Economic data published since early November 2025 highlight a growing divergence in the CEE region. Bulgaria and Czechia show resilience, albeit driven by different factors (domestic consumption vs. balanced recovery). In contrast, Hungary and Slovakia are grappling with stagnation and sluggishness. This divergence is largely structural: economies heavily dependent on the German industrial supply chain (Hungary, Slovakia, and to a lesser extent, Czechia) are suffering from the ongoing industrial slowdown in Germany, while those with stronger domestic demand dynamics (Bulgaria) are insulated.

Fiscal policy has taken centre stage across the CEE region. Czechia has been pursuing a gradual consolidation, which may lose momentum with a new, post-election cabinet. Still, we forecast the public budget deficit at a mere 1.7 % of GDP in this year and below 3% of GDP in 2026. Hungary faces a dilemma: it needs to consolidate but is opting for stimulus to revive growth, risking a "twin deficit" problem (fiscal and current account deficit). Recently, the government in Budapest has announced new budgetary measures targeting families and SMEs. The measures, which boost domestic demand, are strengthening fears of a widening budget gap in 2026 due to pre-election spending. We forecast the Hungarian public budget deficit at 5.0% of GDP in 2025 and 5.3% of GDP in 2026. In a sharp contrast to Hungary, the most significant policy development in November in Slovakia was the approval of another robust fiscal consolidation package. Key measures include raising the standard VAT rate to 23% for unhealthy foods (effective Jan 2026), introducing a new tax on financial transactions for businesses, and increasing corporate levies. Moreover, a "tax pardon" was introduced to encourage the settlement of tax arrears without penalties, aiming to boost short-term revenue. Owing to the adopted fiscal austerity, we may expect the Slovak budget deficit to start declining from 5.5% of GDP last year to 5.0% of GDP in 2026.

Bulgaria’s imminent entry into the Eurozone is a landmark event for the region. It signals continued integration of the Balkans into the EU core. For the wider region, it highlights the benefits of a credible monetary anchor. Conversely, the floating currencies (CZK, HUF, PLN) have allowed for independent monetary policy but also have exposed these economies to higher inflation volatility and imported price pressures. A special feature of Bulgaria's transition to the euro is the fact that it has progressed in recent years (and now comes to a close) amid a turbulent political environment, manifested, among other things, by frequently changing governments. After the resignation of the current government in December, we may only hope that if early elections are held in spring 2026, the winner will be more successful than predecessors in restoring political stability in the country.

While headline inflation is falling (most notably in Czechia), sticky services inflation remains a risk across the board. In Czechia, inflationary pressures continued to ease significantly. The annual inflation rate dropped to 2.1% in November, the lowest level since April, driven by falling food and energy prices. This figure aligns closely with the Czech National Bank's 2% target, validating previous monetary tightening. We forecast Czech annual HICP inflation to oscillate in a narrow range around 2.3% for the foreseeable future. Consumer price growth in Slovakia is moderating. The HICP inflation rate was estimated at 3.8% year-on-year in November, and we expect its annual value to remain at 4.2% this year and next year. Hungarian harmonized year-on-year inflation remains stickier than in other Visegrad countries, driven by services. It has been hovering above 4% since December 2024 and we do not expect the average rate to drop below 3.5% next year. In Bulgaria, with the year-on-year inflation rate at 5.3% in October, rapidly growing prices of consumer goods and services have been accompanied by a record high increase in real estate prices. The Bulgarian National Bank introduced borrower-based measures to cool the overheating mortgage market and ensure financial stability ahead of the currency switch. As a result of a disinflation process foreseen to start next year, annual HICP inflation should slide down to 2.7% in 2026.

