Industrial output clouded by downside risks in CEE

GDP growth in Central and Eastern European economies has varied substantially since the beginning of 2024. The third-quarter prints widened the gap, ranging from a growth of -0.7% qoq in Hungary to 0.6% qoq in Bulgaria, while the Czech Republic and Slovakia recorded modest positive gains (see figure CEE1). Looking into the final quarter of this year, our updated nowcasts point to stagnation of economic activity in Hungary and likely broadly unchanged growth momentum in the remainder of the CEE economies.

However, zooming in specifically on industrial production, which has a relatively high share of total GDP in regional economies, the picture is less positive. Compared to the 2019 level, industrial output was flat in the Czech Republic, Slovakia and Hungary without clear turnaround signals (see figure CEE2). 

This is in line with the recently published readings of industrial sentiment. In the Czech Republic, the PMI index in the manufacturing sector has remained visibly below the 50-point threshold for almost two and a half years. Considering the harmonised EC business survey, industrial confidence indicators continue to deteriorate and remain at relatively low levels from a historical point of view (see figure CEE3). 

What is particularly concerning is the assessment of order-book levels, an important forward-looking indicator. Hungary’s outlook, in particular, looks gloomy and very similarly to the situation in Germany (see figure CEE4). 

Industrial production in the CEE region is held back by weak external demand, largely linked to the underperformance of the German industrial sector. In fact, industrial production in Germany has been steadily declining already for seven years with a 18% decline from the 2017 peak. A combination of cyclical and structural impediments is likely to dampen output also for the coming quarters. In our baseline scenario, we assume a gradual improvement from the second half of 2025 on and further in 2026 when expected German fiscal policy easing together with the supply-side reforms of the new government are likely to boost overall economic activity.

At the same time, there is a substantial risk of higher US trade tariffs in early 2025. While direct trade exposure of CEE economies towards the US is relatively low, the indirect exposure via Germany’s supply chains (as well as through the confidence channel) is noticeable (see figure CEE5). The impact of Trump’s trade policies, however, remains highly uncertain as we lack details on their scope and timing. Still, CEE economies are, in general, among the most exposed to growing threats in global trade such as higher protectionism given their elevated level of openness (exports related to GDP). 

Overall, our GDP outlook assumes relatively solid growth rates across the CEE economies next year. The outlook is nonetheless dominated by large uncertainty and downside risks, specifically for the industrial sector which remains under considerable pressures from an adverse external environment.