Countries in the EU's east have higher and more persistent inflation than their western neighbors. Current efforts in the region to boost growth with higher spending run the risk of fueling inflation.
Consumers in CEE countries like Poland are going through tough timesImage: Aleksander Kalka/IMAGO
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The countries of the Central and Eastern European region have "probably already digested" the majority of economic shocks caused by the war in Ukraine, the Vienna Institute for International Economic Studies noted recently. Growth in the region is expected to pick up somewhat and inflation to come down at the end of 2023, the institute said in a report published January 30.
In the course of 2023, however, the four CEE countries — comprising Poland, Hungary, the Czech Republic and Slovakia — face a series of tough choices, and a complex and uncertain global and regional situation.
Central banks in the region have put their interest rate hike cycles on hold as a feared acceleration in inflation appears to have abated at the start of 2023. But the economic fate of the region is heavily tied into how its EU partners to the west cope with rising prices and high interest rates.
With around 80% of their trade done with the rest of the EU, all four CEE countries are as likely as ever to catch a cold if Germany and others sneeze.
UK-based economic consultancy Capital Economics thinks CEE headline inflation could rise from around 15% now to 20% in the second or third quarters of 2023.
How well CEE governments and central banks navigate the tricky course between the dual and often contradictory needs of avoiding recession while dampening inflation will determine how well the CEE countries perform in 2023 and beyond.
Higher government spending in the lead up to the October general election is feared to further drive up Polish inflationImage: Reuters/A. Szmigiel
Poland in an election year
Poland's gross domestic product (GDP) rose 4.9% in 2022, easing from 6.8% in 2021 — the year of the post-pandemic rebound. Excellent figures, experts say, when compared to Western Europe, but for 2023 growth forecasts differ widely and are far lower.
Dutch bank ING sees GDP expanding just 1%, while the International Monetary Fund (IMF) has lowered its growth forecasts to 0.3%. The World Bank sits in between, forecasting GDP to rise by 0.7% in 2023.
The key reasons for the slowdown in Poland are weaker growth in the eurozone and lower domestic demand largely due to inflation outstripping wage growth, thus reducing purchasing power.
Capital Economics said in a note to clients that Poland's economy "seems to be holding up much better" than in Hungary and the Czech Republic. But the impact of high inflation, the lagged impact of higher interest rates and subdued global demand are still likely to impede growth.
Meanwhile, ING expects Poland's consumer price inflation to rise to 18.1% in January from 16% at the end of 2022, before dropping to about 10% in December.
Poland has managed to slash its dependence on Russian gas and oil since the invasion of Ukraine last February, but global energy prices remain a key factor and depend on events in Ukraine and how fast China ends its COVID-19 lockdowns.
Exploring Central and Eastern Europe — a travel diary
For two weeks, DW's Laila Abdalla and Shabnam Surita are traveling through Poland, the Czech Republic, Slovakia, Hungary and Romania. Follow their daily updates here!
Image: Shabnam Surita/ Laila Abdalla
Day 15: This is the end
Two weeks, five countries, and unmatchable experiences. We took this picture to remember our last moments in our hostel in Timisoara. As per our research, the number of tourists in the cities we visited is lower than pre-pandemic times, but the reason is unclear. Could it be the war in Ukraine? Maybe... The one thing we are sure of is that it has deeply affected the region in terms of morale.
Image: Privat
Day 14: The beginning of the end
Final stop: Timisoara, Romania. The city, so far, has been a pleasant surprise! The center is full of architectural gems with a myriad of colors, styles and historical periods. But the true charm of Timisoara is its vibrant cultural life. Frequently referred to as "Little Vienna," it’s home to year-round art events, galleries, and museums. Definitely promising to be the cherry on top of our trip.
Image: Shabnam Surita/ Laila Abdalla
Day 13: Farewell Budapest!
We couldn’t have said goodbye to Budapest without exploring the city at night. And what better way to do that but visit one of the city’s historic ruin bars. Our pick of the night was Szimpla Kert, Budapest’s first ruin bar, that opened in 2002. On packed nights, this bar attracts thousands of people, most of whom are tourists. And the waiting time is definitely worth it.
