Economic trends in CESEE

Unexpected resilience to the war in Ukraine but economic cooling is visible on the horizon ^{1 , 2 , 3}

1 Regional overview

War as a turning point for the European economy

All these considerations have direct implications for the highly open CESEE economies that based their economic success on an ever-deeper integration into the world economy over the past three decades, guided by liberal principles of openness and international exchange. Aside from basic economic parameters, the political narrative across the EU has also changed profoundly. Political discussions in the years to come will strongly revolve around defense capabilities, decarbonizing the economy and Western unity but also around the reach of great powers on infrastructure development, investments and political players in certain parts of CESEE. Yet, CESEE countries are in many ways also driving forces behind the coordinated European response to the war in Ukraine. This will likely give them a bigger say in European decision-making in the future, shifting some political leverage from the West to the East. Finally, geopolitical and security considerations will without doubt gain more influence on economic decision-making in the years to come.

Invasion brought about several unexpected consequences

Russian economy initially proved largely resilient to sanctions

After depreciating by some 40% against the US dollar within the first week after the invasion, the Russian ruble recovered rather quickly. It was buoyed by a huge hike in the Russian key policy rate (from 9.5% to 20%), several measures targeted at the foreign exchange market (including the obligation of exporters to sell large parts of foreign exchange receipts) and a large current account surplus. Russia’s current account surplus swelled to a whopping 16.3% of GDP in the first half of 2022, as (1) energy exports from Russia remained largely unsanctioned during the review period – at least on the part of the EU –, (2) energy prices rose strongly, (3) Russia managed to increase commodity exports to some big emerging markets (i.e. China and India) and (4) Russian imports plummeted due to Western trade restrictions. As a result, the ruble was 20% more expensive than prior to the invasion in early October 2022, and capital controls could be eased (see chart 1). The ruble’s recovery and subdued domestic demand brought back consumer price growth from its peak of 17.8% in April to 14.3% in September and allowed Russia’s central bank to reduce its policy rates to 7.5% in mid-September, back to its level of November 2021.

Yet, the war and the sanctions did impair growth: In the second quarter of 2022, the Russian economy shrank by 4.1% year on year. However, the economic contraction two years earlier, i.e. at the height of the COVID-19 pandemic, was way more severe (–7.4% year on year). Especially private consumption suffered from weak sentiment, high inflation, tightening financing conditions and broader economic uncertainty. At the same time, gross fixed investment held up comparatively well and net exports presumably contributed strongly to economic dynamics. Furthermore, budgetary balances are increasingly burdened by a combination of ruble appreciation, declining import tax revenues and a sizable spending increase; and the fiscal surplus has already narrowed substantially in recent months. Sanctions will start to bite more strongly in the medium term, as more and more sectors of the Russian economy are running out of vital Western supplies and as sanctions are set to become more binding in the coming months (e.g. with respect to the planned EU embargo on Russian tanker-transported oil from late 2022 onward).

Most other CESEE countries are weathering the storm reasonably well too

Table 1: Real GDP growth  

	2019	2020	2021	Q1 21	Q2 21	Q3 21	Q4 21	Q1 22	Q2 22
	Period-on-period change in %
Slovakia	2.6	–4.4	3.0	–1.4	1.8	0.4	0.4	0.4	0.5
Slovenia	3.5	–4.3	8.2	1.6	1.9	1.4	5.2	0.7	0.8
Bulgaria	4.0	–4.4	4.2	1.7	1.0	1.0	1.2	0.9	0.8
Croatia	3.5	–8.1	10.2	5.9	1.0	1.8	1.1	2.8	2.0
Czechia	3.0	–5.5	3.5	–0.5	1.4	1.7	0.8	0.6	0.5
Hungary	4.9	–4.5	7.1	1.2	2.6	1.1	2.3	1.8	1.1
Poland	4.7	–2.2	5.9	1.4	2.0	2.6	1.8	2.5	–2.1
Romania	4.2	–3.8	6.0	1.1	3.2	–2.9	1.0	5.1	2.1
Türkiye	0.8	1.9	11.4	2.6	2.0	2.7	1.6	0.7	2.1
Russia	2.2	–2.7	4.7	1.6	2.6	–0.9	0.5	–0.3	–1.9
CESEE average1	2.5	–2.2	6.9	1.7	2.3	0.6	1.1	0.8	–0.4
Euro area	1.6	–6.1	5.2	–0.1	2.0	2.2	0.5	0.7	0.8
Source: Eurostat, national statistical offices.
1 Average weighted with GDP at PPP.

Pandemic-related legacies, such as pent-up demand and abundant deposits, mobility normalization, substantial corporate financial surpluses as well as tight labor markets, shielded CESEE countries from some of the effects of faltering external demand, of deteriorating sentiment and of energy market disruptions on output growth (see chart 2).

Labor markets performed better than in the pre-pandemic period

Labor markets are again becoming very tight, and companies are reporting rising labor shortages, especially in services but also in manufacturing and construction. Thus, problems with insufficient labor supply amid skill mismatches and labor market bottlenecks, which have plagued CESEE labor markets for many years, again came to the fore and resulted in robust nominal wage growth. Despite deteriorating economic sentiment and a dim outlook, wage growth accelerated to an average of 9.3% in the second quarter of 2022, with Bulgaria, Hungary, Poland and Romania reporting wage advances firmly in the double digits.

Fixed capital formation still strong, but inventory cycle is turning

Unclogging of supply chains and currency depreciation sustain export growth

Resilience to the fallout from the war is gradually weakening

Looking forward, high-frequency data signal that resilience to the fallouts from the war in Ukraine is gradually weakening. ⁵ Industrial production growth has been declining steadily since spring 2022. In July, it reached its lowest point so far this year at an average of 5.5% in the CESEE EU member states (3.1% in Türkiye). Almost all manufacturing sectors have been affected by the downturn recently, especially the export-oriented industries that depend on raw materials and imported components and industries with a high dependence on fossil energy carriers. This trend is expected to continue, as forward-looking surveys in CESEE fell to new lows in September 2022. In Poland, Czechia and Türkiye, for example, purchasing managers’ indices moderated to levels last seen at the height of the COVID-19 pandemic in spring 2020. The decline was driven by weaker order intake, higher input prices and deteriorating future output expectations, while supplier delivery times again embarked on an upward path. The accumulated order backlog, by contrast, has largely returned to pre-pandemic levels.

Consumer sentiment has also been declining over the past months, reflecting rising economic uncertainty amid strong inflation and the associated downward pressure on real wages and purchasing power. While overall economic sentiment as measured by the European Commission’s economic sentiment indicator declined by an average of 8.6 points between January and September 2022, consumer sentiment was lower by a full 13 points (see chart 3). Consumer sentiment in September 2022 was even weaker than at the height of the COVID-19 pandemic in March 2020. This stands in stark contrast to the rather moderate deterioration in retail and services sentiment (–3.8 and –4.6 points, respectively).

Annual retail sales growth in September 2022 was only a third of its January 2022 reading and amounted to an average of 4.3% in the CESEE EU member states and 2.8% in Türkiye. This represents the worst performance since early-2021, a time when pandemic restrictions were in full force. Retail sales growth is increasingly driven by daily necessities, while sales of durable goods and fuels are weakening. At the same time, the pent-up demand created by the pandemic now appears to have been used up.

War is disrupting international commodity markets

Commodity price developments can serve as a kind of fever curve, mirroring the heat of the conflict. After notable increases already in 2021, prices increased at an unparalleled pace across different segments between the beginning of the year and early March 2022: iron +25%, oilseeds +30%, cereals and nonferrous metals +40%, crude oil +70% and gas +240% (see chart 4). Markets, however, stabilized to some extent after it became clear that Russia lost the battle of Kiev and had to retreat from its maximalist goals for the war. Since July 2022, prices embarked on a broader downward trend. By early October, oil seeds and nonferrous metals traded at about their January prices, and iron was even some 10% cheaper. Cereals and crude oil prices remained somewhat elevated, however, and were up by 30% and 40% against January 2022.

Gas prices are especially volatile and CESEE countries increasingly renounce Russian gas

By October 9, 2022, CESEE EU member states – which historically showed a high dependence on Russian gas – managed to fill between 76% (Hungary) and 98% (Poland) of their available gas storage capacities for winter, mostly well ahead of their targets. This translates to gas storages covering between 15% (Bulgaria, Croatia, Poland) and 60% (Slovakia) of annual gas consumption (see chart 5). This is on average higher than the coverage in Western European countries. Furthermore, those lagging behind within CESEE are countries with access to the sea and can therefore be more easily supplied with liquefied natural gas (LNG). Croatia, for instance, opened a large LNG terminal in 2021, allowing even exports of gas to Hungary. CESEE countries also managed to reduce total gas demand by quite a bit: In the first nine months of the year 2022, Bulgaria, Czechia, Poland and Romania cut gas consumption by around 10% compared to 2019–21 averages; Hungary and Slovenia achieved a 5% reduction. Only Croatia and Slovenia reported an increase in gas demand in the year to date (by 8% and 4%, respectively). However, also in those two countries, gas demand has embarked on a downward trend more recently, and gas consumption was reduced by 10% in Slovenia and 28% in Croatia in September 2022 vis-à-vis the 2019–21 average.

Gas prices started to increase already long before the war

Inflation reaches new heights, but lower energy prices have recently dampened the increase

Some further push of HICP inflation might well be in the offing

Inflation expectations have moderated recently as well. Surveys among consumers on the expected price trends over the next 12 months indicated record price expectations in spring 2022. Yet, over the review period, the situation eased notably. By September 2022, survey responses converged to the values reported in summer 2021. Similar trends were observed for industry, retail and services, but price expectations in those sectors remained far above pre-war levels.

At the same time, however, there may well be further inflationary pushes ahead in the coming months. This is directly related, above all, to the fact that wholesale gas and electricity price increases are reflected in household price structures and hence in the HICP, only with a certain time lag. In Hungary, for example, recent increases in regulated prices for household energy have already added more than 2 percentage points to August’s inflation (propelling Hungarian inflation to the highest level among CESEE EU member states).

Furthermore, pressures upstream the price chain remain strong. In August 2022, producer prices for the domestic market increased by 45.7% on average in the CESEE EU member states and by 144.6% in Türkiye, with the upward trend largely unabated. Within the producer price index, the energy component showed the strongest price rises, followed by consumer goods (the component most closely linked to consumer prices). At the same time, inflation in intermediate and capital goods has moderated recently.

Monetary policy has been tightened significantly

Further rate hikes have to be weighed against the incipient economic slowdown

In contrast to Poland and Czechia, the Hungarian central bank (MNB) has recently even accelerated the pace of monetary policy tightening. The key interest rate and the interest rate for one-week deposits were combined in June 2022 and have since been raised from 5.9% to 13%. In addition to the interest rate hikes, further measures were adopted to reduce interbank liquidity (higher reserve ratios, longer-term deposit instrument, regular central bank discount bond auctions) and to increase the effectiveness of the transmission mechanism (daily tenders providing foreign currency liquidity). Those steps were initially meant to put an end to the MNB’s tightening cycle, but they did not put an end to the depreciation of the forint: The currency reached an all-time low against the euro on October 13, 2022, at 430 HUF per EUR. The following day, the MNB called an emergency meeting where it decided to hike the upper end of its interest corridor by 950 basis points to 25%, to introduce an overnight deposit tender at 18% and to launch a one-day foreign exchange swap with an interest rate of 17%. For the time being, these measures stabilized the currency, and the forint again reached 418 HUF per EUR on October 17, 2022.

Even after this appreciation, the forint remains the worst performer of the free-floating currencies in the CESEE EU member states. Year to date, it depreciated by 12% against the euro. This compares to a depreciation of 5% of the Polish złoty and a largely stable development of the Romanian leu and the Czech koruna (see chart 9). Especially the latter, however, was buoyed by exchange rate interventions by the Czech National Bank (CNB), which depleted some 6 percentage points of GDP of its foreign currency reserves. The CNB, however, has ample firepower, given the large foreign currency reserves it amassed during the “intervention floor policy” several years ago.

Turkish central bank opts for further rate cuts despite lira weakness and record inflation

Tightening financing conditions are already somewhat impairing credit growth

Rising rates – in tandem with increasing uncertainty – have already notably dampened the growth of loans to households in Hungary, Czechia and Poland. In Poland, credit to households started to decline in July 2022 (in annual comparison), which was the first recorded contraction since the start of the time series in 1997. Credit growth to corporates, however, was more resilient to tightening financing conditions due to firms’ rising liquidity needs and demand for working capital against the backdrop of rising input prices. For the private sector as a whole, this translated into broadly constant credit growth rates in Czechia, Hungary, Poland and Romania, a moderate increase in Slovakia and a stronger increase in Slovenia, Bulgaria and Croatia in the review period (see chart 10).

Surveys hint to a possible turning point in credit activity

Credit quality improved further in the first half of 2022, as nonperforming loans (NPLs) trended down across the region. Furthermore, the drop in NPLs was visible both in the retail and corporate segments, with particularly strong dynamics among the latter (possibly still reflecting some earlier pandemic-related support measures). However, following the incipient cooling of the economy and rising rates, banks are expecting a deterioration of credit quality going forward, significantly affecting both the retail and corporate segments.

Current account balances turn red for the first time in a decade

Sufficient foreign direct investment (FDI) and other investment inflows covered large parts of the current account shortfalls over the past four quarters. However, tighter financial conditions around the globe and increased risk aversion have recently been accompanied by a deterioration in market conditions in some CESEE economies. Even though the sharp contraction in portfolio inflows at the onset of the war in Ukraine has subsided, nonresidents have been net sellers of securities, especially of bonds. Accordingly, sovereign bond spreads over German bonds have risen in most countries under observation, led by Hungary with a plus of more than 300 basis points within the first nine months of 2022. In Hungary, this was partly related to home-grown problems, such as the temporary halt of EU fund disbursement to the country due to disputes with the European Commission concerning rule of law requirements. In a broader comparison, Romanian spreads widened just as much as Italian spreads did. Polish and Hungarian spreads widened even more.

