Domestic demand drives CEE region's growth

The structure of GDP growth in the CEE region is gradually changing. While in 2011 and 2012, net exports represented the key source of GDP growth, now it is seemed to shift towards domestic demand. This is important as it reduces the region's reliance on the external environment as well as its exposure to macro-economic risks. 

"Domestic demand has now become the key driver of GDP growth, particularly in Poland, Czech Republic and Slovakia, while net exports are tending to reduce growth or support it just marginally (in Q2 15 net exports contributed 0.1pp yoy to GDP growth in Poland and 0.3pp yoy in the Czech Republic). A different situation can be seen in Hungary, where net exports continue to play an important role in the country's economic performance (in Q2 15 net exports ontributed 1.5pp yoy to growth)", notes Societe Generale. 

Household consumption and fixed investment are thus gradually taking over as the key GDP growth drivers in the CEE region, while government consumption is pushing growth higher as well. Household consumption is being supported by rising employment across the region, rising wages and increasing household spending appetites. Fixed investment is also showing strong growth as CEE governments try to tap as much money as possible from the EU funds as the chance to obtain funds for the programming period 2007-2013 ends this year. 

Gross fixed capital formation increased by more than 6% yoy on average within the CEE countries, with Slovakia at the top (9.4 % yoy). From the supply-side point of view, manufacturing and the wholesale and retail trade remain the key drivers of GDP growth in the region. Nevertheless, growth is fairly evenly spread across most sectors (although significant drops have been observed in the Hungarian agricultural sector and the Slovak financial sector). 

For the CEE region as a whole, this trend is expected to continue as rising domestic demand, and the domestic demand is likely to put upward pressure on imports of investment and consumer goods, while exports could suffer from the still weak euro-area revival, said Societe Generale in a report on Tuesday.