Image: DW
Day 12: Budapest with a local
It’s very difficult to see everything on a short visit, which is why we reached out to Zeina, an expat living in Budapest since 2017. She took us to her favorite spots in the city. We hopped on one of the oldest metros in the world and ended up in front of the Hungarian Parliament. The superb view made us hang around a little longer than expected.
Image: Privat
Day 11: Hello Budapest!
We have reached Hungary, our fourth destination. We were very lucky to have stunning weather in Budapest! We immediately took a stroll along the city’s central quarter and saw the most important sights, including St. Stephen’s Basilica (pictured) and Heroes' Square. We even saw Budapest from the top of the Museum of Ethnography. The view was truly amazing!
Image: Privat
Day 10: Goodbye Bratislava!
Next up, we are heading to Budapest, which is just two hours by train. Bratislava, Budapest and Vienna are in close proximity of each other, and our train was full of tourists who were visiting all three. Historically, these cities have much in common, for example, the use of Slovak, German, and Hungarian words on Bratislava buildings.
Image: Laila Abdalla/Shabnam Surita/DW
Day 9: The invisible war
We noticed that people in Bratislava were reluctant to discuss the Ukraine war. Even though Bratislava is almost 1,200 kms away from Kyiv, Ukraine’s capital, reports suggest that the drop in tourists could be because of perceived war-related fears. We spoke to a travel expert, but they denied any effects. Instead, they highlighted Bratislava’s remarkable recovery post-COVID-19.
Image: privat
Day 8: Bratislava and its optical illusions
The Slovak capital is known for its charming old town, castle, and the Danube river. But very few tourists are aware of the vibrant art and culture scene that Bratislava has to offer. We visited the Multium Gallery, an experimental art venue that challenges our sense of perception using lights and mirrors. The optical illusions were disorienting at first, though we quickly grew to enjoy them.
Image: Laila Abdalla/Shabnam Surita/DW
Day 7: Bratislava it is!
After a train trip and an unexpected bus ride, we reached our next destination: Bratislava, the capital of Slovakia. Along with its historic sights, Bratislava has a quirky side too. We stumbled upon the Five Points Cafe in the old town, where you can get any image printed on your "Selfieccino." So along with one of our favorite selfies, we also got a coffee with the DW logo!
Image: Laila Abdalla/Shabnam Surita/DW
Day 6: Leaving Prague behind
We discovered a lot in Prague and also tried to find out how the Ukraine war affects tourism here. We spoke to tourism experts who expressed disappointment in the supposedly low number of visitors, though we we didn't feel that at all. Instead, we were quite overwhelmed by the hordes of tourists in the city. But now our time in Prague is over and it's time to move on.
Image: privat
Day 5: A cycle rickshaw tour of Prague
We couldn't soak in everything that Prague had on offer in just two days. But we tried to experience the city in new ways and decided to go for a cycle rickshaw tour. We met Libor, who wowed us with his knowledge of Prague architecture. In the end, Shabnam was particularly impressed by his cycling skills.
Image: DW
Day 4: Touring Prague
None of us have ever visited Prague before, so we decided to stop by this city. The beautiful Bohemian metropolis attracts tourists from all over the world, and we wanted to find out why. We started our day with a boat tour on the river Vltava soaking up the stunning views — lucky for us, the weather was playing along.
Image: DW
Day 3: Looking back at Wroclaw
Wroclaw welcomed us with open arms, and we learned that it has been equally welcoming towards others, especially Ukrainians displaced by the war — 190,000 Ukrainian refugees live there now. Everywhere we went, we saw blue-yellow flags, restaurants displaying messages of solidarity and even people singing Ukrainian songs. After two days, it is time for us to move on by bus to our next stop.
Image: Shabnam Surita/DW
Day 2: At Wroclaw zoo!
Did you know that the world's largest collection of African flora and fauna is actually in Wroclaw, Poland? That made us curious, so we explored the "Afrykarium" at Wroclaw zoo and yes — it was great! We experienced many firsts: Laila enjoyed seeing marine life and grew really fond of manatees. Shabnam saw her first giraffe and was not at all scared of the shark as she had expected.