2 Slovakia: economy torn between choked-off recovery and epic inflation

The unemployment rate continuously fell while employment kept on rising in the first eight months of 2022. The notorious skills mismatch and lack of (skilled) labor have been somewhat mitigated as refugees from Ukraine have filled many long-vacant jobs, particularly in the trade and services sectors. Nonetheless, the still tight labor market is exerting strong upward pressure on wages. Since a trough of 0.7% in January 2021, headline inflation has been continuously heading upward and came in at 13.4% in August 2022, levels unseen since mid-2000. Towering food and energy prices aside, annual core inflation has most recently climbed to about 12% as well. Hence, the lofty price hikes have been bloated by nearly all components, most notably food, housing, services and skyrocketing energy prices.

After the general government deficit climbed up to 6.2% of GDP in 2021 in the wake of the response measures to the pandemic, a deficit of 4.9% of GDP was approved for 2022. However, despite additional expenditures related to the energy crisis, Slovakia’s independent Council for Budget Responsibility currently expects the deficit to come in at 3.5% of GDP. The more positive outcome results particularly from higher tax revenues and social contributions as high inflation has boosted the tax base. Moreover, the lower than expected absorption of EU funds has reduced cofinancing expenditures. Consequently, public debt is projected to decrease by about 1.5 percentage points from just above 63% in 2021. In light of the sustained strong growth of credit to both firms and households, Národná banka Slovenska raised the countercyclical capital buffer rate from 1.0% to 1.5% as of August 2023.

Table 2: Main economic indicators: Slovakia  

	2019	2020	2021	Q1 21	Q2 21	Q3 21	Q4 21	Q1 22	Q2 22
	Year-on-year change of the period total in %
GDP at constant prices	2.6	–4.4	3.0	0.2	9.6	1.3	1.4	3.1	1.8
Private consumption	2.7	–1.3	1.2	–5.5	5.0	2.5	2.7	9.3	4.2
Public consumption	4.6	0.9	1.9	–1.7	8.1	–1.0	2.1	–0.4	–7.2
Gross fixed capital formation	6.7	–11.6	0.6	–9.3	5.6	–1.9	6.0	6.4	0.4
Exports of goods and services	0.8	–7.3	10.2	10.8	39.3	–3.0	1.6	–4.5	–0.3
Imports of goods and services	2.1	–8.2	11.2	6.0	39.2	3.5	3.5	–1.3	0.0
	Contribution to GDP growth in percentage points
Domestic demand	3.8	–5.2	3.8	–5.9	11.9	6.6	3.4	7.5	0.9
Net exports of goods and services	–1.2	0.9	–0.8	4.6	0.4	–5.4	–1.7	–3.4	–0.3
Exports of goods and services	0.8	–6.7	8.7	9.8	28.8	–2.4	1.2	–4.5	–0.3
Imports of goods and services	–2.0	7.6	–9.5	–5.2	–28.5	–3.0	–2.9	1.0	0.0
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	5.2	6.4	2.1	0.9	–1.3	4.4	4.6	5.5	6.3
Unit labor costs in manufacturing (nominal, per hour)	5.6	3.0	–3.1	–9.0	–17.9	9.9	7.2	9.6	12.9
Labor productivity in manufacturing (real, per hour)	1.3	1.1	10.1	10.6	23.5	1.7	7.0	1.0	–1.9
Labor costs in manufacturing (nominal, per hour)	6.8	3.6	7.4	0.7	1.3	11.9	14.7	10.8	10.8
Producer price index (PPI) in industry	1.8	–0.5	6.8	–0.8	4.3	9.3	14.5	24.4	30.6
Consumer price index (here: HICP)	2.8	2.0	2.8	1.0	2.1	3.4	4.8	8.5	11.8
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	5.8	6.8	6.9	7.2	7.0	6.8	6.6	6.4	6.2
Employment rate (%, 15–64 years)	68.4	67.5	69.5	67.9	68.8	70.3	70.8	70.6	71.4
Key interest rate per annum (%)	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	6.8	6.8	6.8	4.8	4.2	5.2	7.3	8.9	11.7
of which: loans to households	8.0	8.0	8.0	6.0	7.2	8.0	8.8	10.5	11.3
loans to nonbank corporations	4.4	4.4	4.4	2.5	–1.8	–0.2	4.3	5.5	12.6
	%
Share of foreign currency loans in total loans to the nonbank private sector	0.1	0.1	0.1	0.1	0.1	0.1	0.1	0.1	0.1
Return on assets (banking sector)	0.8	0.5	0.7	0.5	0.8	0.8	0.7	0.5	0.7
Tier 1 capital ratio (banking sector)	16.6	18.1	18.3	18.8	19.2	18.8	18.3	18.1	17.8
NPL ratio (banking sector)	2.8	2.3	1.9	2.2	2.1	1.9	1.9	1.9	1.9
	% of GDP
General government revenues	39.4	39.9	40.7	..	..	..	..	..	..
General government expenditures	40.7	45.3	46.8	..	..	..	..	..	..
General government balance	–1.3	–5.5	–6.2	..	..	..	..	..	..
Primary balance	–0.1	–4.2	–5.0	..	..	..	..	..	..
Gross public debt	48.1	59.7	63.1	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	53.9	55.2	53.4	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	43.7	47.2	48.5	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	–1.2	1.1	–0.1	4.0	–0.3	–2.5	–0.9	–6.9	–4.1
Services balance	1.3	1.2	0.8	0.7	0.7	1.5	0.4	0.5	0.1
Primary income	–2.3	–1.2	–1.7	–0.4	–1.8	–1.6	–2.9	–0.9	–1.9
Secondary income	–1.1	–0.8	–1.0	–1.9	–1.0	–0.8	–0.4	–1.3	–0.5
Current account balance	–3.4	0.4	–2.0	2.4	–2.4	–3.4	–3.8	–8.7	–6.3
Capital account balance	0.7	0.8	1.4	0.9	3.7	0.2	0.8	0.1	1.3
Foreign direct investment (net)3	–2.3	2.1	0.3	3.0	–1.0	–1.3	0.7	–1.8	–2.2
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	112.7	121.4	137.0	119.0	117.6	118.6	137.0	143.5	130.6
Gross official reserves (excluding gold)	5.3	6.6	7.1	6.8	6.5	7.2	7.1	8.9	9.7
	Months of imports of goods and services
Gross official reserves (excluding gold)	0.7	0.9	0.9	1.0	0.9	1.0	0.9	1.1	1.2
	EUR million, period total
GDP at current prices	94,048	92,079	97,123	21,819	24,078	25,637	25,589	23,843	26,486
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Foreign currency component at constant exchange rates.
2 Nonprofit institutions serving households.
3 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

3 Slovenia: new government is focusing on short-term issues, long-term reforms not yet addressed

Following parliamentary elections in April 2022, a new center-left coalition government took office at the beginning of June. The main priorities of the new government in the short term include measures to address the rise of energy and food prices and to implement an exit strategy from the coronavirus crisis. The government has already implemented various measures to mitigate the impact of global energy price increases for both households and businesses (e.g. various energy price caps, cuts in excise duties and VAT on energy, one-off payment). With respect to rising food prices, the government has launched public price monitoring but has not ruled out more rigorous measures at a later point. As for the medium term, reforms in the areas of healthcare, pensions and the labor market, hikes in wages and pensions, better access to housing, green transition and digital transformation rank high on the government’s agenda. The government announced, however, in mid-July 2022, that the start of the implementation of the long-term care reform will be postponed from early 2023 to April 2024 in order to make amendments.

To take into account the changed macroeconomic developments during the first half of 2022, accommodate the recently introduced inflation-alleviating measures and reflect the medium-term policy priorities of the new administration, the government has adopted a supplementary budget for 2022 (increasing revenues more than expenditures). It is also drafting changes to the 2023 state budget and putting together the budget for 2024. According to Slovenia’s Fiscal Council, the 2022 budget amendment increases the risk of unnecessary spending and additional revenue should have been used to reduce public debt. The Fiscal Council was also critical about the medium-term budgetary plans of the government (as set out in the coalition agreement), noting the general vagueness in terms of size and timing of measures.

During the reporting period, inflation rose from 7% in February to 11.7% in July before falling back to 11.5% in August. Energy and food prices (processed and unprocessed) rose the most dynamically, but price pressures fed through into the inflation rate of services and industrial goods. Globally rising prices for energy and other raw materials left their footprint on the current account as well. The surplus on the goods and services balance melted to 2.9% of GDP by the second quarter of 2022 (on a four-quarter moving sum basis) as the goods balance turned into a deficit on the back of soaring imports fueled by buoyant domestic demand and worsening terms of trade. Combined with a deterioration in the capital account, net lending to the rest of the world decreased to 0.1% of GDP (from 3.4% at end-2021).

Table 3: Main economic indicators: Slovenia  

	2019	2020	2021	Q1 21	Q2 21	Q3 21	Q4 21	Q1 22	Q2 22
	Year-on-year change of the period total in %
GDP at constant prices	3.5	–4.3	8.2	1.6	16.2	5.1	10.5	9.6	8.2
Private consumption	5.3	–6.9	9.5	–2.9	14.2	5.8	21.2	19.3	12.2
Public consumption	1.8	4.1	5.8	3.4	6.0	5.4	8.3	4.5	0.7
Gross fixed capital formation	5.1	–7.9	13.7	8.7	21.5	11.8	13.2	8.6	6.5
Exports of goods and services	4.5	–8.6	14.5	2.4	32.4	12.6	13.8	8.0	7.9
Imports of goods and services	4.7	–9.6	17.6	0.8	35.4	19.5	18.1	16.0	9.7
	Contribution to GDP growth in percentage points
Domestic demand	3.2	–4.3	9.0	0.2	15.4	8.3	12.3	14.9	9.0
Net exports of goods and services	0.2	0.0	–0.8	1.4	0.9	–3.2	–1.8	–5.2	–0.8
Exports of goods and services	3.8	–7.2	11.3	1.8	23.5	9.5	11.1	6.8	6.6
Imports of goods and services	–3.6	7.2	–12.0	–0.4	–22.7	–12.7	–12.9	–12.1	–7.4
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	4.0	7.6	0.9	6.6	–2.6	5.0	–4.3	–5.0	–2.5
Unit labor costs in manufacturing (nominal, per hour)	0.1	8.1	–2.7	3.3	–15.8	4.0	–0.8	–2.0	2.7
Labor productivity in manufacturing (real, per hour)	3.9	–4.4	9.6	3.1	24.0	2.9	10.2	8.5	6.7
Labor costs in manufacturing (nominal, per hour)	4.0	3.1	6.9	6.5	4.4	7.0	9.3	6.4	9.5
Producer price index (PPI) in industry	0.6	–0.3	5.5	1.1	3.6	7.5	9.9	15.6	21.7
Consumer price index (here: HICP)	1.7	–0.3	2.0	–0.6	2.1	2.3	4.5	6.3	9.0
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	4.5	5.0	4.8	5.7	4.4	4.5	4.5	4.3	4.2
Employment rate (%, 15–64 years)	71.9	70.9	71.5	68.1	71.9	73.4	72.4	72.5	73.1
Key interest rate per annum (%)	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	4.3	4.3	4.3	–1.9	0.9	2.2	5.6	8.0	10.4
of which: loans to households	5.8	5.8	5.8	0.8	2.9	3.6	5.0	6.7	7.9
loans to nonbank corporations	2.8	2.8	2.8	–4.5	–1.1	0.7	6.2	9.4	13.2
	%
Share of foreign currency loans in total loans to the nonbank private sector	1.7	1.4	1.1	1.3	1.2	1.2	1.1	1.0	1.0
Return on assets (banking sector)	1.3	1.0	1.1	0.8	1.0	1.0	1.1	0.7	0.8
Tier 1 capital ratio (banking sector)	17.8	16.7	16.9	16.5	17.0	17.0	16.9	15.7	15.7
NPL ratio (banking sector)	2.2	1.9	0.8	1.8	1.0	0.9	0.8	0.9	0.8
	% of GDP
General government revenues	43.8	43.5	43.9	..	..	..	..	..	..
General government expenditures	43.3	51.3	49.1	..	..	..	..	..	..
General government balance	0.4	–7.8	–5.2	..	..	..	..	..	..
Primary balance	2.2	–6.2	–3.9	..	..	..	..	..	..
Gross public debt	65.6	79.8	74.7	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	47.9	47.8	46.1	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	26.8	27.8	26.4	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	2.7	5.0	1.0	4.7	1.6	–0.3	–1.3	–3.4	–4.4
Services balance	6.0	4.2	4.6	4.3	3.8	5.2	4.9	4.7	6.4
Primary income	–1.7	–0.9	–1.3	–0.9	–1.0	–1.5	–1.7	–1.1	–1.5
Secondary income	–1.0	–1.0	–1.0	–1.6	–0.8	–0.7	–0.9	–1.0	–1.0
Current account balance	6.0	7.4	3.3	6.5	3.6	2.7	1.0	–0.9	–0.4
Capital account balance	–0.4	–0.5	0.1	1.2	–0.1	0.7	–1.4	–0.5	–0.7
Foreign direct investment (net)3	–1.6	0.6	–1.0	–1.6	–4.0	–2.0	3.3	–2.8	–1.9
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	91.2	101.6	96.7	106.4	101.5	102.8	96.7	96.4	93.0
Gross official reserves (excluding gold)	1.6	1.9	3.5	2.0	2.0	3.4	3.5	3.5	3.5
	Months of imports of goods and services
Gross official reserves (excluding gold)	0.3	0.3	0.5	0.4	0.3	0.5	0.5	0.5	0.5
	EUR million, period total
GDP at current prices	48,533	47,021	52,208	11,606	13,110	13,483	14,009	13,290	15,044
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Foreign currency component at constant exchange rates.
2 Nonprofit institutions serving households.
3 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

4 Bulgaria: economy surprised on the upside in the first half of 2022 despite high inflation and political uncertainty

Private consumption – which added 2.5 percentage points to growth in the first half of 2022 – was fueled by strong demand for durable goods, decreasing unemployment (down to 4.6% by August) and downward-trending deposit growth. Yet, high inflation and falling consumer confidence turned retail sales growth negative from April 2022. Government consumption contributed 1.5 percentage points to growth in the first half of 2022.

