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2021/11/24 / Erste Group Research

Political instability clouds outlook

After a weak start to 2021 growth bounced back in 2Q rising 13.1% y/y, thus averaging 5.2% y/y growth in 1H21. Growth was underpinned by revived domestic demand developments, notably unleashed household consumption, while net external contribution to growth was negative. High-frequency indicators suggest slowdown of growth in 2H21.

Stubbornness of the pandemic, supply-side bottlenecks affecting the global car industry and elevated local political uncertainty weighing on investments are factors behind our decision to slightly trim this year’s and next GDP growth forecasts. Bottom line, we trim this year’s and next GDP growth forecasts by 0.3pp and 0.6pp respectively to 3.5% before rising to 4% in 2023.

Supply side pressures intensified considerably recently. After averaging 3.5% y/y in 3Q, CPI surged to 4.1% y/y in October. The increase was primarily driven by electricity, fuel and food prices. We have revised our average CPI forecast for the year to 3.1% y/y, followed by 2.6% y/y and 1.6% y/y in 2022 and 2023 respectively.

Although the government revised up its budget deficit target to 6.5% of GDP, we forecast the end figure will be below 6% of the GDP courtesy of decent revenue growth and under-execution in planned public investment, especially likely in the last quarter reflecting political wrangling. The government plans to cut the deficit to 3.5% of the GDP by 2023 but consolidation measures remain unclear.

Political uncertainty has increased following a bad result on local elections for the ruling Social Democrats. After a failed attempt by the opposition to oust the government, the ruling parties are busy trying to bolster their shaky support base in parliament. The blockade by Bulgaria continues to hamper EU accession path.

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General information

AuthorErste Group Research
Product nameCEE Country Macro Outlook
Topic in focusFX, Macro/ Fixed income
Economy in focus-
Currency in focus-
Sector in focus-


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