As for fresh data on real GDP growth, the Czech economy demonstrated solid resilience in Q3 2025, expanding by 2.8% year-on-year and 0.8% quarter-on-quarter. This growth was primarily driven by a recovery in household consumption, supported by rising real wages and a decline in the savings rate, alongside strong gross capital formation. The Czech labour market remains tight with unemployment hovering around 3.1%, one of the lowest in the EU, though slight increases are expected as the economy cools. In Hungary, economic performance remains sluggish. Q3 2025 GDP grew by only 0.6% year-on-year and stagnated on a quarterly basis. While the construction and services sectors showed some strength, industrial output and agriculture acted as significant drags on the economy. In line with expectations, Slovakia also recorded only modest growth of 0.8% year-on-year and 0.3% quarter-on-quarter in Q3 2025. Growth was supported by net exports and a recovery in investment, although household consumption remained subdued due to fiscal tightening fears. Bulgaria outperformed its regional peers with strong growth of 3.2% year-on-year and 0.7% quarter-on-quarter in Q3 2025. Domestic consumption remains the primary engine of Bulgarian growth, fuelled by real wage increases, which can, in turn, push up inflation.

The CEE outlook is still clouded by external threats, specifically adverse implications of US tariffs and the continued weakness of the German automotive sector. This is a critical risk for the Visegrád economies (CZ, HU, SK), which are deeply integrated into global automotive supply chains. In the period 2025 to 2026, we forecast the fastest average annual real GDP growth to take place in Bulgaria (2.7%), followed by Czechia (2.0%). In contrast to the frontrunners, the growth in Hungary and Slovakia should be weaker on average though accelerating; from 0.4% to 2.3% in the former economy and from 0.7% to 0.9% in the latter.

Box 1 – Some CEE labour markets are slightly cooling, but wage pressures remain high

Labour markets in many CEE countries remain tight, leading to continued labour hoarding in certain sectors and potential wage pressures. In a few countries, such as Hungary and the Czech Republic, conditions are slightly cooling, with unemployment rates slowly rising. This is partly due to the slowdown in German industry and supply shocks linked to geopolitical events. Nevertheless, wage forecasts for these countries remain elevated. Unemployment is still (well) below NAIRU estimates, and even small adverse economic shocks are unlikely to change that.

Labour shortages

For years, companies across CEE have reported labour shortages as a key factor limiting production (see figure CEE1). This trend shows little sign of reversing and has several causes. Ageing populations and persistently low birth rates have reduced the working-age cohort, while many skilled workers have emigrated to Western Europe in search of higher wages. Rapid economic growth and integration into EU supply chains have amplified labour demand, but slow wage convergence continues to fuel emigration. Education and training systems lag behind evolving industry needs, creating skills gaps in sectors such as healthcare, construction and IT. Immigration from Ukraine and the Western Balkans has helped, but limited inflows from non-European countries and low participation among women and older workers exacerbate the problem, making labour shortages a persistent challenge for competitiveness and growth.

Non-accelerating inflation rate of unemployment

The NAIRU or non-accelerating inflation rate of unemployment is the level at which inflation remains stable because wage pressures are balanced. If unemployment falls below NAIRU, firms compete for scarce labour, pushing wages up and feeding inflation. Conversely, when unemployment is above NAIRU, wage growth slows and inflationary pressures ease. NAIRU estimates have been trending downward for many years in the region (see figure CEE2) despite demographic headwinds partly offset by Ukrainian migration and return migration. This decline is driven by structural factors such as anchored inflation expectations which have reduced wage sensitivity to unemployment, integration into global supply chains which limits firms’ ability to pass higher labour costs into prices, and productivity improvements that allow companies to absorb wage increases without triggering inflation. These changes have weakened the traditional link between low unemployment and accelerating inflation enabling NAIRU to remain low even in an environment of limited labour supply.

Nevertheless, unemployment rates remain below estimated NAIRU levels, resulting in continued upward wage pressures. For Hungary, we expect wage growth of 9.5% in 2026, after likely reaching 9.1% this year. In Bulgaria, following a year of double-digit wage growth, expected at 10% in 2025, growth in 2026 is forecast at around 8.7%. In the Czech Republic, where unemployment has risen the most among the countries mentioned, wage growth is still expected at 5.5% in 2026 after reaching 7% this year.