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Hungary and Poland’s economic boom may soon come to an end

Budapest, Hungary – Hungary and Poland’s economic growth rates are still outperforming, by far, most of their European neighbours. But this situation might not last long.

According to a report by the Vienna Institute for International Economic Studies, released on May 15, the current economic boom of the top-performing economies in Central and Eastern Europe, namely Hungary, Poland and Romania, is mostly based on temporary factors and could soon come to an end as their growth cycle’s peak may already be behind us.

EU funds, tightening labor market… Hungary’s GDP growth rate expected to drop

With an annual growth rate of 5.2% in the first quarter 2019, Hungary is the most rapidly-growing economy in the EU ahead of Romania (+5.1%) and Poland (+4.6%), while economic growth has already started to slow down in the rest of Central and Eastern Europe.

But “temporary factors are making a big contribution to current particularly strong momentum. We do not expect this to last indefinitely”, according to the authors of the study. “In the case of Hungary, we see a particularly strong a front-loaded draw-down of EU funds”, highlights the think-tank: “The strong dependence on EU transfers, a characteristic feature of the current growth path, makes it likely that the expected huge drop in EU supported investments in 2019-2022 will significantly deteriorate Hungary’s growth prospects”.

Hungary’s tightening labour market, marked by record-low unemployment and growing labour shortages, may also strongly dent the country’s economic prospects in the years to come, with analysts pointing to growing signs of the economy overheating and reaching its capacity limits.

General economic slowdown in Central Europe

But Hungary is not the only CEE country facing an economic slowdown. The Czech Republic, considered one of the most stable and robust economies in Europe, only grew by an annual 2.5% in the first quarter of 2019, confirming the long-rumored slowdown of one of the CEE region’s most developed economies.

And while Poland will remain the second fastest-growing economy in 2019 according to EU forecasts and has long been Europe’s growth champion, GDP growth has already started to decelerate compared to previous years, with the Vienna Institute for International Economic Studies also identifying signs of the economy overheating. The single largest net recipient of EU funds, Poland’s economic prospects also largely hinge on the current negotiations regarding the allocation of European funds for the bloc’s next multi-annual budgetary framework.

Central European economies remain highly dependent on Western markets, especially Germany, where GDP growth is expected to reach one of its lowest levels in recent years (+0.5% this year, according to European Commission forecasts).

But “despite the projected slowdown”, points out the study, every country in the CEE region should grow more quickly than the Eurozone and EU average, “implying [economic] convergence with Western Europe”.