Raiffeisen – European Macro, Sep 2023

The central and southeastern European economies have outperformed larger parts of the Euro area due to lower exposure to the global industry recession and a lack of EU funding in Hungary and Poland. However, this outperformance is expected to decline in 2024 as central Europe begins to recover. The current recovery is expected to be muted, as indicated by weak industrial confidence and output data, as well as some weakening in services sentiment in the euro area and central Europe. However, it is anticipated that consumer demand will recover in the coming quarters and in 2024, driven by resilient labor markets and ongoing disinflation accompanied by monetary easing cycles, which are already occurring in central and southeastern Europe ahead of the euro area. Inflation is projected to continue declining in the upcoming months and in 2024, although at a slower pace due to weakening base effects. Inflation in both the euro area and central and southeastern Europe is expected to remain above central bank targets in 2024, and possibly even in 2025. Government interventions, such as those seen in Serbia recently, will continue to dampen inflation in the short-term, but there is a risk of catch-up effects later on. The "new normal" of low real growth but high nominal growth is supportive for sectors that benefit from nominal volume growth. Additionally, the necessary adjustment processes in sectors like real estate will be easier to handle in this environment.