Industrial production growth peaked in the first half of 2022, at 17.8%, and manufacturing output expanded by 10.2%. Exports, however, expanded at a lower pace, driving up inventories, which contributed 5.7 percentage points to real GDP growth in the first half of the year. Moreover, mounting import prices kept net exports and the current account in negative territory. Uncertainty regarding energy supplies in the coming months, deteriorating prospects for euro area growth and tighter financing conditions have already translated into a sharp decline of investments. Gross fixed capital formation also suffered from the ongoing political crisis, which has been delaying the second disbursement of the EU’s Recovery and Resilience Facility.

HICP inflation increased from 10.5% in March to 15.0% in August 2022, with energy and food prices as main drivers of inflation. Core inflation excluding the volatile components energy, food, alcohol, and tobacco rose by 8.8%.

The stronger than expected rise in inflation is putting downward pressure on real wages, particularly for the group of income-poor households who suffer from even higher inflation due to the high weight of energy and food items in their consumption basket. Moreover, minimum wages are lagging behind inflation because they are traditionally adjusted once a year on January 1. The government’s main measures to alleviate rising energy costs for households are regulated prices and an increase of pensions by 10%. Furthermore, firms are currently fully compensated for energy bills above EUR 125/MWh. The interim finance minister warned in September 2022 that Bulgaria’s fiscal deficit might escalate to 6.8% of GDP in 2023 unless corrective measures are taken by the next government.

Bulgaria went to the polls on October 2, its fourth parliamentary election in 18 months. The historically low turnout of 30% reflects voters’ frustration with political instability. Political observers expect the post-election coalition-building process to drag on because of dissent concerning the fight against corruption and relations with Russia. The next government needs to secure gas supplies at affordable prices and speed up the greening of the economy – as laid out in the Recovery and Resilience Plan. Russia cut Bulgaria off from gas deliveries in April 2022 over its refusal to pay for gas in Russian ruble. According to official sources, Azerbaijan will provide 19% of Bulgaria’s gas demand until the end of 2022. A new natural gas pipeline (IGB) started operations on October 3 and has brought some relief. The IGB allows the transfer of natural gas from Greece to Bulgaria and further to Romania, Moldova, Ukraine and even Central Europe – which highlights its geostrategic significance beyond Bulgaria. It will be connected to the new Greek LNG terminal at Alexandropolis, which will start operations in 2023.

Table 4: Main economic indicators: Bulgaria  

	2019	2020	2021	Q1 21	Q2 21	Q3 21	Q4 21	Q1 22	Q2 22
	Year-on-year change of the period total in %
GDP at constant prices	4.0	–4.4	4.2	0.2	6.5	3.9	5.6	5.0	4.0
Private consumption	6.0	–0.4	8.0	5.4	9.3	8.3	8.7	6.4	2.1
Public consumption	2.0	8.3	4.0	6.2	1.4	6.3	2.7	1.1	13.1
Gross fixed capital formation	4.5	0.6	–11.0	–6.1	–4.8	–14.5	–15.5	–4.4	–8.1
Exports of goods and services	4.0	–12.1	9.9	–2.0	22.0	7.9	13.8	7.4	10.7
Imports of goods and services	5.2	–5.4	12.2	4.6	21.8	12.5	10.9	14.1	16.6
	Contribution to GDP growth in percentage points
Domestic demand	4.7	0.1	5.2	4.0	6.4	6.2	4.4	9.8	7.5
Net exports of goods and services	–0.7	–4.4	–1.1	–3.8	0.1	–2.3	1.3	–4.8	–3.5
Exports of goods and services	2.6	–7.7	5.5	–2.0	11.7	4.4	7.2	5.7	7.0
Imports of goods and services	–3.3	3.3	–6.5	–1.8	–11.5	–6.7	–5.9	–10.4	–10.6
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	3.1	9.4	5.4	5.9	3.0	7.9	5.0	11.3	19.6
Unit labor costs in manufacturing (nominal, per hour)	6.6	–0.1	0.9	–5.2	–4.6	7.8	6.6	2.4	–2.5
Labor productivity in manufacturing (real, per hour)	4.8	5.2	6.1	3.7	6.7	7.3	6.4	15.2	18.3
Labor costs in manufacturing (nominal, per hour)	11.9	4.9	7.2	–1.7	1.8	15.6	13.4	18.0	15.4
Producer price index (PPI) in industry	3.0	–2.0	15.5	3.6	12.1	17.4	28.9	33.9	40.2
Consumer price index (here: HICP)	2.5	1.2	2.8	0.2	2.2	2.9	6.0	8.9	13.4
EUR per 1 BGN, + = BGN appreciation	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	4.3	5.2	5.3	6.4	5.7	4.6	4.6	5.0	4.7
Employment rate (%, 15–64 years)	70.1	68.5	68.2	66.9	67.8	69.5	68.5	68.4	69.8
Key interest rate per annum (%)1	..	..	..	..	..	..	..	..	..
BGN per 1 EUR	2.0	2.0	2.0	2.0	2.0	2.0	2.0	2.0	2.0
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector2	9.4	9.4	9.4	4.6	6.3	7.5	8.6	10.6	12.5
of which: loans to households	9.5	9.5	9.5	7.1	10.4	11.8	13.4	14.1	14.7
loans to nonbank corporations	9.3	9.3	9.3	3.0	3.7	4.8	5.5	8.4	10.9
	%
Share of foreign currency loans in total loans to the nonbank private sector	33.2	31.9	29.3	31.6	30.9	30.2	29.3	29.0	28.4
Return on assets (banking sector)	1.5	0.7	1.1	1.1	1.0	1.1	1.1	1.6	1.5
Tier 1 capital ratio (banking sector)	19.5	22.1	22.0	21.9	22.3	21.8	22.0	21.4	20.7
NPL ratio (banking sector)	4.2	4.3	3.7	4.1	4.0	3.8	3.7	3.3	3.1
	% of GDP
General government revenues	38.4	38.1	39.0	..	..	..	..	..	..
General government expenditures	36.3	42.0	43.1	..	..	..	..	..	..
General government balance	2.1	–4.0	–4.1	..	..	..	..	..	..
Primary balance	2.7	–3.4	–3.6	..	..	..	..	..	..
Gross public debt	20.0	24.7	25.1	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	78.5	77.5	72.5	..	..	..	..	..	..
Debt of households and NPISHs3 (nonconsolidated)	23.0	24.4	24.9	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	–4.7	–3.2	–4.9	–3.7	–4.0	–3.6	–7.5	–5.4	–3.2
Services balance	7.9	5.0	6.6	5.4	6.7	9.1	5.1	5.4	6.3
Primary income	–4.2	–3.5	–3.3	–3.6	–3.4	–2.1	–4.0	–5.0	0.6
Secondary income	2.9	1.5	1.1	2.2	1.9	1.1	–0.4	1.7	2.6
Current account balance	1.8	–0.1	–0.4	0.3	1.3	4.5	–6.8	–3.3	6.3
Capital account balance	1.4	1.5	0.7	1.6	1.4	0.7	–0.4	–2.4	0.0
Foreign direct investment (net)4	–2.0	–4.5	–1.7	–1.5	–1.9	–1.9	–1.4	–7.3	3.3
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	61.3	64.9	61.8	63.1	62.5	63.3	61.8	58.7	55.7
Gross official reserves (excluding gold)	37.5	47.0	47.9	43.3	43.6	46.5	47.9	43.4	41.7
	Months of imports of goods and services
Gross official reserves (excluding gold)	7.4	10.4	9.2	9.4	8.9	9.3	9.2	8.0	7.5
	EUR million, period total
GDP at current prices	61,558	61,331	67,872	13,813	15,941	18,475	19,643	16,775	19,921
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Not available in a currency board regime.
2 Foreign currency component at constant exchange rates.
3 Nonprofit institutions serving households.
4 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

5 Croatia: green light for euro adoption and continued strong growth

These successes come against the backdrop of continued strong growth, despite the challenges posed by the pandemic, war and inflation. GDP expanded by 7.4% year on year in the first half of 2022, maintaining the strong momentum seen in 2021. On the output side, all sectors except arts and recreation expanded, with particularly high growth of the largest sector, wholesale and retail trade. The sector of professional, scientific and technical activities also grew strongly. Looking at the expenditure side, growth in the first half of 2022 was broad-based. The largest contributions came from private consumption growth, followed by net exports. Both exports and imports expanded strongly, partially fueled by a strong tourist season that came close to pre-pandemic records. Gross fixed capital formation also expanded strongly and contributed positively to overall growth.

Amidst accelerating CPI inflation – 12.6% year on year in August – domestic demand was supported by a policy package (EUR 634 million, about 1.1% of 2021 GDP) that entered into force on April 1. It included energy price caps, a VAT reduction on selected products and subsidies for vulnerable sectors and groups, among other measures. In September, the government revealed a second and considerably larger package (EUR 2.8 billion, about 5% of 2021 GDP), which includes one-off payments to several subgroups of the population, electricity price caps and a cap on the price of gas for households and other measures. To finance the package, the government announced that it was sending a proposal to the parliament for a special tax on excessive profits of certain companies. Despite supporting measures, declining unemployment and a strong tourist season, consumer confidence indicators have been dropping throughout 2022 and have almost reached the lows observed at the start of the pandemic.

Croatia’s public sector indebtedness remains high, which increases Croatia’s vulnerability to rising interest rates. Government borrowing costs already increased during the first half of 2022, particularly at the long end. However, government debt continued to decrease and stood at 77.3% in March 2022 and the state budget deficit for the first six months of 2022 improved relative to 2021. The Croatian government projects a general government deficit of 2.8% of GDP for 2022 – after a slight upward revision of the deficit in May.

Regarding the banking system, a noteworthy development was the fast growth of credit to nonfinancial corporations during the first half of 2022. It was most likely driven by higher financing needs due to higher input prices and an anticipation of rising borrowing costs. Banks’ return on assets increased slightly in the first half of 2022 to 1.2%. This was mostly due to lower provisions, which overcompensated a fall in (net) interest income. Banks’ tier 1 capital ratio declined a little from a high level and stood at 24.6% in June 2022. The NPL ratio continued to decrease and was reported at 3.8% in June.

Table 5: Main economic indicators: Croatia  

	2019	2020	2021	Q1 21	Q2 21	Q3 21	Q4 21	Q1 22	Q2 22
	Year-on-year change of the period total in %
GDP at constant prices	3.5	–8.1	10.2	–0.6	16.4	15.1	9.7	7.0	7.7
Private consumption	4.1	–5.3	10.0	–0.2	17.9	15.8	7.6	6.2	7.5
Public consumption	3.3	4.1	3.1	–5.8	8.5	–4.5	14.4	5.9	–2.2
Gross fixed capital formation	9.8	–6.1	7.6	5.0	18.1	7.6	0.8	7.9	5.0
Exports of goods and services	6.8	–22.7	33.3	–1.0	43.0	48.8	31.7	29.4	41.9
Imports of goods and services	6.5	–12.3	14.7	–0.7	32.2	13.9	16.4	25.0	28.6
	Contribution to GDP growth in percentage points
Domestic demand	3.4	–2.8	3.4	–0.7	15.9	–5.3	5.3	10.3	4.8
Net exports of goods and services	0.1	–5.3	6.8	0.1	0.6	20.4	4.4	–3.3	2.9
Exports of goods and services	3.4	–11.5	14.0	–0.2	15.3	26.7	12.9	10.2	18.3
Imports of goods and services	–3.3	6.3	–7.2	0.4	–14.7	–6.3	–8.5	–13.6	–15.4
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	..	..	..	..	..	..	..	..	..
Unit labor costs in manufacturing (nominal, per hour)	11.4	2.0	–0.6	–1.5	–8.1	2.9	5.2	4.7	7.4
Labor productivity in manufacturing (real, per hour)	–7.2	–2.4	4.0	4.9	9.6	2.2	–0.4	3.7	1.2
Labor costs in manufacturing (nominal, per hour)	3.6	–0.6	3.5	3.3	0.7	5.1	4.7	8.5	8.6
Producer price index (PPI) in industry	0.8	–3.2	11.7	0.9	8.0	13.1	24.6	25.1	32.5
Consumer price index (here: HICP)	0.8	0.0	2.7	0.7	2.2	3.1	4.6	6.4	10.8
EUR per 1 HRK, + = HRK appreciation	0.0	–1.6	0.1	–1.1	0.7	0.4	0.6	0.4	–0.1
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	6.7	7.6	7.6	10.0	7.9	6.3	6.3	7.2	7.4
Employment rate (%, 15–64 years)	62.1	62.0	63.4	61.4	63.6	64.6	64.1	64.2	64.9
Key interest rate per annum (%)	..	..	..	..	..	..	..	..	..
HRK per 1 EUR	7.4	7.5	7.5	7.6	7.5	7.5	7.5	7.5	7.5
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	3.4	3.4	3.4	1.3	2.4	2.8	2.4	3.9	7.2
of which: loans to households	6.7	6.7	6.7	1.9	3.7	4.5	4.1	4.0	5.1
loans to nonbank corporations	–1.3	–1.3	–1.3	0.4	0.5	0.2	–0.1	3.7	10.4
	%
Share of foreign currency loans in total loans to the nonbank private sector	51.5	52.0	52.2	52.1	51.8	51.5	52.2	52.1	52.5
Return on assets (banking sector)	1.4	0.6	1.2	0.9	1.1	1.1	1.2	1.2	1.2
Tier 1 capital ratio (banking sector)	24.0	25.0	25.4	24.6	25.0	25.2	25.4	25.2	24.6
NPL ratio (banking sector)	5.5	5.4	4.3	5.3	5.1	4.7	4.3	4.2	3.8
	% of GDP
General government revenues	46.3	47.2	46.4	..	..	..	..	..	..
General government expenditures	46.1	54.5	49.2	..	..	..	..	..	..
General government balance	0.2	–7.3	–2.9	..	..	..	..	..	..
Primary balance	2.4	–5.3	–1.3	..	..	..	..	..	..
Gross public debt	71.1	87.3	79.8	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	84.5	93.5	84.8	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	34.0	37.9	34.8	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	–18.9	–17.6	–18.6	–20.7	–19.0	–17.5	–17.6	–28.8	–26.5
Services balance	18.5	10.6	17.2	3.5	9.6	41.5	8.5	4.1	17.3
Primary income	0.1	2.5	0.9	1.8	0.1	–0.8	2.8	1.5	0.0
Secondary income	3.1	4.1	3.7	5.1	3.3	3.4	3.2	3.4	3.1
Current account balance	2.8	–0.5	3.2	–10.4	–6.0	26.6	–3.1	–19.8	–6.0
Capital account balance	1.6	2.1	2.4	2.1	2.5	2.1	2.9	1.8	2.2
Foreign direct investment (net)3	–6.2	–1.4	–4.9	–4.5	–2.8	–7.1	–4.5	–6.5	–4.9
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	72.2	79.9	77.9	87.0	84.5	80.6	77.9	77.3	76.0
Gross official reserves (excluding gold)	33.3	37.8	43.7	42.2	41.2	44.3	43.7	40.8	41.0
	Months of imports of goods and services
Gross official reserves (excluding gold)	7.8	9.3	9.8	10.3	9.7	10.3	9.8	8.5	8.1
	EUR million, period total
GDP at current prices	55,577	50,192	57,216	12,331	14,037	16,415	14,434	14,072	16,586
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Foreign currency component at constant exchange rates.
2 Nonprofit institutions serving households.
3 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

