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

All countries in CESEE experienced positive economic growth in 2017, with ten of them achieving their highest real GDP growth rates over the last 5 years. Among sub-regions the clear leader was EU-CEE with average real GDP growth of 4.9 %, profiting from domestic demand expansion, favourable external conditions, robust growth of Germany (a key trading partner for all of them), and inflows of EU funds for investment. Romania was the top performer in CESEE for the second year in a row, growing by 7.3%, despite rising concerns about overheating.

Strong domestic demand was supported in 2017 by high real wages growth in most CESEE countries, especially in comparison with Western EU and many other economies around the world. Whereas for Ukraine double-digit growth compensated for the decline of a similar magnitude two years ago (following the minimum wage hike in 2017), for Romania and Hungary the increase can be explained by tight labour markets conditions and government policy, including minimum wages rise as well. On the sub-regional level EU-CEE recorded the strongest increases in real earnings. Wages rose due to better bargaining positions of workers, related to tight labour market in these countries, boosting consumption and domestic demand. Although average wage levels are still lower than in Western EU countries, rising unit labour costs are an early warning signal of concerns about future investment and production growth.

The convergence process is proceeding at a moderate rate. The lowest income gaps in terms of GDP per capita at PPP relative to the EU-28 average are observed in the EU-CEE sub-region. The Baltic countries and the Visegrád countries led the way in 2017, (at 26 and 27 percentage points, respectively, below the average EU28 level).

Most countries in CESEE have narrowed the income gap with EU28 average over last ten years, but regional disparities are substantial. While EU-CEE has gained about 9.9 percentage points, the WB6 on average have achieved 3.0 percentage points of convergence, and the CIS3 and Ukraine only 0.8 percentage points increase. The WB6 and CIS and Ukraine remained significantly poorer, with GDP per capita at PPP at 33.7 % and 53.3% of the EU28 level, respectively in 2017.

Demographic factors are significant for shaping the convergence processes. In EU-CEE and the WB6 sub-regions the population is declining, with one of the reasons being emigration to wealthier EU countries. EU Member States in the region have experienced a population decline of more than 3% over the last decade and a half. By contrast, non-EU Member States’ population grew by 4% over the same period. Population shrinkage in EU-CEE had various economic and political effects and not all of them were negative, a decline in unemployment being one example.

Labour market tightening in 2017 in comparison to the previous year is clearly reflected in falling unemployment rates in almost all CESEE countries (except Ukraine and Kosovo).  The longer time span delivers a more differentiated picture, however (see map below).  

Unemployment rates in nine of 22 economies covered by wiiw are higher than pre-crisis levels. These nine countries include Albania and Croatia, countries with double-digit unemployment rates of 13.7% and 11.2% respectively. Among countries with very high unemployment rates Kosovo, Macedonia and Bosnia and Herzegovina have achieved the most progress over last decade, with the unemployment rate falling by 17, 11.4 and 2.9 percentage points respectively.

Direct effects from a trade conflict between the USA and China for most countries in CESEE via the export channel are low. Turkey has the highest export exposure to the US, at 5.5% of the total. Kazakhstan and Russia have double-digit shares for China in their total exports of goods: 12% and 10.9%, respectively. However, other economies could be affected through knock-on effect via their main trading partners.

Deeper integration of CESEE economies into Western and Central European manufacturing supply chains increase their dependence on Germany’s economic performance (and therefore indirectly to global developments, including the US-China trade conflict). Macedonia, Hungary and the Czech Republic are most vulnerable owing their openness to exports and the significant share of Germany as an export destination. Kazakhstan, Montenegro and Kosovo seem to be least exposed.

In the CESEE region gross external debt as a share of GDP declined substantially in 2017 compared to 2016, but has still not reached its pre-crisis level. However not only the magnitude of debt but also its structure by currency and maturity, as well as foreign exchange rate regime, are determinants for the assessment of each country‘s vulnerability to external borrowing risks.

FDI in CESEE has increased in recent years. Albania, Turkey, the Czech Republic and Poland expanded their inward FDI stocks more than 10% in 2017. In the same year, only Belarus, Hungary, Kazakhstan, Russia and Ukraine experienced decline in the stock of inward FDI. Traditionally being the important source of investment for many countries, further FDI growth is now conditional on development in the global economy and unit labour costs in CESEE.

The share of persons employed in ICT, one of the indicators highlighting the rise of the new digital economy, is below 3% for most CESEE economies, except Estonia (4.7%), Slovenia (3.5%) and Latvia (3.2%). Some countries of the region have recently experienced high employment growth in this sector of the economy. Data for 2017 show high growth rates of the employment in ICT for Kosovo (30.1%), Montenegro (20 %) and Latvia (18.9%). On average over a 5-year period, the highest growth rates have been observed in Serbia (14.6%), Estonia (10.9%) and Kosovo (6.6%).