Image: Shabnam Surita/Laila Abdalla/DW
Day 1: Arriving in Wroclaw
Finally the day has arrived! We woke up in Berlin, feeling both excited and anxious, and hopped onto the train for our first stop: Wroclaw! The city greeted us with some amazing sights, and we felt really welcome. We took a stroll across the medieval main market square, or Rynek, and soaked up the splendor. It's one of the largest of its kind in Europe, and so very beautiful!
Image: DW
Getting ready
We spent two weeks preparing for our trip. We planned our route, did research, collected ideas and organized interviews. Also important: packing the right equipment from different cameras to chargers, more chargers, microphones and lights. So much equipment means lots of responsibility. But it also means we can produce quality content for you — here and also on DW Travel's social media channels.
Image: Privat
Start and end point: Berlin
DW's Shabnam Surita (left) and Laila Abdalla (right) started their two-week tour of Central and Eastern Europe in Berlin on September 19. Their journey will take them to Wroclaw in Poland, Prague in the Czech Republic, Bratislava in Slovakia, Budapest in Hungary and Timisoara in Romania. They want to find out how the Ukraine war is impacting the tourism sector.
Image: DW
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The EU decision to withhold funds over doubts about Poland's commitment to winding back on controversial judicial reforms also leaves a hole in the coffers that will need to be filled by added borrowing or higher taxes, neither of which will go down well with voters as parliamentary elections beckon in the autumn.
The role of monetary policy will then be crucial and closely watched. The expected slowdown in 2023 means that the National Bank of Poland is faced with an awkward choice between monetary tightening to rein in inflation and loosening to boost growth after almost a year of rate hikes.
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Czech Republic faces anemic growth
The Czech economy entered recession in the second half of 2022. Economists say this was mainly due to a reduction in consumer spending, following rate rises and higher borrowing costs. As a result the central bank lowered its GDP growth forecast in November from 2.3% to 2.2% for this year.
Meanwhile, consumer price inflation rose to 16.2% at the end of 2022 after the government unveiled plans to cap energy price rises, thus boosting spending and borrowing and in turn reducing the space for spending to stimulate growth. It is expected to stay high in 2023, before falling in 2024.
Czech National Bank expects inflation to remain strong due mainly to supply-side effects, including higher imported energy and food prices, which should fade over the year. The economy, it said in a recent report, depended heavily on energy imports from Russia before Moscow's attack, leaving Prague desperately seeking alternative suppliers.
On the monetary policy side, ING expects the central bank to keep interest rates on hold in February.
Hungary the outlier
Strong growth in Hungary in 2022 was driven by domestic demand and a tight labor market. But the economy is expected to slow in 2023, as domestic and external demand fall away.
Victor Orban's ongoing spat with Brussels threatens inflows of EU funds, limiting his fiscal room for maneuver Image: Olivier Matthys/AP/dpa/picture alliance
ING revised its 2023 GDP growth forecast to 0.7%, but said any growth poses an inflationary risk due to preexisting structural economic imbalances, aggravated further by a series of shocks, including the war in Ukraine, which have driven up inflation, now among the highest in Europe at 24.5%.
ING sees headline inflation peaking just below 26% in the two months of January and February and a 18.5% average rate in 2023.
Slovakia caught in the crosshairs
Slovakia's economy has stuttered since Russia's invasion of Ukraine, even though it "pleasantly surprised in the third quarter," as Lubomir Korsnak, chief economist at UniCredit Bank in Bratislava, told news website Euractive recently. However, a "short recession" is likely to follow, he added, as indicated by the stagnation in the job market.
Slovak inflation reached a 22-year high of 15.4% in November, which may have plunged the economy into a winter recessionImage: imago images/Wolfgang Simlinger
The European Commission forecasts growth of 0.5% in 2023, and is much more upbeat than the National Bank of Slovakia, which sees activity even declining 1% this year.
Being a member of the euro area, Slovakia has fewer means at its disposal to fight inflation, expected to average 13.9% in 2023. It cannot raise the exchange rate of its own currency to mitigate higher consumer prices or set its own policy rate.
But, like its CEE neighbors, the crucial decisions rest in balancing spending to boost growth while combating persistent inflation. For small, open economies caught between richer neighbors to the west and a vicious war to the east, the only viable approach is one of vigilance and flexibility.