6 Czechia: domestic demand still defying post-pandemic and war-induced shocks, including inflation

Owing to lower exports of goods and a wider primary income deficit, the current account deficit deepened significantly, while net foreign direct investment turned markedly negative in the first half of 2022. Gross official reserves declined by more than 6 percentage points of GDP between end-2021 and mid-2022. This was, inter alia, the result of CNB’s interventions in favor of the koruna, which got under pressure in the wake of the weaker current account balance, the outbreak of the war and new appointments to CNB’s board.

The Czech Ministry of Finance originally projected the general government deficit at CZK 280 billion in 2022, about 4.5% of GDP. Yet, owing to rising costs from surging energy prices and the war, the Czech parliament approved an increase of the annual deficit to CZK 330 billion in October. Public debt is expected to surpass 42% of GDP in 2022, up from 30.1% in 2019, but broadly in line with 2021.

The labor market situation improved somewhat further in the first half of 2022. Despite the influx and quick integration of Ukrainian refugees into the labor market and a recent uptick in unemployment, the jobless rate remains very low both by historical and international standards. Significant shortages of (skilled) labor remain a challenge.

Apart from a marginal decline in August, inflation has been steadily rising since mid-2021 to historical records. Consumer prices increased by more than 17% in September, well above CNB’s target (2% ±1 percentage point). Inflation has been broad-based as high core inflation has ballooned further driven by soaring food, energy, fuel but also housing prices. Clearly, the war in Ukraine has exacerbated inflation pressure through various channels. In response to rising inflation, the CNB board continued its tightening cycle: In May and June, it raised the key interest rate further in two steps, by 200 basis points in total, to 7%. In the two subsequent meetings and in a new composition, the board left the rates unchanged.

Table 6: Main economic indicators: Czechia  

	2019	2020	2021	Q1 21	Q2 21	Q3 21	Q4 21	Q1 22	Q2 22
	Year-on-year change of the period total in %
GDP at constant prices	3.0	–5.5	3.5	–2.3	9.5	3.5	3.6	4.9	3.6
Private consumption	2.7	–7.2	4.1	–6.2	9.3	4.8	8.5	8.4	0.1
Public consumption	2.5	4.2	1.5	–0.3	0.4	5.4	0.8	1.4	1.5
Gross fixed capital formation	5.9	–6.0	0.7	–3.7	4.2	1.5	0.5	8.2	8.6
Exports of goods and services	1.5	–8.0	6.9	4.0	34.8	–1.7	–3.4	1.1	1.7
Imports of goods and services	1.5	–8.2	13.3	5.6	36.0	9.8	6.1	5.1	2.7
	Contribution to GDP growth in percentage points
Domestic demand	3.0	–5.1	7.1	–1.6	8.8	10.7	10.3	7.6	4.2
Net exports of goods and services	0.0	–0.4	–3.6	–0.7	0.7	–7.2	–6.7	–2.8	–0.6
Exports of goods and services	1.1	–5.9	4.8	2.9	21.5	–1.1	–2.7	1.0	1.3
Imports of goods and services	–1.1	5.6	–8.4	–3.6	–20.8	–6.1	–4.0	–3.7	–2.0
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	4.3	7.2	1.8	0.4	1.8	3.8	1.2	4.3	2.9
Unit labor costs in manufacturing (nominal, per hour)	9.1	2.9	–2.6	–4.9	–15.0	5.1	5.7	8.1	8.7
Labor productivity in manufacturing (real, per hour)	–0.8	4.5	4.7	5.7	16.1	–0.1	–0.8	–1.2	–1.2
Labor costs in manufacturing (nominal, per hour)	8.2	7.1	2.4	0.5	–1.3	4.9	4.8	6.8	7.4
Producer price index (PPI) in industry	1.7	0.6	6.2	2.3	3.3	8.1	11.0	16.4	21.3
Consumer price index (here: HICP)	2.6	3.3	3.3	2.2	2.8	3.3	5.0	10.2	15.0
EUR per 1 CZK, + = CZK appreciation	–0.1	–3.0	3.2	–1.7	5.6	3.8	5.1	5.8	4.1
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	2.1	2.6	2.9	3.4	3.1	2.8	2.3	2.5	2.4
Employment rate (%, 15–64 years)	75.1	74.4	74.4	73.6	73.7	75.0	75.3	75.0	75.2
Key interest rate per annum (%)	1.9	0.8	0.9	0.3	0.3	0.7	2.4	4.2	5.6
CZK per 1 EUR	25.7	26.5	25.6	26.1	25.6	25.5	25.4	24.6	24.6
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	5.0	5.0	5.0	2.6	4.4	6.3	9.7	10.4	9.2
of which: loans to households	6.1	6.1	6.1	6.9	8.1	9.1	9.9	10.3	8.3
loans to nonbank corporations	3.8	3.8	3.8	–2.7	–0.3	2.8	9.4	10.5	10.5
	%
Share of foreign currency loans in total loans to the nonbank private sector	14.5	14.6	14.6	14.8	13.5	14.1	14.6	15.6	17.3
Return on assets (banking sector)	1.2	0.6	0.8	0.5	0.7	0.8	0.8	1.0	1.2
Tier 1 capital ratio (banking sector)	20.8	23.6	22.8	23.4	23.9	23.2	22.8	21.7	20.9
NPL ratio (banking sector)	2.4	2.6	2.3	2.6	2.6	2.5	2.3	2.2	2.0
	% of GDP
General government revenues	41.4	41.6	40.5	..	..	..	..	..	..
General government expenditures	41.1	47.3	46.4	..	..	..	..	..	..
General government balance	0.3	–5.8	–5.9	..	..	..	..	..	..
Primary balance	1.0	–4.9	–5.2	..	..	..	..	..	..
Gross public debt	30.1	37.7	41.9	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	55.2	55.2	53.4	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	31.7	34.0	35.7	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	4.1	4.9	1.2	6.6	2.7	–2.0	–1.7	0.5	–2.4
Services balance	1.8	1.8	1.8	1.7	2.1	1.9	1.6	1.6	2.1
Primary income	–5.0	–4.2	–3.3	–1.9	–3.6	–4.7	–2.9	–1.5	–3.6
Secondary income	–0.6	–0.5	–0.5	–1.6	0.2	–0.5	–0.2	–1.4	–0.4
Current account balance	0.3	2.0	–0.9	4.8	1.3	–5.3	–3.3	–0.9	–4.3
Capital account balance	0.4	1.2	1.6	–0.1	1.6	2.4	2.1	–0.3	0.7
Foreign direct investment (net)3	–2.4	–2.6	–0.1	2.4	–2.1	–0.7	0.3	–1.0	–2.3
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	76.5	76.3	75.5	76.6	73.6	73.8	75.5	76.7	71.9
Gross official reserves (excluding gold)	59.0	62.5	64.1	64.6	62.1	62.8	64.1	62.9	57.8
	Months of imports of goods and services
Gross official reserves (excluding gold)	10.4	11.9	11.0	12.1	11.1	11.0	11.0	10.7	9.6
	EUR million, period total
GDP at current prices	225,624	215,824	238,349	53,083	59,957	61,830	63,479	62,420	68,946
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Foreign currency component at constant exchange rates.
2 Nonprofit institutions serving households.
3 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

7 Hungary: stagflation seasoned with a twin-deficit

Following heavy overspending during the first four months of the year (up until parliamentary elections in April), the government has since then undertaken various policy measures to ensure that the budget deficit targets for 2022 and 2023 (4.9% and 3.5% of GDP, respectively) are met. Initial revenue measures consisted of a temporary windfall profit tax plus hikes of some small taxes on consumption. Together with the delay of public investments and across-the-board cuts in spending by budgetary units, the announced package was worth around 3.7% of expected 2022 GDP. Facing sustained fiscal risks, the government later on introduced substantial limitations on the use of the preferential small business tax and a significant reduction in energy price subsidies for households.

Despite progress in negotiations about the unlocking of EU funds, the European Commission, in mid-September, recommended to the Council of the EU to withhold EUR 7.5 billion in cohesion funds (and all funds under the Recovery and Resilience Facility) until Hungary implements concrete measures to fight corruption by mid-December at the latest.

Inflation rose to 18.6% in August, mainly due to food and energy price increases, but price pressures have also fed through to industrial goods and services. Price caps on staple foods and fuel are still preventing the worst, and households continue to pay substantially less than the market price for electricity and gas even after the tightening of the subsidy scheme from early August. Inflation concerns, coupled with fears of an economic slowdown, a continuously widening deficit in the combined current and capital account amid persistent uncertainty around the future of EU funds, caused recurring currency weakness.

To combat these developments, Magyar Nemzeti Bank (MNB) further hiked the base rate from 4.4% in March 2022 to 13% in September. In addition, it has introduced euro liquidity-providing overnight swaps on a daily basis and has decided to reduce banking sector liquidity further (with effect from October) by raising banks’ minimum reserve rate, regularly holding discount bond auctions and introducing a long-term deposit facility for banks. Despite these measures, the forint reached new all-time lows during the first half of October. Thus, the MNB implemented a 5 percentage point hike in its operational rate in mid-October (to 18%), started to provide foreign currency swaps and announced that it would cover foreign currency liquidity needs in connection with energy imports from its reserves.

Higher interest rates have led to a noticeable slowdown in lending to households (in particular for consumption loans). Lending to nonfinancial corporations accelerated during the reporting period despite higher interest rates, worsening economic prospects and the expiry of the MNB’s preferential F4G and corporate bond purchase programs.

