Divergent paths to stability and integration in CEE

Since mid-December 2025, the region has witnessed some significant structural shifts, most notably euro area membership of Bulgaria and a shift in Czechia’s fiscal policy under the Babiš administration. While the broader EU grapples with sluggish growth, the CEE economies are navigating a dual-speed recovery where resilient domestic demand, fueled by strong real wage growth, frequently offsets a profound slump in external industrial demand, particularly from Germany.

The economic outlook for 2026 suggests that the average growth in the CEE region should slightly accelerate, yet the aggregate masks the idiosyncratic risks facing each state. As private investment remains cautious, the effective absorption of Recovery and Resilience Facility (RRF) funds has transitioned from a supplemental growth driver to a critical fiscal necessity.

Czechia: A government pivot and monetary stability

The Czech economy entered 2026 with relative stability, though structural shifts are evident. Real GDP growth for 2026 is estimated at 2.3%, driven by a rebound in private consumption as nominal wages finally outpaced inflation. However, industrial performance remains the weak link, with manufacturing output struggling to recover from a protracted slump linked to German economic stagnation.

In its final meeting of 2025 on December 18, the Czech National Bank (CNB) kept its two-week repo rate unchanged at 3.50%.The Bank Board’s decision was unanimous, reflecting a cautious stance toward persistent service-sector inflation, which stood at 4.6% in late 2025. Governor Aleš Michl emphasized that while headline inflation remains close to the 2% target, the tight labor market and rising wages in services present a lingering risk of a price-wage spiral. The Board's consensus suggests that interest rates are likely to remain at a restrictive 3.5% throughout much of 2026, especially as the new government signals plans for increased fiscal spending.

A primary focus of economic policy in recent months has been the rejection of the 2026 budget draft prepared by the outgoing government. The new Babiš administration argued that the proposed deficit of 286 bn CZK was insufficient to cover necessary infrastructure and social spending, including mortgage subsidies and public sector wage hikes. This fiscal expansion could push the deficit close to the 3% of GDP EU threshold, reversing years of gradual consolidation.

The Babiš government’s program, presented in January 2026, includes several measures designed to reinforce national sovereignty. Most notable is the proposal to enshrine the Czech koruna in the constitution as the national currency and to guarantee the right to pay in cash. This move is intended to block future euro adoption indefinitely, aligning Czechia with the nationalist economic policies seen in Hungary and Slovakia.

Hungary: The struggle for liquidity and pre-election stimulus

Hungary's economic narrative in early 2026 is one of a dual-speed economy. While private consumption is rebounding, industrial output is in a deep contraction, creating a complex environment for the Magyar Nemzeti Bank (MNB). The government, led by Viktor Orbán, wants to stimulate the economy through budgetary stimulus ahead of the April 2026 elections, as EU funds remain largely inaccessible due to rule-of-law disputes.

The industrial sector in Hungary suffered a severe downturn in late 2025. Preliminary data released in January 2026 showed that industrial production fell by 5.4% year-on-year in November, accelerating from a 2.7% drop in October. The decline was particularly pronounced in the vehicle and electrical equipment sub-sectors, which are the traditional backbones of the Hungarian export economy. Conversely, retail sales volumes continued to rise, suggesting that the household sector is benefiting from high nominal wage growth, even as the productive sector falters.

The annual average HICP inflation for 2025 was 4.4%. While headline inflation eased to 3.3% in December, underlying pressures remain mixed. Service prices rose sharply at the end of the year, raising concerns about the persistence of core inflation. The MNB kept its base interest rate at 6.50% at its December 16 meeting, reaffirming a "stability-oriented approach" to protect the forint. Governor Mihály Varga noted that while inflation may dip below 3% in early 2026, it is expected to rise again toward the end of the year as government-mandated price restrictions are rolled back. Even so, we stick to our forecast of the MNB base rate at 6% by the end of this year.

Meanwhile, the Hungarian government has embarked on a significant pre-election spending spree to shore up support. The spending measures have come at the cost of a higher budget deficit target, which has been raised to 5% for both 2025 and 2026. (In fact, we see the 2026 budget gap even higher, at 5.3%). Major credit rating agencies, including Fitch and S&P, have cautioned that this fiscal path, combined with Hungary's high debt-to-GDP ratio (close to 75%), could lead to a sovereign downgrade if external funding issues are not resolved.

Slovakia: Aggressive fiscal rebalancing and industrial resilience

Slovakia enters 2026 with a predicted GDP growth of only 0.9% this year, the lowest in the CEE region, as the economy absorbs the shock of a massive fiscal consolidation. The government's third consolidation package, effective as of January 1, 2026, represents a fundamental shift intended to bring the deficit down from a 5.5% of GDP in 2024 toward a 2% target by 2028. However, despite a significant cost the country bears for fiscal consolidation, we do not expect the deficit to drop that fast.

The Slovak economy slowed sharply in 2025, with real GDP growth estimated at just 0.7%. The economic malaise is expected to persist into 2026 as the consolidation measures dampen domestic demand. Paradoxically, while growth remains slow, average HICP inflation is projected to rise (though marginally and temporarily) to 4.2% in 2026, driven by a 4-percentage-point hike in the VAT on many food items and the phased rollback of household energy price caps.

A notable positive indicator was the report of an industrial bounce-back in late 2025. After 17 consecutive months of decline, industrial production showed signs of recovery in November and December, led primarily by the automotive sector.

