CEE economies likely to remain healthy in 2016, external factors may hurt positive outlook

Economic growth in all CEE4 nations exceeded market expectations, except the Czech Republic, according to flash estimates for Q4 15, GDP. The Slovakian and Hungarian economies expanded 1% q/q each, whereas the Polish economy grew 1.1% q/q. The Czech economy unexpectedly fell by 0.1%.  In annual terms, Slovakian economy expanded 4.2%, Polish and Czech economies by 3.9% and Hungarian economy by 2.9%. Domestic demand is expected to have remained the main growth driver for the region. Government efforts are expected to have surprisingly increased investment to use EU funds before the 2013-2017 programming period ends.

From this viewpoint, investment growth might slowdown notably in H1 2016 as the new 2014-2020 programming period begins. This will possibly result in considerably lower inflows of EU funds. However, the funds will continue to be a crucial boost for the CEE region in the coming years. Poland, in the new programming period, will be the largest receiver of the EU funds, as the nation might tap around €77bn. Hungary and the Czech Republic might also receive considerable amount of around €22bn, whereas Slovakia might get about €14bn.

Meanwhile, the economic growth is also likely to have been driven by household consumption in Q4 2015. This is expected to remain the most consistent growth driver in 2016 also. The region's joblessness is declining and is creating pressure on wage growth and reflects the increasing willingness of consumers to spend money. The region's consumer confidence is positive and has improved significantly in the last two months.

Easing of fiscal policy is another factor that is helping real disposable household income, apart from the positive labor market. Hence the CEE economies are expected to be in good shape in 2016. Domestic fundamentals continue to be strong. Hence the main risks for the region are external factors. The positive outlook for the region can be hurt by China's hard landing, the possible slowdown in euro area and the Brexit risk.

"Due to the drop in inflows of EU funds we expect Czech GDP growth to decelerate to 2.6% this year (after 4.3% in 2015, the best result since 2007), Slovak GDP growth to fall to 2.9% (from 3.6% in 2015), while the Polish economy should grow at roughly the same pace as in 2015 (3.6%) and, according to the CB's prognosis, the Hungarian economy should slow to 2.5% from 2.9% recorded in 2015", says Societe Generale.