Eastern European economies are currently facing two opposing macroeconomic factors in the form of higher US-imposed tariffs and the looming EU fiscal expansion aimed at rearming member states. In both cases, we expect the impact of these external influences on the Eastern European economies we follow to be very limited. On the one hand, Eastern Europe's exposure to the US economy is relatively low, and on the other hand, the fiscal multiplier related to fiscal expansion aimed at increasing (German or domestic) military spending will be small in the case of Eastern Europe. Given that the above-mentioned effects can largely offset each other, we can stick to our conservative approach towards GDP revisions.

Turning to the key regional events in Eastern Europe that we consider important for the macroeconomic outlook, we would like to highlight the slightly hawkish stance during CNB and NBH meetings plus the recent developments in Bulgaria, which we believe have brought the country closer to meeting the convergence criteria and thus to joining the euro area in 2026.

Bulgaria’s entry to the EMU

Let’s start with Bulgaria, where the political situation has finally stabilised, leading to minor adjustments in our forecasts of the budget deficit and public debt as the country is preparing for entry into the euro area. The country has requested extraordinary Convergence Reports from the EC and the ECB. Parliament voted for a budget, aiming for a 3% deficit in 2025 with respective adjustment in the following years. As a result – in our view – Bulgaria would be able to meet fiscal convergence criteria.

However, the situation around meeting the inflation criterion looks more challenging (see figure CEE1). Following a clear convergence trend, Bulgaria's average annual inflation expectedly approached the Maastricht price criterion: the three best-performing countries of the EA plus 1.5 percentage point. Thus, in December 2024, inflation in Bulgaria was only 0.1 percentage point higher than the price stability criterion. However, in February, inflation in Bulgaria was already 0.1 percentage point lower than required by the Maastricht treaty.

However, inflation worsened, from 2.8% in December to 3.8% in January and 3.9% in February, due to the reinstatement in 2025 of the VAT rates for flour, bread and restaurants from 9% to 20% and the price increases of the Energy and Water Regulatory Commission – for household electricity by 8.4% and for gas by 8.0% in January for gas by an extra 3.0% in February. In addition, the country's alleged accession to the EMU strongly stimulates the housing market prices, due to the perception of the population that the current prices are still too low compared to the euro area countries.

Until February, these short-term effects practically did not affect the average annual inflation rate. Although, in our assessment, these are one-offs, they create some uncertainty about the punctual fulfilment of the price stability criterion in March and April (relevant for the Convergence Report). What is certain now is that a possible deviation would be small anyway. All in all, given the comprehensive nature of the convergency reports, such a small deviation itself would be hardly the stumbling block for the country's admission to the euro area.

Don’t count on defence fiscal bazooka

Moving to the Czech economy, our GDP growth forecast for 2025 remains at 2.1%, but with risks skewed to the downside due to lacklustre external and investment demand. While hard data was rather weak, confidence indicators have been stable or even better.

As far as the direct impact of the German fiscal stimulus on Czech GDP is concerned, we expect it to be very limited in the short term, with a small boost to medium-term growth forecasts. In this context, it is also worth noting that the Czech parliament recently agreed on the need to increase defence spending from the current level of around 2% of GDP to 3% of GDP by 2030. Given that higher defence spending will be import-intensive, the associated fiscal multiplier is likely to be low (estimates range from 0.3 to 0.9). Thus, we expect the additional defence spending to bring relatively little demand stimulus to the Czech economy in the coming years – in our view less than 0.1% of GDP per year.

Meanwhile, the CNB left official interest rates unchanged, maintaining a surprisingly hawkish stance due to inflation risks. The CNB expects inflation to stay in the upper part of the tolerance band (1-3%) in the first half of 2025, while CNB Governor Michl stressed the new budget injections into infrastructure and defence in Germany to be pro-inflationary. Let us add that we believe that the CNB has not yet said the last word and one standard 25 basis point rate cut will occur at the May meeting when the new staff forecast is available. A subsequent fine-tuning to 3.25% remains in play (although not our base scenario), assuming that price pressures recede faster and/or growth recovery is slower than we expect.

Regarding Hungary, the highlight was the NBH meeting. Even though the central bank left its base rate unchanged at 6.5%, the focus was on the press conference as it was the first one since Mihaly Varga became the new governor of the NBH and new staff forecasts were published as well. The latest inflation figures were above the inflation forecast of the central bank and Mihaly Varga highlighted that the inflation path this year was likely to be higher than earlier expected, so achieving the inflation target has been delayed. According to the new forecast the average inflation might be between 4.5-5.1% year-on-year in 2025 and 2.9-3.9% year-on-year in 2026, which means that the NBH may reach its inflation target only in the second half of 2026. The new NBH governor emphasised that there were broad upside risks in the inflation outlook. In this respect, it is worth noting that we had to revise up our inflation outlook for 2025 too, from 4.7% to 5.0% for 2025.

Hence, the new NBH chief stressed with a hawkish bias that a careful and patient approach to monetary policy remains necessary – not only because of upside inflation risks but also because of trade policy and geopolitical tensions (which can put unwarranted pressure on the forint). It means that the current NBH base rate could be maintained for an extended period. This communication fits into the previous months messages of the NBH, so it confirms our view that there might only be another rate cut in Q3 and any base rate change will be highly dependent on the evolution of inflation in the coming quarters and on the actions done by the ECB and especially by the Fed. We still see a good chance for one or two rate cuts during the autumn, as we believe that inflation has already peaked in February and the Fed might cut the Fed funds rate in the second half of 2025, which could widen the manoeuvring space for the NBH.

Finally, for Slovakia, the GDP growth forecast has been lowered to about 2% on average for the next three years. The downward revision stems from a deterioration in sentiment and expectations of households and firms (see figure CEE2). Another factor is the evolution of the dynamics and structure of GDP at the end of the year. Last, but not least, both households and firms signal concerns about the impact of the domestic consolidation package such as the looming transaction tax as well as uncertainty arising under high energy prices. Firms are also postponing private investment due to uncertainty and the absorption of EU funds, which has been slow. Moreover, given the high exposure of the Slovak economy to the automotive sector, the outlook might prove optimistic, if trade wars escalate further.