CEE economies switching to higher gear
Recovery to be stronger than previously anticipated. CEE economies to grow by 5.1% in 2021 and 4.8% in 2022. RRF to affect growth mostly after 2022. Czechia, Hungary and Poland to start hiking interest rates already this year in order to tame inflation expectations.
Given better than expected 1Q21 GDP growth data, stronger global economic outlook and the brisk reopening of CEE economies stemming from the improved epidemiological situation, we have raised our 2021 GDP growth forecast to 5.1% from 3.8% a quarter ago. So far, the recovery has been mostly driven by industrial output, exports of goods and government consumption, while household consumption was depressed by restrictive measures and uncertainty. This is going to change in the coming quarters, as we expect a strong recovery in household spending.
Although there are still risks associated with another pandemic wave in the autumn or winter, this time may be different. Two key indicators may help in assessing the necessity of restrictive measures and may render them regional rather than nationwide: the number of hospitalizations and the vaccine uptake. The larger the latter, the more contained may be the former. Progress in vaccination and the availability of full spectrum of disposable vaccines by then should significantly reduce both health and economic costs compared to previous waves.
We expect inflation to remain above its target in many CEE countries both this year and next. Thus, Czech, Hungarian and Polish central banks will deliver their first rate hikes already this year to signal their preparedness to tighten monetary policy and contain rising inflation expectations.