Table 7: Main economic indicators: Hungary  

	2019	2020	2021	Q1 21	Q2 21	Q3 21	Q4 21	Q1 22	Q2 22
	Year-on-year change of the period total in %
GDP at constant prices	4.9	–4.5	7.1	–2.2	17.8	6.2	7.4	8.2	6.5
Private consumption	5.0	–1.2	4.9	–5.0	9.9	6.9	8.0	12.0	9.6
Public consumption	5.8	–0.5	2.0	8.2	0.5	3.2	–2.9	4.8	3.1
Gross fixed capital formation	12.8	–7.1	5.2	–3.3	9.6	11.8	0.2	10.6	6.2
Exports of goods and services	5.4	–6.1	10.3	5.5	36.1	2.8	2.6	5.1	7.6
Imports of goods and services	8.2	–3.9	9.1	2.9	27.2	7.7	2.1	8.4	7.0
	Contribution to GDP growth in percentage points
Domestic demand	6.8	–2.6	6.0	–4.6	11.9	9.8	7.0	11.2	5.9
Net exports of goods and services	–2.0	–2.0	1.1	2.4	5.8	–3.6	0.5	–3.0	0.6
Exports of goods and services	4.5	–5.0	8.1	4.6	25.8	2.2	2.1	4.8	6.3
Imports of goods and services	–6.5	3.1	–7.0	–2.2	–19.9	–5.8	–1.6	–7.8	–5.7
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	3.1	6.7	2.2	7.9	–3.9	2.8	2.2	12.6	6.6
Unit labor costs in manufacturing (nominal, per hour)	6.3	8.3	0.2	–0.7	–15.8	9.3	11.3	7.1	7.6
Labor productivity in manufacturing (real, per hour)	4.3	–0.2	5.8	4.6	20.6	0.2	0.4	3.8	2.5
Labor costs in manufacturing (nominal, per hour)	10.9	7.4	6.8	3.9	1.5	9.5	11.7	11.2	10.3
Producer price index (PPI) in industry	2.2	4.3	13.5	8.0	10.9	14.4	20.7	23.4	32.0
Consumer price index (here: HICP)	3.4	3.4	5.2	3.3	5.3	5.0	7.1	8.3	11.0
EUR per 1 HUF, + = HUF appreciation	–2.0	–7.4	–2.0	–6.1	–0.8	–0.1	–1.0	–0.9	–7.9
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	3.5	4.3	4.1	4.5	4.1	3.9	3.7	3.8	3.2
Employment rate (%, 15–64 years)	70.1	69.7	73.1	71.8	72.8	73.6	74.1	74.0	74.3
Key interest rate per annum (%)	0.9	0.8	1.1	0.6	0.6	1.3	2.0	3.1	5.3
HUF per 1 EUR	325.2	351.2	358.5	361.0	354.7	353.9	364.3	364.1	385.3
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	12.5	12.5	12.5	8.7	10.5	11.6	12.1	9.3	10.2
of which: loans to households	15.5	15.5	15.5	13.4	15.5	16.0	14.9	11.0	8.9
loans to nonbank corporations	10.4	10.4	10.4	5.4	6.8	8.3	9.9	7.9	11.3
	%
Share of foreign currency loans in total loans to the nonbank private sector	23.8	22.3	20.3	21.9	20.0	20.3	20.3	21.3	22.3
Return on assets (banking sector)	1.2	0.4	0.9	1.1	1.3	1.2	0.9	1.1	0.6
Tier 1 capital ratio (banking sector)	16.4	17.4	18.1	17.3	17.2	16.6	18.1	17.3	16.7
NPL ratio (banking sector)	2.6	2.4	1.6	2.3	2.2	1.8	1.6	1.6	1.9
	% of GDP
General government revenues	43.9	43.4	41.1	..	..	..	..	..	..
General government expenditures	46.0	51.2	47.9	..	..	..	..	..	..
General government balance	–2.1	–7.8	–6.8	..	..	..	..	..	..
Primary balance	0.1	–5.5	–4.5	..	..	..	..	..	..
Gross public debt	65.5	79.6	76.8	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	62.8	68.7	76.0	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	18.2	20.1	20.4	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	–2.5	–1.0	–3.0	3.3	–1.7	–6.6	–5.3	–7.0	–6.7
Services balance	4.8	2.9	3.3	2.2	3.6	4.2	2.9	3.2	4.5
Primary income	–2.5	–2.5	–3.4	–2.8	–3.2	–3.7	–3.6	–1.9	–3.1
Secondary income	–0.6	–0.5	–1.1	–1.3	–1.7	–0.7	–0.8	–0.8	–0.9
Current account balance	–0.8	–1.1	–4.2	1.3	–3.0	–6.8	–6.8	–6.5	–6.2
Capital account balance	1.8	2.0	2.6	2.0	1.7	1.9	4.4	4.7	2.2
Foreign direct investment (net)3	–0.8	–1.7	–1.8	1.4	–0.5	–2.4	–4.9	3.9	–1.2
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	73.1	81.0	84.6	87.1	84.9	87.5	84.6	86.2	84.3
Gross official reserves (excluding gold)	18.4	23.3	21.8	20.2	18.2	22.7	21.8	19.8	19.7
	Months of imports of goods and services
Gross official reserves (excluding gold)	2.8	3.6	3.2	3.1	2.8	3.4	3.2	2.9	2.7
	EUR million, period total
GDP at current prices	146,395	137,683	153,756	31,846	38,778	39,746	43,387	37,914	42,502
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Foreign currency component at constant exchange rates.
2 Nonprofit institutions serving households.
3 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

8 Poland: strong growth coupled with policy support against jumping inflation

In contrast, gross fixed capital formation contracted sharply quarter on quarter in the second quarter after expanding at a double-digit rate in the first quarter. Still, annual growth even accelerated in the second quarter, thanks to a favorable base effect. While industrial confidence was moderately weaker in the second quarter than at the end of 2021, factors supporting investment remained strong, e.g. sales profitability, the share of profitable enterprises, corporate liquidity and capacity utilization. Within total fixed investment, residential investment was only marginally higher than a year earlier in the second quarter.

In manufacturing, nominal unit labor costs were slightly higher in the second quarter than a year earlier but the increase was less pronounced than in the euro area, while the złoty’s value in euro was weaker by 2.5%. From February to August, the złoty’s value in euro depreciated by 3.5%. According to the HICP (and national CPI) definition, inflation rose from 8.1% (8.5%) in February to 14.8% (16.1%) in August. In parallel, core inflation rose from 6.9% (6.7%) to 11.5% (9.9%) in August. Within core HICP, nonenergy industrial goods inflation amounted to 8.7% in August. The Monetary Policy Council (MPC), pursuing a CPI inflation target of 2.5% ± 1 percentage point, hiked its main policy rate from 2.75% to 6.75% in monthly steps from February to September. In September 2022, the MPC stated that its recent hike served to reduce the persisting risk of inflation running above target in the medium term and to curb inflation expectations. The MPC stated that it would take all necessary actions to ensure stability, including above all to reduce the risk of inflation remaining elevated.

In May, the European Commission forecast that Poland’s general government deficit would rise from 1.9% of GDP in 2021 to 4.0% in 2022 and 4.4% in 2023, while general government debt would decline from 53.8% of GDP at end-2021 to 50% at end-2023. The deficit increase stems from the decline of the revenue-to-GDP ratio as a result of cuts in indirect tax rates under the “anti-inflationary shield” and direct tax rates, particularly the basic personal income tax rate, under the Polish Deal.

Table 8: Main economic indicators: Poland  

	2019	2020	2021	Q1 21	Q2 21	Q3 21	Q4 21	Q1 22	Q2 22
	Year-on-year change of the period total in %
GDP at constant prices	4.7	–2.2	5.9	–1.1	10.9	6.2	7.9	9.2	4.7
Private consumption	3.9	–2.8	6.0	–0.4	13.0	4.7	7.7	6.3	6.6
Public consumption	6.5	4.9	3.4	1.9	3.9	3.6	4.0	1.1	1.3
Gross fixed capital formation	6.1	–4.9	3.8	–1.2	2.8	6.3	5.4	5.2	7.1
Exports of goods and services	5.2	0.0	11.8	6.8	29.4	7.4	6.9	2.4	5.0
Imports of goods and services	3.0	–1.1	15.9	9.2	33.8	12.0	12.0	8.3	8.3
	Contribution to GDP growth in percentage points
Domestic demand	3.5	–2.7	7.1	–0.5	10.7	8.0	10.0	12.6	6.3
Net exports of goods and services	1.3	0.6	–1.2	–0.7	0.1	–1.8	–2.0	–3.4	–1.6
Exports of goods and services	2.9	0.0	6.6	3.9	15.5	4.1	3.9	1.9	3.4
Imports of goods and services	–1.6	0.6	–7.8	–4.5	–15.4	–5.9	–5.9	–5.3	–5.0
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	2.4	8.0	0.6	5.6	–2.5	–0.8	0.4	2.7	10.7
Unit labor costs in manufacturing (nominal, per hour)	4.3	4.8	–4.6	–4.1	–12.9	0.6	–0.8	–1.2	1.6
Labor productivity in manufacturing (real, per hour)	2.4	1.8	12.9	10.2	22.9	9.2	10.3	12.3	10.3
Labor costs in manufacturing (nominal, per hour)	6.7	6.2	8.0	5.7	7.1	9.8	9.4	10.9	12.1
Producer price index (PPI) in industry	1.4	–0.5	8.1	2.6	6.6	9.6	13.6	18.5	25.3
Consumer price index (here: HICP)	2.1	3.7	5.2	3.9	4.6	5.1	7.3	9.0	12.8
EUR per 1 PLN, + = PLN appreciation	–0.9	–3.3	–2.6	–4.9	–0.6	–2.8	–2.4	–1.6	–2.5
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	3.4	3.2	3.4	4.1	3.6	3.1	2.9	3.2	2.7
Employment rate (%, 15–64 years)	68.2	68.7	70.3	69.2	70.0	71.0	71.0	71.0	71.4
Key interest rate per annum (%)	1.5	0.5	0.3	0.1	0.1	0.1	1.1	2.7	5.1
PLN per 1 EUR	4.3	4.4	4.6	4.5	4.5	4.6	4.6	4.6	4.6
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	5.0	5.0	5.0	–2.2	0.3	2.6	5.0	6.1	6.1
of which: loans to households	5.6	5.6	5.6	1.3	3.0	4.0	4.2	3.1	0.4
loans to nonbank corporations	4.1	4.1	4.1	–8.0	–4.4	–0.1	6.5	11.7	16.9
	%
Share of foreign currency loans in total loans to the nonbank private sector	19.2	19.6	17.5	19.3	18.1	18.0	17.5	17.6	17.7
Return on assets (banking sector)	0.7	0.0	0.2	0.4	0.5	0.5	0.2	1.0	0.9
Tier 1 capital ratio (banking sector)	17.0	18.5	17.3	18.6	18.6	18.0	17.3	16.6	16.9
NPL ratio (banking sector)	6.6	7.0	5.8	6.7	6.5	6.3	5.8	5.7	5.6
	% of GDP
General government revenues	41.0	41.3	42.3	..	..	..	..	..	..
General government expenditures	41.8	48.2	44.2	..	..	..	..	..	..
General government balance	–0.7	–6.9	–1.9	..	..	..	..	..	..
Primary balance	0.6	–5.6	–0.8	..	..	..	..	..	..
Gross public debt	45.6	57.1	53.8	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	44.7	44.7	43.5	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	34.7	33.7	32.1	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	–0.8	1.3	–1.3	0.9	0.7	–2.8	–3.5	–4.7	–3.3
Services balance	4.5	4.4	4.7	4.9	5.1	4.6	4.1	4.8	6.1
Primary income	–4.2	–3.8	–4.7	–5.2	–5.3	–5.6	–3.1	–4.8	–5.6
Secondary income	0.2	0.5	–0.1	–0.4	0.2	0.2	–0.3	–0.3	–0.3
Current account balance	–0.2	2.4	–1.4	0.2	0.7	–3.5	–2.7	–5.0	–3.1
Capital account balance	1.5	1.4	0.7	–0.1	1.0	1.0	0.7	–0.5	0.5
Foreign direct investment (net)3	–2.0	–2.4	–4.1	–6.1	–1.7	–5.9	–2.8	–7.9	–3.2
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	59.2	58.1	55.8	58.8	56.8	57.1	55.8	55.1	54.8
Gross official reserves (excluding gold)	19.6	21.7	23.5	23.6	22.6	23.9	23.5	21.8	22.1
	Months of imports of goods and services
Gross official reserves (excluding gold)	4.8	5.5	5.2	5.9	5.3	5.5	5.2	4.6	4.5
	EUR million, period total
GDP at current prices	533,674	526,350	574,131	129,958	137,110	143,563	163,500	148,605	154,836
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Foreign currency component at constant exchange rates.
2 Nonprofit institutions serving households.
3 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

9 Romania: rising inflation, weak fiscal position and increasing current account deficit

In the first half of 2022, GDP growth was mainly driven by private consumption and changes in inventories (particularly in the second quarter). Private consumption benefited from the lifting of COVID-19 restrictions and the release of pent-up demand. Due to rising inflation, real wage growth turned negative in April 2022 with nominal wage growth remaining above 10% until mid-2022. The unemployment rate declined from 5.9% in the fourth quarter of 2021 to 5.3% in the second quarter of 2022. After contracting in the second half of 2021, gross fixed capital formation increased again and showed mildly positive year-on-year growth rates. An increase in construction output as well as investment in equipment supported this development. Growth of domestic credit to nonfinancial corporations accelerated noticeably in the first half of 2022. As export growth declined in the second quarter, while import growth picked up, the negative contribution of net exports widened markedly. Industrial production shrank by 2.6% in the second quarter reflecting weakening external demand and supply chain bottlenecks.

Consumer price inflation climbed to 15.3% in August 2022 from 8.2% at end-2021, moving further away from the upper bound of the inflation target variation band of 2.5% ± 1 percentage point as defined by the National Bank of Romania (NBR). Inflationary trends were fueled by electricity, gas, fuels and food items amid supply-side shocks.

The revision of the price capping schemes for electricity and gas prices to a more restrictive form in April led to an increase in the inflation rate in the subsequent months. Nevertheless, the capping scheme continued to have an important disinflationary effect. Without this scheme, inflation would have run about 5 percentage points higher in recent months. In addition to this price capping scheme, social support measures to vulnerable households were implemented (such as one-off payments to recipients of small pensions, vouchers to low-income earners). Moreover, public sector wages were hiked somewhat in August. Romania’s fiscal council expects the budget deficit (in cash terms) to reach 7% of GDP in 2022 compared to the 5.8% target stipulated in the budget revision enacted in August. In response to rising inflation, the NBR raised its key policy rate in four steps from 3% in April to 6.25% in early October. According to the current NBR inflation forecast, inflation will decline to 13.9% in the fourth quarter of 2022 and further to 7.5% in the fourth quarter of 2023.

The current account deficit widened markedly in the first half of 2022 and reached 9.5% of GDP, compared to 7% of GDP recorded in the first half of 2021. The widening was caused by a rising trade in goods deficit (due to volume and price effects) and a growing deficit in the primary income balance related to outflows of reinvested earnings and distributed dividends. The net borrowing position from current and capital accounts worsened too (reaching 8% of GDP), as the capital account surplus only increased to a small extent. Net FDI inflows covered less than half of the net borrowing position in the first half of 2022. Meanwhile, unit labor costs in the manufacturing sector rose considerably, while the Romanian leu remained nearly stable vis-à-vis the euro.

