US elections and weak German growth trigger negative revisions in GDP outlook

The Republican sweep may also be a challenge for Eastern European economies. While our baseline scenario assumes that the Trump administration does not increase tensions for the entire region by pushing the Russia-Ukraine conflict in an undesirable direction, other economic policy steps still may have a negative impact on the region. From a macroeconomic point of view, the most damaging policy for Eastern Europe will be the possible imposition of across-the-board tariffs of 10% (or possibly 20%), as Donald Trump promised during the election campaign. Although the direct exposure of regional exports to the US may not be high (see figure CEE1), the impact would clearly be stagflationary. For these reasons, we have downgraded the outlook for economic growth in 2025 and 2026, while we have also revised up the inflation outlook slightly for most countries in the region.

Let us add that the negative GDP growth revisions in the Czech Republic and Hungary also reflect a deterioration in the near-term outlook. Given the evolution of the Czech and Hungarian monthly data (see figure CEE2) and third-quarter GDP results, respectively, we expect growth to be weaker (than previously expected) in the fourth quarter and in the first half of 2025. The negative revisions can be attributed to the still very weak economic activity in Germany, which is the most important trading partner of both countries. Perhaps needless to say, in addition to structural problems and the threat of trade wars, the German economy has to deal with uncertainty ahead of early parliamentary elections called for February 2025.

Bearish spillovers from Trump trade to regional bonds and currencies

Though Central European economies may be vulnerable to the imposition of US tariffs only in 2025 (or possibly later), regional financial markets - especially bonds and currencies - have immediately felt the impact of the Republican sweep. Recall that Central European government bond yields settled at 35-55 bps higher than at the beginning of October. Moreover, regional currencies are also trading at weaker levels, with the most visible losses being in the Hungarian forint (see figure CEE3). In this context, it is logical that the post-election upward revision of our outlook for the US yield curve must also bring corrections in the outlook for Eastern European fixed-income and forex markets.

Perhaps the most visible changes in our outlook are adjustments in regional longer-term interest rates, where we expect the yield curves to remain partly influenced by global developments, or rather by developments in the US. At the same time, speaking about the Hungarian yield curve, it is worth noting the significant change in the outlook for the NBH's base rate. In the case of NBH monetary policy, we think that central bank’s fear of a weak forint will outweigh the recent worsening in the economic outlook (as the Hungarian economy faces a technical recession now). Hence, we believe the NBH will be much more cautious in cutting official interest rates deeper, should the forint remain weak. Hence, our updated view is that the NBH will stay in a wait-and-see mode for the rest of this year, while we see only a 100 bps (aggregate) cut next year (compared to 125 bps as we had penciled in before the US elections).

This brings us to revisions to the outlook for Central European currencies, which are negatively impacted by higher US interest rates. Moreover, regional currencies may also suffer from the uncertainty associated with the snap elections in Germany and concerns about whether its economy will eventually fall into a real recession. For the above reasons, we do not expect the koruna or the forint to be able to post visible gains in the 6-month horizon. The wild card in our outlook remains the zloty, where the NBP's persistently hawkish stance may support the currency more than in other countries in the region.