Bulgaria: The euro accession frontier and price stability monitoring

On January 1, 2026, Bulgaria officially became the 21st member of the euro area, marking a historical milestone for the country's economic integration into the European core. This changeover, conducted at a fixed rate of 1.95583 lev per euro, is expected to enhance economic stability, lower transaction costs for the country's export-oriented SMEs, and eliminate remaining currency risk.

The transition followed several years of intensive preparation, including the frontloading of euro banknotes and coins to commercial banks in late 2025. As of January 1, 96% of Bulgaria’s ATMs began distributing euro notes, with the remainder coming online within two weeks. A one-month dual circulation period allows the lev to be used alongside the euro until the end of January 2026, with all change given in euro to facilitate the rapid withdrawal of the legacy currency.

Since the accession, interest rates in Bulgaria have begun to follow the ECB Governing Council's decisions directly. The Governor of the Bulgarian National Bank (BNB) now participates as a full member in setting monetary policy for the entire eurozone. Analysts expect that membership will lead to a reduction in sovereign risk premiums and a further deepening of the country's capital markets.

Bulgaria enters the eurozone with some of the highest GDP growth rates in the EU, projected at around 2.7% for 2026. This expansion is propelled by sustained private consumption and public investment under the Recovery and Resilience Plan (RRP). However, the labour market is historically tight, with the unemployment rate predicted to drop to 3.7% in 2026. This has maintained pressure on nominal wages, which increased strongly in late 2025.

A major policy concern is potential unfair price increases during the changeover. To combat this, the Consumer Protection Commission (CPC) has been monitoring the prices of 101 frequently purchased products daily and publishing the results on a dedicated website. Preliminary reports from early January 2026 suggest that price stability has been largely maintained, with the HICP inflation rate expected to stabilise at 3.4% in 2026 before dropping to 2.6% the next year.

Box 1 – Central and Eastern Europe heads to the polls

In 2026, Central and Eastern Europe faces a pivotal electoral year with material economic implications. After the Czech Republic voted in the autumn of last year, Hungary’s parliamentary election in April could test Fidesz’s long period of dominance, with potential effects on fiscal policy and investor sentiment. Bulgaria is heading towards another snap election just after its euro adoption, raising questions about stability and reform momentum. Slovakia will hold local and regional elections later this year, offering a gauge of support for consolidation measures. These outcomes will shape fiscal discipline, EU integration and the region’s growth prospects.

Hungary (parliamentary elections, 12 April 2026)

For the first time in years, Fidesz is not leading all opinion polls. The Tisza party, founded in 2020 and brought to prominence in 2024 under former Fidesz politician Péter Magyar, has emerged as the main challenger. A Fidesz victory remains possible thanks to broad support outside the cities. Polls suggest that at most three parties may clear the 5% threshold. Alongside Fidesz and Tisza, the third is most likely the far-right MH party. The Social Democratic DK party has recently slipped below 5 per cent in polling. Rating agencies will watch fiscal policy after the election and may update ratings in May and June. Tisza’s programme remains relatively vague, avoiding firm positions on sensitive issues to appeal to a broad audience, with more policy detail likely in the coming months.

Slovakia (local and regional elections, autumn 2026)

Slovakia’s parliamentary elections are not due until 2027. Following sizeable deficits, the Fico government raised taxes and cut spending (to a limited extent), which triggered protests. Part of the deficit persists and could widen without further action given weak growth. Fico’s party currently trails the opposition Progressive Slovakia in polls. The run up to, and outcome of, the regional contests could encourage a more expansionary fiscal stance in 2026 and especially in 2027, which would add some upside risk to underlying inflation.

Bulgaria (spring 2026 snap elections expected)

On 11 December 2025, the Zhelyazkov (GERB) government elected in January 2025 resigned amid nationwide protests. The 2026 budget was withdrawn and a 2025 extension budget approved, limiting monthly spending to one twelfth of the prior year. A caretaker cabinet and early elections in spring 2026 are expected. Parliamentary reshuffles are likely, although forming a stable government may again prove difficult. Regular presidential elections are to be held in autumn 2026, in which a new president will be directly elected; the incumbent cannot run again. On 19 January, President Rumen Radev announced that he would resign, which is widely interpreted as a move to enable his participation, potentially through a newly formed party, in the upcoming parliamentary elections. If his resignation is approved by the Constitutional Court, Vice President Iliana Iotova will temporarily assume presidential duties until the scheduled elections later in the year.

Czech Republic (local and senate elections, October 2026)

A new government led by Andrej Babiš comprising ANO, SPD and the Motorists succeeded Petr Fiala’s cabinet, which had consolidated public finances. We estimate a 2025 deficit of 1.7% of GDP, down from 5% in 2021, with debt at 43.6% of GDP, low by EU standards. Despite this progress, a structural deficit of about 2% remains. We assume the budget deficit is likely to now surpass CZK 300 billion as the government’s spending priorities lack equivalent revenue gains. The macro backdrop is supportive, with growth above potential, inflation near target and unemployment among the lowest in the EU, but programme commitments visibly exceed what can be covered by tackling the grey economy or by faster growth. In October 2026, one third of the Senate and municipal councils will be elected, but these contests are not expected to alter our baseline scenario. We expect consolidation required by the Budget Responsibility Act to pause, with renewed fiscal loosening. The associated budgetary expansion poses a medium‑term upside risk to inflation.