Table 9: Main economic indicators: Romania  

	2019	2020	2021	Q1 21	Q2 21	Q3 21	Q4 21	Q1 22	Q2 22
	Year-on-year change of the period total in %
GDP at constant prices	4.2	–3.8	6.0	–0.1	15.4	6.9	2.4	6.4	5.3
Private consumption	3.8	–4.8	7.6	0.9	11.7	9.0	9.4	7.2	8.0
Public consumption	8.0	1.5	5.3	–4.3	2.1	–2.4	12.5	5.4	–0.4
Gross fixed capital formation	12.7	4.4	2.5	11.3	12.9	–1.3	–6.0	1.7	2.5
Exports of goods and services	4.6	–9.3	12.8	1.0	41.7	7.2	7.8	8.6	4.9
Imports of goods and services	8.8	–5.9	15.0	3.1	42.0	11.2	8.2	10.8	19.1
	Contribution to GDP growth in percentage points
Domestic demand	5.8	–2.3	7.3	0.3	16.9	6.0	3.7	7.9	4.2
Net exports of goods and services	–1.6	–1.5	–1.4	–0.7	–2.9	–2.0	–0.5	–1.9	–8.1
Exports of goods and services	2.2	–3.8	4.7	0.2	14.7	2.5	2.7	4.7	2.3
Imports of goods and services	–3.9	2.3	–6.1	–1.0	–17.6	–4.5	–3.3	–6.6	–10.4
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	6.5	4.5	1.3	4.7	–3.4	–0.1	4.2	5.0	5.3
Unit labor costs in manufacturing (nominal, per hour)	13.3	7.6	4.2	0.5	–4.9	9.3	12.6	11.8	15.1
Labor productivity in manufacturing (real, per hour)	–0.8	0.4	3.1	5.4	11.6	0.3	–4.0	–0.1	–2.5
Labor costs in manufacturing (nominal, per hour)	12.5	8.0	7.5	5.9	6.1	9.6	8.1	11.7	12.2
Producer price index (PPI) in industry	4.0	0.0	14.9	2.3	10.1	16.4	30.8	46.2	47.3
Consumer price index (here: HICP)	3.9	2.3	4.1	2.3	3.1	4.3	6.6	8.2	12.4
EUR per 1 RON, + = RON appreciation	–1.9	–1.9	–1.7	–1.7	–1.7	–1.8	–1.6	–1.4	–0.4
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	4.0	5.2	5.6	6.1	5.1	5.3	5.9	6.0	5.3
Employment rate (%, 15–64 years)	65.8	65.6	61.9	60.8	62.4	62.3	62.1	62.4	63.5
Key interest rate per annum (%)	2.5	1.9	1.4	1.3	1.3	1.3	1.6	2.3	3.4
RON per 1 EUR	4.7	4.8	4.9	4.9	4.9	4.9	4.9	4.9	4.9
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	5.5	5.5	5.5	6.2	10.6	12.7	14.2	15.2	17.1
of which: loans to households	6.7	6.7	6.7	4.6	7.5	8.8	9.3	9.3	8.6
loans to nonbank corporations	4.2	4.2	4.2	7.9	14.3	17.3	19.8	21.7	26.4
	%
Share of foreign currency loans in total loans to the nonbank private sector	32.4	30.5	27.6	29.9	28.9	28.4	27.6	27.3	28.0
Return on assets (banking sector)	1.4	1.0	1.4	1.3	1.4	1.5	1.4	1.2	1.5
Tier 1 capital ratio (banking sector)	20.1	23.2	20.9	22.7	22.1	21.4	20.9	19.0	18.9
NPL ratio (banking sector)	4.1	3.8	3.4	3.9	3.8	3.7	3.4	3.3	3.0
	% of GDP
General government revenues	31.9	32.7	32.8	..	..	..	..	..	..
General government expenditures	36.2	42.0	39.9	..	..	..	..	..	..
General government balance	–4.3	–9.3	–7.1	..	..	..	..	..	..
Primary balance	–3.2	–7.9	–5.7	..	..	..	..	..	..
Gross public debt	35.3	47.2	48.8	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	32.2	33.3	33.3	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	15.3	16.1	15.8	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	–8.0	–8.7	–9.6	–10.9	–9.3	–9.5	–9.3	–12.1	–11.4
Services balance	3.9	4.3	4.0	4.6	3.8	3.6	4.1	4.3	4.8
Primary income	–1.4	–1.5	–1.7	0.3	–3.1	–2.8	–1.1	–1.9	–3.8
Secondary income	0.7	0.9	0.4	0.1	0.6	0.8	0.2	0.3	0.7
Current account balance	–4.9	–5.0	–7.0	–5.9	–8.0	–7.8	–6.2	–9.4	–9.6
Capital account balance	1.3	1.9	2.2	1.1	1.4	1.5	4.2	0.9	2.1
Foreign direct investment (net)3	–2.2	–1.3	–3.0	–4.5	–2.7	–4.2	–1.3	–5.2	–2.4
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	49.1	58.0	56.1	56.3	56.4	57.0	56.1	54.8	52.7
Gross official reserves (excluding gold)	14.7	17.1	16.9	16.3	16.1	17.6	16.9	16.1	16.1
	Months of imports of goods and services
Gross official reserves (excluding gold)	4.0	4.9	4.3	4.7	4.4	4.7	4.3	4.1	4.0
	EUR million, period total
GDP at current prices	223,085	218,706	239,991	46,743	55,871	65,172	72,205	55,359	67,785
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Foreign currency component at constant exchange rates.
2 Nonprofit institutions serving households.
3 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

10 Türkiye: widening external deficit despite restrictive measures to substitute for interest rate hikes

Inflation accelerated further from February to August, with both the headline rate and the core rate rising markedly to 80% and 75%, respectively. However, the Turkish central bank (TCMB) delivered two policy rate cuts in August and September (to 12%), implying a large negative real key rate. On average, in the first half of 2022, the Turkish lira’s value measured in euro was 5% lower than a year earlier (in CPI-deflated terms), as double-digit real depreciation in the fourth quarter of 2021 was followed by double-digit real appreciation in the first half of 2022.

Lira stabilization resulted from measures aimed to substitute for interest rate hikes, including the offer to convert FX or gold deposits to central bank-guaranteed exchange rate-linked lira deposits, higher reserve requirements for banks’ FX deposits where only a small share of FX deposits was converted, and an increase of the share of FX revenues that exporters were required to sell to the central bank to 40% in April (from 25% since January 1, 2022). These measures were aimed at increasing lira demand and reducing banks’ negative on-balance sheet net FX position so that banks have less need for entering into swaps with the central bank by selling FX initially. As a result, households’ FX deposits declined by 20% from end-2021 to mid-2022 and banks’ negative on-balance net FX position was lower by 30%. Corporations succeeded in reducing their negative on-balance net FX position inter alia by moderately increasing their FX deposits with domestic banks. However, in mid-2022, the Turkish supervisory authority announced that any corporation will only have access to new lira loans if it has FX holdings (including gold) below a low ceiling. Moreover, to contain lira loan growth, the central bank introduced and gradually raised reserve requirement ratios on selected commercial lira loans and added such ratios for banks with high loan growth or relatively high loan interest rates.

Table 10: Main economic indicators: Türkiye  

	2019	2020	2021	Q1 21	Q2 21	Q3 21	Q4 21	Q1 22	Q2 22
	Year-on-year change of the period total in %
GDP at constant prices	0.8	1.9	11.4	7.5	22.2	7.9	9.6	7.5	7.6
Private consumption	1.5	3.3	15.3	7.7	24.2	9.4	20.4	21.3	22.4
Public consumption	3.8	2.5	2.6	–1.8	3.1	8.0	1.4	3.1	2.3
Gross fixed capital formation	–12.5	7.4	7.4	12.1	21.1	–1.3	2.1	4.2	4.7
Exports of goods and services	4.2	–14.4	24.9	3.2	60.0	25.9	21.6	14.8	16.4
Imports of goods and services	–5.0	6.7	2.4	–0.8	20.5	–8.7	3.1	2.2	5.8
	Contribution to GDP growth in percentage points
Domestic demand	–2.1	4.1	11.4	7.3	20.5	6.3	12.7	14.3	15.1
Net exports of goods and services	2.3	–5.4	5.0	1.0	6.8	7.4	4.4	3.1	2.8
Exports of goods and services	1.1	–3.8	5.6	0.8	11.4	5.3	5.2	3.6	4.1
Imports of goods and services	1.3	–1.6	–0.6	0.2	–4.6	2.1	–0.8	–0.5	–1.3
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	..	..	..	..	..	..	..	..	..
Unit labor costs in manufacturing (nominal, per hour)	21.9	10.0	19.1	9.0	13.1	29.2	26.7	47.8	53.3
Labor productivity in manufacturing (real, per hour)	1.7	8.3	–0.2	4.5	–6.8	–1.1	3.3	2.5	3.1
Labor costs in manufacturing (nominal, per hour)	23.8	18.9	19.1	13.9	5.4	27.8	30.9	51.6	58.0
Producer price index (PPI) in industry	17.6	12.2	43.9	28.2	38.8	44.8	60.6	104.7	131.0
Consumer price index (here: HICP)	15.2	12.3	19.6	15.6	17.1	19.2	25.9	54.8	74.1
EUR per 1 TRY, + = TRY appreciation	–10.4	–21.0	–23.2	–24.3	–25.2	–15.9	–26.4	–43.1	–39.8
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	14.0	13.4	12.2	13.8	12.0	11.9	11.2	11.8	10.4
Employment rate (%, 15–64 years)	50.3	47.5	50.3	48.0	49.7	51.6	51.7	50.8	53.0
Key interest rate per annum (%)	20.6	10.2	17.8	17.3	19.0	18.9	15.9	14.0	14.0
TRY per 1 EUR	6.4	8.0	10.5	8.9	10.1	10.1	12.8	15.7	16.8
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	11.0	36.3	36.1	31.9	20.7	14.5	36.1	45.1	60.4
of which: loans to households	15.9	40.1	20.4	35.4	24.9	15.9	20.4	22.7	37.5
loans to nonbank corporations	9.5	35.0	41.9	31.3	20.1	14.7	41.9	52.4	67.4
	%
Share of foreign currency loans in total loans to the nonbank private sector	35.2	30.9	38.1	32.4	32.7	32.2	38.1	37.0	33.9
Return on assets (banking sector)	1.1	1.0	1.3	1.0	1.0	1.1	1.3	2.6	3.3
Tier 1 capital ratio (banking sector)	13.9	14.1	13.2	13.4	13.3	12.9	13.2	15.4	13.6
NPL ratio (banking sector)	5.7	4.4	3.4	4.1	3.9	3.8	3.4	3.0	2.7
	% of GDP
General government revenues	31.0	31.2	30.7	..	..	..	..	..	..
General government expenditures	35.5	35.9	33.4	..	..	..	..	..	..
General government balance	–4.5	–4.7	–2.7	..	..	..	..	..	..
Primary balance	–1.9	–1.6	0.4	..	..	..	..	..	..
Gross public debt	32.7	39.7	42.0	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	..	..	..	..	..	..	..	..	..
Debt of households and NPISHs1 (nonconsolidated)	..	..	..	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	–2.2	–5.3	–3.6	–3.7	–3.4	–3.2	–4.2	–11.7	–9.1
Services balance	4.5	1.6	3.3	1.2	1.9	5.4	4.0	2.7	4.4
Primary income	–1.7	–1.3	–1.5	–1.6	–1.9	–1.2	–1.3	–1.4	–1.3
Secondary income	0.1	0.0	0.1	0.1	0.3	0.1	0.1	–0.2	–0.1
Current account balance	0.7	–5.0	–1.7	–4.0	–3.1	1.2	–1.4	–10.7	–6.2
Capital account balance	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Foreign direct investment (net)2	–0.9	–0.6	–0.9	–0.7	–0.7	–1.5	–0.7	–0.3	–1.0
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	52.4	51.3	51.4	53.8	53.0	53.1	51.4	52.2	51.4
Gross official reserves (excluding gold)	10.3	6.5	9.3	6.5	7.5	10.7	9.3	8.3	7.5
	Months of imports of goods and services
Gross official reserves (excluding gold)	4.1	2.4	3.2	2.4	2.7	3.8	3.2	2.6	2.2
	EUR million, period total
GDP at current prices	677,821	625,392	686,913	156,572	157,253	191,802	181,287	159,999	202,875
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Nonprofit institutions serving households.
2 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

11 Russia: continued war in Ukraine and slide into sanctions-triggered recession

While economic activity in the first quarter was still supported by private consumption and fixed investment, the upsurge of inflation in March and April soon dampened demand. The second quarter brought a slump in private consumption, while fixed investment slowed down, but still expanded. While real export and import figures have so far not been published for 2022, Russian imports have doubtlessly plummeted due to Western trade restrictions, while exports have held up better than expected due to some successful redirecting of oil deliveries to big emerging markets (e.g. China, India, Türkiye). The result was a spike in net exports in the first eight months of 2022. After recouping its initial sharp depreciation against the US dollar in April, the ruble, as of late September, was even 20% more expensive than prior to the invasion, largely due to a combination of high energy prices, the large current account surplus and the authorities’ remaining capital controls (even after some easing). The jobless rate reached a post-Soviet low of 3.9% in July and August. The sharp key rate hike in late February as well as the ruble’s recovery and subdued demand brought back consumer price growth from its peak of 17.8% in April to 13.7% in September. Declining inflation and inflation expectations allowed the monetary authority to continue to cut its key rate from 17% in early April to 7.5% in mid-September.

Buoyed by further rising oil prices (average Urals price in January to August 2022: USD 82.1 per barrel, i.e. 26% more than in the same period of the previous year), Russia still achieved a fiscal surplus in the first eight months of 2022, but this surplus has narrowed substantially in recent months (to about 0.2% of pro rata GDP in the mentioned period). This narrowing was because of hefty shortfalls recorded in July and August against the backdrop of a combination of ruble appreciation (with oil sales remaining USD-denominated), declining import tax revenue and sizable spending increases. Due to the allocation of substantial saved budgetary means of 2021, the assets of the National Wealth Fund expanded by 8% over the first eight months of 2022 to USD 196.6 billion (or about 9% of GDP).

