The results place these three countries among the worst-performing economies in the European Union. Hungary’s GDP has now contracted for two consecutive quarters, officially entering a recession, while Romania saw no growth at all. Even in relatively better-performing economies such as the Czech Republic and Slovakia, quarterly GDP growth reached just 0.3%, trailing behind the eurozone average of 0.4%.

On an annual basis, year-on-year declines in GDP have been recorded in Hungary, Romania, Latvia, Estonia, as well as Austria and Germany. Among Central and Eastern European nations, Lithuania leads with a 2.2% growth rate, while Poland and Slovakia show a more modest growth of 1.7%, and the Czech Republic lags slightly at 1.3%. However, even these figures fall short of earlier forecasts, reflecting broader economic weaknesses.

Growth forecasts could face U.S. trade headwinds

The European Commission has revised its economic growth forecasts upwards for Central Europe, including Poland, projecting an acceleration from 3% GDP growth in 2023 to 3.6% in 2024. Poland’s outlook is particularly positive, with previous forecasts of 2.8% for 2023 and 3.4% for 2024 now raised to reflect stronger economic momentum. Similarly, Hungary is expected to rebound from its current challenges, with GDP growth forecast at 1.8% in 2024 and 3.1% in 2026. Other nations in the region, such as the Czech Republic, Slovakia and Romania, are also anticipated to experience steady growth in the coming years.

Inflation rates across these countries are projected to remain between 3% and 4%, except in Slovakia, where inflation is forecast to exceed 5% in 2024, and Poland, which is expected to see inflation rise to 4.7% in 2025. By contrast, the Czech Republic is likely to achieve inflation near the European Central Bank’s target of 2%. Unemployment rates are expected to remain low in Poland, falling below 3%, while Romania and Slovakia are likely to see figures above 5%. Fiscal deficits are also forecast to decline gradually, with Poland’s expected to decrease from 6% of GDP in 2023 to 5.3% by 2026. Hungary and Slovakia are predicted to achieve similar reductions, while the Czech Republic’s deficit could fall below 2% by 2026.

Germany’s struggles weigh on Central Europe

Economic analysts point to the ongoing challenges in Germany, Central Europe’s largest trading partner, as a major factor behind these disappointing results. Germany’s manufacturing-focused economy has been grappling with declining exports and subdued industrial production, which significantly affects its regional neighbors.

Adding to the slowdown, domestic consumption in Central Europe has been weaker than expected. In Poland, despite rising household incomes, retail spending has failed to keep pace. Instead, households appear to be funneling additional income into rebuilding savings, which were depleted during the inflation surge two years ago. This shift in spending patterns has dampened economic momentum, highlighting a cautious consumer sentiment.

Germany’s economic turnaround: elections and budget reforms

Germany's economic challenges extend beyond its reliance on exports. The upcoming snap parliamentary elections on February 23 could bring significant changes. Polls suggest a return of the center-right CDU/CSU coalition, potentially with the SPD, with CDU leader Friedrich Merz seen as the likely new chancellor. Merz has indicated a willingness to reconsider Germany's stringent budget deficit cap of 0.35% of GDP, a rule in place since 2009 that has been criticized for stifling public investment and contributing to economic stagnation.

Merz's remarks have drawn close attention from financial markets. While he supports loosening deficit rules to fund investments aimed at revitalizing the economy, he firmly opposes using such flexibility to increase social spending. Economists argue that this shift could provide much-needed stimulus to Germany's sluggish economy, with potential ripple effects for Central European nations like Poland, Slovakia and Hungary, which are heavily dependent on German economic activity.

Russia’s economy outpaces Central Europe but faces problems

In contrast, Russia’s economy has shown stronger growth, expanding by 3.1% year-on-year in the third quarter. While this outpaces most Central European economies, it marks a significant slowdown for Russia, which had previously enjoyed growth rates exceeding 5%. Much of Russia’s earlier expansion was driven by increased military spending and generous government payouts to boost consumer demand. However, this approach has led to economic overheating and surging inflation.

The Bank of Russia has responded with interest rate hikes, but inflationary pressures remain persistent. Prices for staple goods have risen steeply, with potatoes up 73%, butter up 30%, and bread and milk increasing by over 12% since the start of the year. While these are national averages, rural areas often experience much higher price hikes than urban centers. Looking ahead, the Bank of Russia forecasts significantly slower GDP growth of just 0.5% to 1.5% for 2024 as the economy adjusts to these challenges.

U.S. trade policy: a looming threat

Donald Trump’s second term in the White House could also throw a spanner in the works for the economies of the region. His campaign promised to impose tariffs on imported goods. Economists at ING warn that Central European economies, heavily integrated into German supply chains, would be particularly vulnerable to such a policy shift. Germany’s automotive industry, a cornerstone of the region’s exports, could face significant challenges if tariffs make German cars less competitive on the U.S. market.

A drop in German car sales would ripple through Central Europe, affecting suppliers across the region. Compounding the issue, German automakers might respond by relocating production to the U.S. to circumvent tariffs. Such a move would not only shift jobs but also disrupt established supply chains, potentially replacing Central European subcontractors with North American suppliers.