WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

• Compared with the wiiw Spring Forecast, growth projections for the CESEE region were for the most part revised upwards.
• We expect the region’s GDP to grow by 2.4% in 2017 and an acceleration of growth rates to 2.6% and 2.7%, respectively, in the next two years.
• The  most  important  factors  driving  growth  are  the  economic  recovery  in  the  euro area  and  the  relatively  low  oil  price.  Many  countries  in  the  CESEE  region  are  also experiencing favourable developments in private consumption and investments.
• (Geo)political  turmoil  remains  a  constraint  on  growth  in  Ukraine,  Russia  and  some countries  in  the  Western  Balkans.  Negative  political  developments  in  Poland, Romania, Hungary and Turkey have not yet had a material negative economic impact. However, together with Brexit, they represent the greatest sources of uncertainty in the medium term.

^{Julia Grübler and Richard Grieveson, wiiw}
 
Economies in EU member states in Central and Eastern Europe (EU-CEE) are performing better than we had expected at the time of our Spring Forecast, with a projected average growth  rate  of  3.5%  this  year.  The  growth  differential  compared  to  the  euro  area  therefore amounts to 1.8 percentage points. On the country level, GDP growth projections for 2017 range from  2.3%  for  Estonia  to  4.8%  for  Romania.  Exports  are  increasing  strongly,  reflecting  the economic  recovery  in  the  euro  area.  Wages  are  continuously  increasing  –  on  the  one  hand
caused by a shortage of skilled labour, on the other hand supported politically by increases in minimum wages (e.g. in Hungary, Latvia, Poland, Romania, and Slovakia), social benefits, and wages paid in the public sector. At the same time inflation remains low, partly due to the low oil price. This environment supports private consumption in particular as the most important growth driver in the region. The start of the new EU funding programming period is also expected to result in an increase in EU co-financed investments.
 
For  Turkey,  growth  projections  for  2017  were  raised  by  0.7  percentage  points  to  2.8% based  on  increased  public  investment  and  stronger  supply  of  loans.  In  addition,  the currently weak Turkish lira is supporting export growth and the recovery of the tourism sector. In the  medium  term,  however,  negative  political  developments,  high  inflation  and  high  levels  of external  debt  (particularly  in  US  dollars)  could  erode  the  confidence  of  local  businesses  and consumers, and foreign investors. Turkey’s large external financing needs leave it vulnerable to swings in market sentiment, particularly at a time of tightening US dollar liquidity.
 
Sluggish public investments have reduced growth prospects for the Western Balkans to around 2.9% for 2017. In Macedonia and Montenegro in particular, political turmoil after recent elections led to a standstill in public investments. In the Western Balkans, Albania is developing most dynamically with an expected growth rate of 3.9%, based on a positive export performance and  investments  such  as  the  construction  of  the  Trans  Adriatic  Pipeline  or  the  Devoll Hydropower plant.
 
The  persistently  low  oil  price  and  the  conflict  in  eastern  regions  of  Ukraine  are  still determining economic developments in the region. The negative impact of the conflict for Ukraine has been intensified by a trade blockade of the separatist-controlled areas of Donbas, which has been in place since the end of January. Electricity shortages and the related collapse of steel production led to a downward revision of growth projections to 2% for 2017. Russian exports have recovered with the increase of the oil price. Simultaneously, however, the Russian rouble  has  appreciated,  resulting  in  import  growth  developing  more  dynamically  than  export growth.  Therefore,  net  exports  will  contribute  negatively  to  Russian  GDP  growth  in  2017. Assuming a stable oil price (50-55 US dollar per barrel), we expect GDP for the region of CIS and Ukraine to increase only by 1.5% this year.
 
Austria continues to be one of the main investors in CESEE. Based on the stock of foreign direct  investment  (FDI),  Austria  was  the  largest  investor  in  Slovenia  (30.7%),  Bosnia  and Herzegovina (20.4%) and Croatia (19.2%) in 2016. It also featured among the top 10 investors in another 14 CESEE countries. From an Austrian perspective, the Visegrád countries (Poland, Czech Republic, Slovakia and Hungary) form the core of investment activity in the region.  
 
Austrian  trade  figures  are  still  dominated  by  Germany.  However,  a  trade  reorientation towards the East has been visible for some time, and is set to continue. In 2016, the share of CESEE in Austrian exports was 22%, and 21% in terms of imports. Trade with EU member states in the region is gaining particularly in importance for Austria. Between 2006 and 2016 the share of EU-28 in Austrian trade shrank by two percentage points, while the share of CESEE (including EU-CEE) grew by a similar amount. In 2016 Austria generated a merchandise trade surplus with CESEE of EUR 5.4 billion, while the trade in services showed a deficit of EUR 2.2 billion.
 
From 2015 to 2016 the unemployment rate in Austria, for both Austrians and nationals of EU-CEE,  fell  for the first time since the onset of the global economic crisis.  While  the Austrian unemployment rate fell from 8.1% to 8.0%, the unemployment rate for EU citizens in the  aggregate  fell  by  0.6  percentage  points  to  9.3%  and  for  nationals  of  the  EU  countries  of Central  and  Eastern  Europe  by  0.9  percentage  points  to  10%  in  2016.  In  total,  9.3%  of  the Austrian population originated from CESEE in 2016, 48% of which was accounted for by EU-CEE nationals.  
 
In  summary,  the  economies  in  Central,  East  and  South  East  Europe  are  on  average performing  very  well  and  are  –  with  the  exception  of  Ukraine  and  some  parts  of  the Western Balkans – firmly shrugging off negative political developments. Due to its close ties with CESEE – in particular with EU-CEE – Austria should, at least in the short term, continue to benefit from the current growth acceleration in the region.