Banks are currently doing business in a regime of regulatory lenience, flanked by subsidized lending programs. The initially high interest rate level coupled with weak demand and continuing uncertainty, pushed growth of loans to enterprises and households to –3% (year on year, in real terms and exchange rate adjusted) by end-August 2022. In the meantime, deposits of enterprises continued to expand (+9% year on year), while retail deposits strongly declined (–7%). According to the Bank of Russia, Russia’s banks lost around RUB 1,500 billion (or about USD 25 billion) in the first half of 2022, which corresponds to about 12% of the sector’s regulatory capital as of end-2021. Losses are expected to increase further in the second half of 2022.

Table 11: Main economic indicators: Russia  

	2019	2020	2021	Q1 21	Q2 21	Q3 21	Q4 21	Q1 22	Q2 22
	Year-on-year change of the period total in %
GDP at constant prices	2.2	–2.7	4.7	–0.3	10.5	4.0	5.0	3.5	–4.1
Private consumption	3.8	–7.3	9.5	–2.1	27.2	9.5	7.1	4.5	–5.4
Public consumption	2.4	1.9	1.5	1.2	2.6	1.3	1.1	0.0	–0.4
Gross fixed capital formation	1.0	–4.6	6.8	1.8	12.2	8.2	5.2	11.1	3.2
Exports of goods and services	0.7	–4.1	3.5	–0.6	–1.1	8.7	7.1	..	..
Imports of goods and services	3.1	–11.9	16.9	0.0	32.2	19.2	17.7	..	..
	Contribution to GDP growth in percentage points
Domestic demand	3.0	–4.7	7.4	–0.3	17.1	6.0	7.1	3.0	–6.1
Net exports of goods and services	–0.5	1.7	–2.7	–0.2	–6.9	–1.8	–2.4	..	..
Exports of goods and services	0.2	–1.1	0.9	–0.2	–0.3	2.1	1.7	..	..
Imports of goods and services	–0.7	2.9	–3.7	0.0	–6.5	–3.9	–4.1	..	..
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	..	..	..	..	..	..	..	..	..
Unit labor costs in manufacturing (nominal, per hour)	3.9	7.6	3.2	6.1	–0.4	3.2	4.3	12.0	14.7
Labor productivity in manufacturing (real, per hour)	3.7	–1.4	7.3	1.1	12.3	7.9	8.2	4.8	–3.2
Labor costs in manufacturing (nominal, per hour)	7.8	5.9	10.9	7.3	11.9	11.3	12.8	17.7	11.0
Producer price index (PPI) in industry	2.3	–3.7	24.6	10.6	31.2	28.2	28.3	25.6	21.6
Consumer price index (here: HICP)	4.6	3.4	6.7	5.5	6.0	6.9	8.3	11.5	16.9
EUR per 1 RUB, + = RUB appreciation	2.2	–12.3	–5.3	–17.9	–11.0	–0.3	9.3	–8.7	24.3
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	4.6	5.8	4.8	5.6	5.0	4.4	4.3	4.2	3.9
Employment rate (%, 15–64 years)	..	..	..	..	..	..	..	..	..
Key interest rate per annum (%)	7.3	5.0	5.7	4.3	5.0	6.3	7.5	12.7	13.9
RUB per 1 EUR	72.5	82.6	87.2	89.7	89.5	86.6	83.1	98.3	72.0
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	10.6	10.6	10.6	9.4	12.7	13.9	15.3	15.6	11.7
of which: loans to households	19.0	19.0	19.0	13.5	20.3	20.7	22.1	20.3	12.2
loans to nonbank corporations	7.1	7.1	7.1	7.5	9.3	10.8	12.2	13.3	11.4
	%
Share of foreign currency loans in total loans to the nonbank private sector	11.8	12.6	10.8	12.3	10.8	10.8	10.8	11.2	7.3
Return on assets (banking sector)	2.2	1.9	2.4	2.4	2.5	2.6	2.4	..	..
Tier 1 capital ratio (banking sector)	9.2	9.7	9.6	10.8	10.3	9.8	9.6	..	..
NPL ratio (banking sector)	17.0	17.1	15.1	17.0	16.2	15.8	15.1	..	..
	% of GDP
General government revenues	36.0	35.6	36.7	..	..	..	..	..	..
General government expenditures	34.1	39.6	35.9	..	..	..	..	..	..
General government balance	1.9	–4.0	0.8	..	..	..	..	..	..
Primary balance	..	..	..	..	..	..	..	..	..
Gross public debt	12.4	17.6	16.0	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	..	..	..	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	..	..	..	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	9.8	6.3	10.7	7.9	9.3	11.6	12.8	..	..
Services balance	–2.2	–1.1	–1.1	–0.8	–0.9	–1.4	–1.1	..	..
Primary income	–3.2	–2.3	–2.4	–0.4	–4.0	–2.2	–2.7	–2.1	–2.1
Secondary income	–0.6	–0.4	–0.3	–0.5	–0.1	–0.3	–0.2	–0.3	–0.5
Current account balance	3.8	2.5	6.9	6.2	4.2	7.6	8.7	17.7	15.0
Capital account balance	0.0	0.0	0.0	0.1	–0.1	0.0	0.0	0.0	0.1
Foreign direct investment (net)3	–0.6	–0.2	1.4	0.9	0.8	0.9	2.8	0.0	1.3
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	29.4	29.9	28.2	31.5	30.6	30.8	28.2	26.2	26.8
Gross official reserves (excluding gold)	26.1	28.7	29.1	30.3	29.6	30.3	29.1	..	..
	Months of imports of goods and services
Gross official reserves (excluding gold)	15.1	16.8	16.4	17.4	16.6	16.8	16.4	..	..
	EUR million, period total
GDP at current prices	1.515,749	1.298,180	1.509,221	301,956	345,451	395,248	466,566	352,338	481,607
Source: Bloomberg, European Commission, Eurostat, national statistical offices, national central banks, wiiw, OeNB.
1 Foreign currency component at constant exchange rates.
2 Nonprofit institutions serving households.
3 + = net accumulation of assets larger than net accumulation of liabilities (net outflow of capital).
– = net accumulation of assets smaller than net accumulation of liabilities (net inflow of capital).

Outlook for selected CESEE countries and Russia

Economic growth slows sharply in the CESEE-5 region despite initial resilience; war and sanctions are triggering a protracted recession in Russia ^{6 , 7}

Table 1: OeNB-BOFIT GDP projections for 2022 to 2024 compared with the IMF forecast  

	Eurostat/ Rosstat	OeNB-BOFIT projections October 2022			IMF WEO forecast October 2022
	2021	2022	2023	2024	2022	2023	2024
	Year-on-year growth in %
CESEE-5	5.4	4.1	1.2	3.0	4.0	1.5	3.4
Bulgaria	3.9	3.1	1.9	3.0	3.9	3.0	4.1
Czechia	3.5	1.8	0.8	3.9	1.9	1.5	3.9
Hungary	7.1	5.6	0.9	3.4	5.7	1.8	2.8
Poland	5.8	4.0	1.1	2.0	3.8	0.5	3.1
Romania	5.2	5.5	2.0	4.2	4.8	3.1	3.8
Russia	4.7	–4.0	–4.0	1.0	–3.4	–2.3	1.5
Source: IMF World Economic Outlook (WEO) of October 2022, Rosstat, OeNB-BOFIT projections.

Russia’s war in Ukraine and severe Western sanctions have caused Russia to plunge into recession. We project that GDP will decline by about 4% in 2022 and by another 4% in 2023, before growth will bounce back to about 1% in 2024. The factors shaping the continuing slide of the Russian economy differ from 2022: In 2023, net exports will likely turn strongly negative because Russia is not likely to find new buyers for the amount of oil deliveries affected by the EU oil embargo; domestic demand drivers will marginally weaken, while imports are expected to recover at least slightly.

1 CESEE-5: all demand components will continue to weaken well into 2023, EU funds keep supporting investments

We base our forecast on the assumption that the status quo concerning the war in Ukraine will remain more or less unchanged over the projection horizon. While a diplomatic solution is out of sight given the most recent developments, a further escalation may occur any time but does not form part of our baseline. This assumption implies that sanctions will remain in place, with the EU import embargo on Russian oil taking effect at the end of this year. We also assume that gas deliveries from Russia to Europe will remain at their currently negligible levels. Hence, the CESEE-5 economies will be forced to reduce their dependency on oil and gas imports in general, and particularly on those from Russia, much faster than anticipated some months ago.

Outlook depends crucially on future inflation path

Despite recent employment growth, labor markets will remain tight as firms in the region increasingly cite labor as a factor limiting production. Further, skill mismatches will not dissipate soon.

As mentioned before, energy will remain a decisive factor shaping inflation dynamics even if the impact of different energy sources is currently changing. The focus has clearly shifted from oil to gas: While oil price developments have normalized again, gas prices will remain an important source of inflation and may per se impact on the operation of companies in certain sectors. While we do not expect crucial shortages of supply or gas rationing, record-high gas prices may render business operations economically unviable for some companies, especially smaller and medium-sized firms in branches heavily dependent on gas. On the other hand, high gas prices will also leave their imprint on demand, thus alleviating price pressures to some extent. Overall, high gas prices will leave their mark on economic activity over most of our projection horizon as the situation is unlikely to relax notably anytime soon. Much will depend on how quickly firms can reduce gas demand and/or switch gas suppliers and energy carriers.

No further support from monetary policy, fiscal policy remains overall supportive

Unlike monetary policy, fiscal policy will continue its overall supportive stance. Given that inflation is still more elevated in CESEE compared to Western European countries and against the background of a higher share of energy and food in CESEE consumption baskets, all CESEE-5 countries are under pressure to prolong their support to households. Measures to shield the population from the effects of extraordinarily high inflation include income support to vulnerable households, minimum wage hikes, tax reductions, energy subsidies and direct transfers. Since the general escape clause in the Stability and Growth Pact remains activated until end-2023, there is little pressure on the governments to withdraw these various forms of support to households too soon. Hence, we expect that these measures will remain in place for some time and will be financed by dedicated taxes where necessary. In addition to support for households, all countries have increased their military expenses, which has partly resulted in higher public employment supporting output growth. But higher military spending has also led to additional imports, with a consequently negative contribution to GDP growth.

Notable slowdown in private consumption

Public consumption provides small but steady support to growth

EU funds back investments

External demand will weaken considerably

Imports will almost stagnate in 2023

CESEE-5 projection risks still tilted to the downside as uncertainty remains high

We would like to emphasize that, even more so than in previous rounds, our projections crucially depend on our external assumptions on economic growth in the euro area, in particular in Germany. So far, these assumptions do not imply a recession in the euro area and only a mild recession in Germany. However, a more pronounced or more protracted economic slump in the euro area constitutes a major risk to our forecast. While, in general, this high dependence on the external environment would imply both, up- and downside risks, overall, we think the probability of downside risks materializing is much higher at the moment – especially given the greatly increased uncertainty about the future of Russian gas supplies to Europe in 2023 and beyond.

An intensification of the war in Ukraine or an extension of war or warlike operations beyond Ukraine is a worst-case scenario, forming part of the downside risks to this forecast. At the same time, a pacification of the situation poses a strong upside risk; however, we attach a rather low probability to such a development within our forecast horizon.

Inflation may remain high for longer than anticipated. Especially elevated gas prices could trigger more severe effects on a wider range of firms than envisaged in our projections, thus eliciting more firm failures and ultimately driving nonperforming loans up. This could cause some strain on the banking sector, especially when higher than expected inflation dynamics cause a sharper than expected monetary policy tightening thus further worsening financing conditions for firms. Also, additional energy and food price shocks cannot be ruled out. Such a negative spiral could, in the worst case, result in financial market turmoil and lead to a financial crisis on top of the current geopolitical and energy crisis. Ultimately, the energy crisis could impair climate policy cooperation and delay policy action against global warming with severe negative medium- to long-run consequences, not least via an intensification of food price inflation.

While renewed large-scale lockdowns appear unlikely from the current perspective, possibly lasting (structural) supply chain disruptions pose a further major risk on top of the currently already extreme level of uncertainty.

2 Projections for Bulgaria, Czechia, Hungary, Poland and Romania

Bulgaria: prospects for 2023 clouded by weakening external demand, high inflation and political uncertainty

As a result, we have revised our GDP growth forecast for 2022 up to 3.1% (+0.2 percentage points) and that for 2023 and 2024 down to 1.9% (−1.6 percentage points) and 3.0% (−0.2 percentage points). Headline inflation is expected to stay in double digits at least until the second quarter of 2023, reflecting our assumptions on energy and food prices as well as second-round effects.

Domestic demand will contribute 4.7 percentage points to GDP growth in 2022, which breaks down as follows: inventories will contribute 2.9 percentage points, followed by private and public consumption, which will contribute roughly 1 percentage point each. Net exports will contribute −1.6 percentage points to GDP growth in 2022, because of deteriorating terms-of-trade and stronger import dynamics (by comparison). Furthermore, the number of international tourists remained well below pre-pandemic levels in 2022 again. The war in Ukraine and the rapid increase in the number of COVID-19 cases in July, as well as the situation at airports in Europe with canceled flights, have had an unprecedented impact and will continue to have a negative effect on the travel industry in Bulgaria.

Looking ahead, the contribution of domestic demand to GDP growth is expected to fall to almost zero in 2023, while net exports will improve and will be the key contributor to GDP growth. Although external demand, particularly from the euro area, will slow down substantially, the expected correction of imports will outweigh the effect and contribute to a narrowing of the current account deficit.

