Soft investment so far does not weigh significantly on CEE labour markets

Although the most recent GDP figures have confirmed cautious acceleration of the growth momentum in the CEE region, investment activity and foreign demand remain rather weak. While quarter-on-quarter real GDP growth in the fourth quarter was 0.5% in Hungary, 0.7% in the Czech Republic and 1.3% in Poland, the gross capital formation (approximated by the sum of investments and inventories) declined in all three countries, including Poland, where investment activity has been growing relatively fast over the past two years.

Overall, the rather weak investment environment, which has been associated with the underperformance of the manufacturing sector, especially in the Czech Republic and Hungary, has not led to any dramatic cooling on the labour market. The harmonised unemployment rate stayed nearly unchanged in the Czech Republic (2.6%) and Hungary (4.2%), while it even decreased in Poland (2.7%) (see figure CEE1). 

Nevertheless looking specifically at the manufacturing employment together with the registered unemployment data, one can notice some visible cooling off, especially in the Czech Republic. The number of manufacturing jobs has been declining steadily over the last one and a half year and compared to 2019, it is approximately 2% lower in Poland, 3% lower in Hungary and 7% lower in the Czech Republic (see figure CEE2).

Other sectors have been able to offset the reduction of the manufacturing jobs so far, but this does not have to be the case forever. Looking specifically at national registered unemployment data (which may better capture certain turning points in comparison with harmonised Eurostat surveys), the registered unemployment rate has recently increased more significantly, especially in the Czech Republic to 4.3% (0.3 percentage points higher year-on-year and the highest level since February 2021). The gap between the harmonised unemployment and the national registered unemployment has increased somewhat, also in Poland.

Looking ahead, we do not forecast further major cooling on the CEE labour markets, but rather a stabilisation going hand in hand with a stabilisation of the investment environment. The current weak investment environment can be partly attributed to the nervousness stemming from the trade tensions after the election of Donald Trump. According to our recent analysis, we believe Hungary and Slovakia are especially vulnerable towards potential US tariffs on the automotive industry. This uncertainty can probably persist for some time, but should not limit the “necessary” investment activity in the region forever. Secondly, regulatory uncertainty in the automotive sector could have led to a delay of investments in the CEE region. Until recently, the production of combustion engines was mandated to be severely limited already in 2025. Now, the EU's Competitiveness Compass seems to introduce a more flexible approach. This will allow the maximum permitted emissions from new cars sold to be measured against average emissions in the years 2025-2026-2027, rather than in each year separately. This change could offer more "breathing space" for combustion-engine oriented automotive in the CEE region to manage its transition to net zero by 2035 and it can potentially support investment activity. And last but not least, the approaching deadline for the implementation of Recovery and resilience fund projects together with major fiscal plans of the German government could be supportive for the regional investments in 2026 and 2027 as well. If that is the case, we believe also the labour force in the manufacturing sector should stabilise across the CEE.