficit, which analysts expect to exceed the EU’s Excessive Deficit Procedure threshold in the coming years.

CEE countries are also positioning themselves to benefit from the energy transition. Poland and the Baltic States are expanding their maritime infrastructure for LNG and oil imports, reducing the EU’s reliance on Russian energy. Poland’s Gdańsk oil terminal already supplies neighboring countries, and the nation has seen significant growth in solar energy installations, supported by subsidies and strong household demand. Additionally, Poland is advancing its nuclear energy plans, with large-scale plants and small modular reactors in the pipeline. Hungary, too, is extending the use of its nuclear plant in Paks and focusing on renewable energy development. These initiatives present lucrative investment opportunities, particularly in sectors requiring external expertise.

Addressing Labour Market Challenges

One of the challenges facing the CEE region is a labor shortage, particularly in Czechia and Poland, where unemployment rates are among the lowest in the EU (2.7%). Companies in these countries are struggling to find both skilled and unskilled workers, as highlighted by the European Commission’s monthly business survey.

Several trends could help mitigate this issue. Labour market participation rates have been increasing, with more people becoming economically active. In Czechia, the activity rate has risen from 74% to 77% since 2015, while in Poland, it has increased from 67% to 73%. This trend is expected to continue, driven by longer healthy life expectancy and the growth of cognitive jobs.

Additionally, there is significant potential to increase productivity through digitization. The International Federation of Robotics notes that the density of robots in Poland is below the global average, suggesting opportunities for increased automation. Czechia, while slightly ahead in robot density, also has room for further digital adoption. Investments in automation and digitization could help alleviate labor shortages and boost productivity across the region.

To address the labor shortage, CEE governments have introduced measures to attract immigrants, particularly from Ukraine. Since the onset of the conflict in Ukraine, over a million people have arrived in Poland, with nearly 500,000 settling in Czechia. These governments have made efforts to integrate these individuals into the labor market, with many Ukrainians establishing small businesses in Poland, contributing to the local economy’s diversity and dynamism.

Inflation and Economic Stability

The tight labor markets in CEE countries are contributing to wage-led inflation. While inflation peaked in February, it remains a concern, especially in Hungary, where the Consumer Price Index (CPI) is still rising by 20% year-on-year as of May. In Poland, Czechia, and Slovakia, inflation hovers around 13-14%, and slightly over 11% in Romania. Analysts expect average inflation in CEE to be 11.7% in 2023 and 5% in 2024, though rates will vary by country.

Czechia is expected to experience the fastest decline in inflation in 2024, thanks to fiscal austerity measures and significant reductions in real income in 2022. In contrast, Slovakia, Poland, and Hungary have adopted more lenient approaches to the energy crisis, supporting households with financial aid and proposing generous minimum wage increases. While this approach supports economic growth, it also prolongs inflationary pressures, with CPI inflation in Poland and Hungary expected to be 3 percentage points higher than in Czechia in 2024.

Conclusion

Economic growth in CEE remains resilient despite global challenges. These economies exhibit significant growth potential with relatively few imbalances, supported by moderate levels of private and public debt and robust labor markets. While inflation remains a concern, CEE continues to be an attractive and promising region for investment.

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