Poland: Fiscal challenges persist despite solid growth

The Polish government has approved its draft budget for 2027, maintaining defence, healthcare and energy transition spending as key priorities despite continued pressure on the public finances. The budget projects a general government deficit of 7.1% of GDP, unchanged from 2026 and substantially above the level envisaged in Poland's fiscal consolidation commitments under the European Union's excessive deficit procedure, which was launched in 2024. The fiscal outlook is further complicated by the ongoing confrontation between President Karol Nawrocki and Prime Minister Donald Tusk's government. A series of presidential vetoes has blocked several revenue-raising and reform measures, limiting the government's room for fiscal consolidation.

Drought conditions have weighed on Poland's agricultural sector, with cereal production estimated to decline by 4.9% year-on-year, rapeseed output by 14.4%, and field vegetable production by 4.5%. Nevertheless, food inflation has remained subdued so far. Headline inflation increased from 3.0% in July to 3.4% in August, driven primarily by higher energy and fuel prices. We expect average annual inflation to moderate from 3.3% in 2026 to 3.0% in 2027.

Against this backdrop, the National Bank of Poland has adopted a more cautious tone, reflecting renewed inflation risks stemming from higher oil and gas prices. Although Governor Adam Glapiński stressed that inflationary pressures remain largely external rather than domestically driven, he indicated that the recent improvement in the inflation outlook has partly reversed. With headline inflation close to the upper limit of the NBP's target range, the central bank now appears firmly in wait-and-see mode. We continue to expect policy rates to remain unchanged over the coming quarters (see figure CEE1), although the possibility of renewed monetary tightening can no longer be fully ruled out should energy prices remain elevated and inflation prove more persistent than anticipated.

The Polish economy grew by 1.0% quarter-on-quarter in Q2, supported by robust investment activity and a positive contribution from net exports. Looking ahead, we expect average annual GDP growth to accelerate to 3.4% in 2027, from 3.2% in 2026.

Hungary: Weak Investment, Stronger Outlook

Hungarian investment activity remained on a downward trajectory. In the second quarter of 2026, the volume of investment was 7% lower than a year earlier. There was no turnaround compared with the previous quarter; on the contrary, the contraction accelerated further (see figure CEE2). Looking ahead, a recovery in investment could be supported by the arrival of EU funds, particularly those earmarked for energy-related projects. It is also encouraging that business confidence indicators have shown some improvement in recent months. Combined with the expected inflow of EU funding, this could help stimulate new private-sector investment projects. However, any meaningful improvement in investment activity is likely to materialise only in 2027 and 2028. We forecast GDP growth of 1.8% in 2026, following 0.4% in 2025, with growth expected to accelerate further to 2.4% in 2027.

On the monetary policy front, the Magyar Nemzeti Bank lowered its base rate by another 25 basis points to 5.5% in August, continuing its easing cycle. The move was in line with market expectations and was primarily justified by the current low-inflation environment. This was reinforced by the August CPI release, which increased only modestly from 1.2% to 1.3% year-on-year, somewhat less than expected. The key question now is whether there remains scope for further rate cuts during the remainder of the year. More clarity could emerge at the central bank's next policy meeting on 22 September, when it will publish an updated inflation report. Recent market rumours suggest that rates could remain unchanged, with policymakers instead focusing on a potential reduction in the inflation target from 3.0% to 2.5%, which would be the first such adjustment. Over the longer term, the objective would be to align the target more closely with the European Central Bank's 2% inflation target, consistent with the government's ambition to eventually join the euro area. According to our current forecast, the policy rate is likely to remain at 5.5% by the end of this year. Looking ahead to 2027, monetary policy decisions will largely depend on the inflation outlook and Hungary's perceived risk profile, including developments in interest-rate spreads. Under our baseline scenario, the policy rate could decline to around 4.5% next year.

Romania: Waiting for a Political Breakthrough

Romania enters its fifth month with a caretaker government. As Parliament returned from its summer recess, President Nicușor Dan resumed consultations with parliamentary parties in an attempt to break the political deadlock. However, disagreements over the identity of the next prime minister and the composition of a governing coalition continue to hinder progress. The situation is further complicated by strong polling for the far-right Alliance for the Union of Romanians (AUR) (see figure CEE3). Due to the prolonged political crisis, the main parties ultimately failed to reach an agreement before the August deadline to complete reforms linked to the National Recovery and Resilience Plan (PNRR), putting approximately EUR 770 million in EU funding at risk.

Inflation continued its expected decline in year-on-year terms, falling from 8.1% in July to 6.0% in August, largely driven by favourable base effects. Even so, Romania remains among the highest-inflation economies in Central and Eastern Europe. Food prices, however, exerted somewhat more downward pressure than expected. Given the ongoing drought conditions and their impact on European agricultural production, this relief is likely to prove temporary. We expect average inflation to reach 8.1% in 2026 before easing further to 4.1% in 2027.

As for economic growth, we forecast a contraction of 0.2% in 2026. This outlook is consistent with the stagnation recorded in the second quarter, reflecting persistently weak domestic demand. Drought conditions are also weighing on the near-term growth outlook. Persistently low water levels on the Danube have reduced navigability, disrupted ferry services and delayed grain exports, creating logistical bottlenecks for one of the EU's largest agricultural exporters. Moreover, both units of the Cernavodă nuclear power plant remain offline due to insufficient cooling water. Looking ahead, we remain cautiously optimistic for 2027 and expect growth to recover to 2.2%.

Bulgaria: A test of Radev's political dominance

Bulgarian GDP grew by 0.7% quarter-on-quarter, broadly in line with our expectations, supporting our forecast of 2.6% growth for 2026 as a whole. For 2027, we are slightly more cautious and expect growth to moderate to 2.4%. Inflation accelerated from 4.5% in July to 5.1% year-on-year in August, driven primarily by higher transport costs linked to rising fuel prices. As elsewhere in the region, food price developments remained comparatively favourable. Looking ahead, we expect average annual inflation to reach 5.0% in 2026, before easing to 3.8% in 2027 as the impact of recent price shocks fades and underlying inflationary pressures gradually moderate. The drought is also having an inflationary impact. The drought forced the Kozloduy Nuclear Power Plant to reduce its output by approximately 120 MW, adding to upward pressure on regional electricity prices.

Bulgaria will hold presidential elections on 25 October 2026, with a potential second-round runoff on 1 November 2026. The vote has become more politically significant than usual following the resignation of former president Rumen Radev in January 2026 and his subsequent return to frontline politics as prime minister after winning the April parliamentary elections. Although Bulgaria is a parliamentary republic and executive power rests primarily with the government, the president retains important powers, including appointing caretaker governments during political crises, vetoing legislation, representing the country internationally, and serving as commander-in-chief of the armed forces. The election is widely viewed as a referendum on whether Prime Minister Rumen Radev's newly established ruling force, Progressive Bulgaria, can consolidate its dominance by also capturing the presidency.

Slovakia: Consolidation challenges persist amid weak economic momentum

The Council for Budget Responsibility delivered a stark assessment of Slovakia's fiscal position, concluding that public finances remain in the high-risk zone. The council expects public debt to increase from 61.4% of GDP in 2025 to 74.0% by 2029 unless further action is taken. Long-term government bond yields have risen in recent months, in line with trends observed elsewhere in Central and Eastern Europe. However, the spread over German Bunds has remained relatively contained, suggesting that investors continue to view Slovak public debt as broadly manageable despite the deteriorating fiscal outlook.

Q2 GDP data showed that the Slovak economy grew by 0.2% quarter-on-quarter, slightly above our forecast of 0.1%. Despite a cautiously positive start to the quarter, with manufacturing output rising by 1.0% and retail sales by 0.2% in July, the August economic sentiment indicator fell by more than five points, driven primarily by weaker confidence in the industrial sector (see figure CEE4). For Q3, we expect zero quarter-on-quarter growth, resulting in annual GDP growth of 0.7% in 2026. For 2027, we are somewhat more optimistic and forecast growth of 1.2%.

Drought has hit Slovak food production hard, with the driest April since records began in 1881 raising concerns that crop losses could exceed 40% in some areas. In response, the government has approved €30 million in compensation for farmers affected by this year's extreme drought, while separate support measures have been introduced to help offset higher fertiliser and energy costs. While the impact on consumer prices has so far remained limited, the drought is likely to generate additional inflationary pressure in the coming months. CPI inflation eased from 3.3% year-on-year in July to 3.1% in August. As elsewhere in the region, upward pressure stemmed primarily from energy and transport, while food prices continued to exert a disinflationary effect. Looking ahead, we expect HICP inflation to average 4.1% in 2026 before moderating to 3.6% in 2027.

Czech Republic: Downward Wage Surprise Eases Pressure on the CNB

The Czech economy grew by 1.9% year-on-year in the second quarter according to the revised estimate. Although annual growth slowed slightly from 2.2% at the beginning of the year, quarterly momentum strengthened to 0.4% from 0.2%, suggesting that the economy is gradually regaining traction. Growth continues to be driven primarily by domestic demand, with household consumption rising by 0.5% quarter-on-quarter and 2.7% year-on-year, supported by solid real income growth. Investment remained particularly strong, increasing by 1.5% quarter-on-quarter and 7.1% year-on-year, likely reflecting the implementation of previously postponed projects, government investment spending and continued absorption of EU funds. By contrast, foreign trade and inventories remained a modest drag on activity. We continue to expect GDP growth of 1.9% n 2026, followed by a gradual acceleration towards the economy's estimated potential growth rate of 2.0-2.5% in 2027.

Inflation rose from 1.7% year-on-year in July to 1.9% in August (+0.3% month-on-month). As expected, food prices continued to decline at an accelerating pace, falling by 4.3% year-on-year compared with 3.1% in July, primarily reflecting lower dairy and meat prices. However, the sharp decline in food prices this year is likely to create room for a stronger rebound in food inflation during 2027. More expensive motor fuels again contributed to monthly price growth. More encouragingly from the Czech National Bank's perspective, services inflation continued to ease gradually, with both annual and monthly inflation momentum slowing.

Meanwhile, wage growth slowed to 6.4% year-on-year in Q2 (see figure CEE5). However, the weaker outcome was largely driven by substantial revisions to previous data. As a result, wage dynamics now appear broadly stable at slightly above 6%. While wage growth remains stronger than the Czech National Bank would consider fully consistent with its inflation target, the composition of wage developments has become more reassuring. Wage pressures are easing in export-oriented sectors, particularly manufacturing, while public-sector pay increases have become a more important driver of overall wage growth.