We assume that the election outcome of October 2 will prolong the political stalemate in Bulgaria into 2023. This stalemate will add to uncertainty and delay the disbursement of NGEU funds and hence associated investments in the health and education sector and basic infrastructure. As a consequence, gross fixed capital formation is expected to decline again by 2.4% in 2022 (after −9.7% in 2021) and roughly stagnate in 2023. Moreover, political instability is delaying a comprehensive policy response to mitigate the impact of high inflation on vulnerable groups and industries. Consumer confidence has deteriorated since April 2022. We expect that the steep fall in real wages will translate into a moderate decline of private consumption in 2023. A failure to tame inflation and control the fiscal deficit could endanger Bulgaria’s plans to adopt the euro in 2024.

Czechia: inflation is holding back the recovery, frictions caused by the pandemic and the war are becoming more palpable

So far, household consumption this year has benefited from a low base in the first half of 2021, remaining pent-up savings and buoyant nominal disposable income amid a tight labor market, rising wages and pensions. Yet, the forced pandemic savings have been depleted and real household income is increasingly suffering from ballooning living costs. In addition, households face rising interest rates and tightening credit conditions. As a result, consumer sentiment indicators have dropped to some of the lowest levels in two decades, which will soon be reflected in cooling private consumption. In fact, household consumption is projected to start shrinking in year-on-year terms in the second half of 2022 and keep contracting well into 2023 before it resumes gradual growth in the medium term on the back of decelerating inflation.

In contrast, public consumption will maintain steadfast growth over the forecast horizon bolstered by increased expenses related to Ukrainian refugees, military equipment, rising public sector wages as well as government compensation for high energy prices.

Fixed investment recorded rather solid growth in the first half of 2022 despite partially skyrocketing input prices and tightening monetary policy. However, against the background of persistently high prices of energy, raw materials and other inputs, these frictions will become increasingly crippling. In addition, fixed investment growth will be more and more dampened by cooling domestic and external demand and value chain disruptions. Housing investment will cool down noticeably on the back of tightened financing conditions and elevated prices for property, labor and raw materials. In contrast, rising labor costs as well as structural changes (e.g. vehicle electrification) are likely to boost investment in automation and robotization. Overall, despite some slowdown in the remainder of the year, fixed capital formation will remain relatively solid in 2022 but lose more steam next year.

Whereas the notorious shortage of some inputs, particularly semiconductors, has gradually faded, other supply side frictions and bottlenecks have obstructed production. As a result, additions to stocks (of unfinished products waiting for completion) were the single most prominent driver of economic growth in the first six months of this year. Companies will be gradually finishing off the products currently piled up in these forced stocks so that their contribution to growth should turn negative in the months ahead.

Growth of exports will remain subdued over the first half of the forecasting horizon owing to persistent supply chain disturbances and a notable slowdown of foreign demand, particularly in the euro area but also in other markets such as Russia, which was, for instance, the third-biggest sales market for the car producer Skoda. Yet, as growth of imports will slow down too because of cooling domestic demand, the contribution of net exports to growth is forecast to turn positive in the medium term and strengthen thereafter.

Following a change in the composition of the board, the CNB has paused its monetary policy tightening cycle for now. Nonetheless, the policy rate remains at its highest level since 1999 and CNB board members have signaled vigilance and readiness to resume rate hikes if necessary. Despite increased government expenditures on military equipment, support to refugees and measures to offset the impact of high energy prices, the fiscal stance is expected to be slightly restrictive in 2022 due to the earlier termination of pandemic support programs. Continued higher expenditure will turn the fiscal stance slightly supportive in 2023.

Hungary: dynamic start into 2022 but consequences of war started to bite from mid-year on

Following the strong start into the year, we expect the economy to slow substantially in the second half of 2022, with the weakness extending into 2023. As a result, we have changed our GDP forecasts for 2022 (up from 3.4% to 5.6%) and for 2023 (down from 3.0% to 0.9%). We broadly maintain our expectation for 2024 (3.4%).

Heavy payouts by the government and the nearly 20% rise in minimum wages boosted private consumption during the first half of 2022. We expect private consumption growth to slow markedly in the second half of 2022 and to turn negative in 2023. Accelerating inflation is increasingly eroding strong nominal income growth. Moreover, from August 2022 the government has tangibly scaled back gas and electricity price subsidies for households and tightened the eligibility criteria for its preferential small business tax (equaling a substantial income tax hike). Interest rate hikes by the central bank have translated into markedly rising interest rates on new loans to households. All these factors have contributed to a sharp worsening of consumer confidence. Weak household consumption will likely extend into 2023, as we expect price caps (on fuel and staple foods), the mortgage interest rate cap and the limited debt repayment moratorium to be lifted and real wages to decrease in 2023. We expect a recovery to start in the second half of 2023 or early 2024, with slowing inflation and improving overall economic prospects.

Government consumption was boosted in 2022 by the spending spree ahead of the parliamentary elections in April. However, we expect government consumption to decelerate in the second half of the year as a result of savings measures, such as across-the-board expenditure cuts (or freezes) by ministries, and to contract modestly in 2023 from a comparably high base.

Various factors point to a slowdown of gross fixed capital formation, such as global supply shortages (e.g. microchips), compounded by high gas prices across Europe and dim prospects for Hungary’s major trading partners. Windfall profit taxes imposed on eight sectors, rising interest rates and curtailed preferential financing programs will likely additionally restrain companies’ propensity to invest. Public sector investments will partially fall victim to budgetary savings, while the inflow of EU funds could resume in the first quarter of 2023 at the earliest. Household investments will likely suffer from households’ worsening real income position, rising interest rates and the substantial rise in construction prices. At the same time, the extension of the preferential VAT rate for new home construction beyond 2022 will continue to support building activity.

We expect net real exports to have a negative impact on the overall GDP growth rate in full-year 2022 despite an improving outcome in the second half of the year. For 2023, we expect export growth to slow substantially along with weakening external demand, while the stagnation of domestic demand will cause an import slowdown, resulting in a positive contribution of net real exports, which will likely get somewhat smaller in 2024.

Poland: sharp growth slowdown in 2023 but recession unlikely

As a result, in 2023, the slowdown of foreign and domestic demand growth will decelerate import growth sharply toward near-stagnation, following projected growth of 7% in 2022. Hence, real import growth will remain marginally positive while real exports will marginally contract in 2023. Despite starting from a sizable external surplus, the growth differential will be sufficiently large to keep the contribution of net exports to GDP growth in negative territory but not as deep as in 2022.

Private consumption is expected to grow at close to 3% in 2023, a moderate slowdown from the expected 5% in 2022. On the one hand, this results from a substantial deterioration of consumer confidence, driven by the ongoing war and the rise of inflation. Moreover, employment growth will slow or even turn negative in response to slowing foreign demand and the postponement of domestic investment projects. On the other hand, wage increases are likely to more than offset inflation, even more so as inflation will likely decline substantially in the course of 2023, due to the favorable base effect and weaker demand. The hikes in minimum wages agreed for 2023 will support poorer households’ consumption. The outflow of Ukrainian migrant workers will contribute to a tight labor market and substantial nominal wage increases. At the same time, Ukrainian refugees fleeing from the war will provide additional private consumption demand, financed by personal savings and public transfers received in Poland. More generally, public support measures will bolster consumption through cuts in indirect tax rates (prolonged “anti-inflationary shield”) and direct tax rates (Polish deal) as well as through energy subsidies (coal) and higher family transfers. Public consumption growth will accelerate given measures related to incoming refugees and national defense and probably also in view of elections in 2023.

Fixed investment is expected to grow at about 1.5% in 2023, after an expansion of about 5% in 2022. On the one hand, weaker foreign demand and war-driven uncertainty will considerably weaken corporate and residential fixed investment. Moreover, supply chain bottlenecks will likely remain a limiting factor. On the other hand, both public and corporate sector fixed investment will benefit from additional EU funds under the Recovery and Resilience Facility and from higher national defense efforts. Besides, the forecast incorporates a negative growth contribution from inventory change in 2023, as the buildup will be far smaller than in 2022 when it increased substantially compared to 2021.

Romania: economic growth surprisingly robust in the first half of 2022, notable weakening in 2023

In the next few quarters, private consumption will be dampened by negative real wage growth, low consumer loan growth and tightening financial conditions. Real wage growth might turn positive again in the course of 2023 due to falling inflation rates, the renegotiation of private sector wages and likely also due to a further minimum wage hike (a minimum wage hike of 18% is being discussed). Regarding pensions, an increase of 10% in 2023 is currently being considered by government officials. Natural gas and electricity price caps were extended until August 2023, and further social measures targeted at vulnerable households were introduced in the first half of 2022. As 2023 is a pre-election year, the government might be inclined to renew or introduce further social support measures. However, public consumption is not expected to act as a distinct growth driver due to the ongoing excessive deficit procedure.

Despite high uncertainty, rising interest rates in Romania and tightening global financial conditions, we still expect gross fixed capital formation to gain importance in the growth structure, mainly due to Romania’s access to sizable EU fund inflows (from the multiannual budget frameworks and NGEU). Yet, there is considerable uncertainty about effective EU fund absorption and the implementation of the national recovery and resilience plan as a requirement for disbursements from the Recovery and Resilience Facility. Robust corporate credit growth (partly on the back of state guarantee programs) is supportive of private investments, but a tightening of credit standards can be expected. While Russia’s war on Ukraine entails negative confidence effects, gross fixed capital formation in Romania could benefit from foreign direct investments related to production reallocations, from energy efficiency investments and from investments into the transport infrastructure aimed at facilitating the reconfiguration of Ukraine’s export routes. Ongoing investments (and investment plans) in the automotive and battery sectors are a further positive factor for gross fixed capital formation and will also lead to an increase of Romania’s export capacities.

In the short term, however, the outlook for exports is clouded by faltering external demand, remaining supply chain bottlenecks and possible production cuts related to high energy prices. Moreover, noticeable increases of unit labor costs in the manufacturing sector combined with a largely stable exchange rate vis-à-vis the euro do not bode well for Romania’s external price competitiveness. While import growth will be dampened by weakening domestic demand, exchange rate developments seen so far will not entail an additional effect. Hence, we expect the growth contribution of net exports to remain negative over the forecast horizon.

3 Russia: war and sanctions are triggering a protracted recession

GDP is projected to shrink by about 4% in 2022 and by another 4% in 2023, before growth will return to positive territory at about 1% in 2024. Private consumption will decrease markedly, in line with retail trade, destabilized by the swelling of inflation and uncertainty. Indeed, private consumption is seen as the major factor pulling the Russian economy into recession in 2022. Gross capital formation is also expected to contract sharply, largely on account of a massive drawdown of inventories following Western trade restrictions covering various sectors. On the other hand, net exports are expected to skyrocket in 2022, given a combination of a sharp sanctions-triggered drop of imports and a mild decline of exports (notably of natural gas, coal, wood and steel, while oil exports largely remain on 2021 levels). Meanwhile the fiscal stimulus delivered in 2022 promises to remain modest. Different forces from those seen in 2022 are expected to drive the continuing slide of the Russian economy in 2023: Specifically, net exports will likely plunge deep into negative territory, assuming that the planned EU embargo on Russian tanker-transported oil is implemented from late 2022, because Russia is not likely to find new buyers for the entire amount of oil deliveries in question. Moreover, Russian imports are expected to recover at least slightly. Private consumption will marginally weaken or stagnate on its new-found lower level; the same goes for public consumption and gross capital formation. In 2024, the Russian economy is projected to revert to − very low − growth of 1% again.

Risks for this forecast are tilted downward. Uncertainty is huge and possible major defeats in the ongoing war in Ukraine may have destabilizing political and economic effects. An escalation of the war and/or the economic conflict with the West (including a threatened Russian oil embargo in response to the imposition of a unilateral price cap on Russian oil envisaged by the G7) could exacerbate Russia’s recession in 2023 and further weaken the global economy with spillbacks on Russia. Given these various imponderables, the Urals export prices for 2023 and 2024 are very difficult to predict. In any case, the oil price ranges Russia can fetch are likely to be lower than in 2022, so probably no additional growth boost can be expected from oil.

Table 2: Russian GDP and components (realized and forecast)  

	2019	2020	2021	2022	2023	2024
	Year-on-year growth in %
GDP	2.2	–2.7	4.7	–4	–4	1
Private consumption	4	–7	10	–9	–1	–
Public consumption	2	2	2	2	0	–
Gross capital formation	2	–4	9	–15	1	–
Exports	1	–4	4	–5	–10	–
Imports	3	–12	17	–25	5	–
Source: BOFIT-OeNB October 2022 projections, Rosstat.

Spotlight on the Western Balkans

Special feature

Property rights and homeownership in the Western Balkans ¹⁰

We provide an overview of property rights protection in the Western Balkans based on the Index of Economic Freedom and look at how documentation of property rights may relate to other property-related findings from the OeNB Euro Survey. We document how homeowners assess their ability to document their property rights and whether landownership and homeownership overlap. We examine whether property rights are correlated with the mode of acquisition, ownership structure and the quality of housing. We further address the question whether there are regional differences in property rights. To conclude we provide evidence on housing as collateral. This special feature is intended to provide a first overview and introduce novel survey evidence. It is not intended as a comprehensive background paper on the institutional background, nor do we claim that the survey evidence presented here allows the identification of causal relationships.

1 Still a long way to well protected property rights in the Western Balkans

The score for judicial effectiveness provides important information on the functioning of the judicial system, which is essential for the protection of households’ rights. In case of disputes over land claims, for example, its smooth functioning is key for a fair solution. The third score on government integrity reflects, for example, the extent of systemic corruption that has the potential to hamper the protection of property rights. As is evident from chart 2 and chart 3, all Western Balkan economies show significant deficiencies when it comes to government integrity scores.

Moreover, the European Commission regularly points toward deficiencies in the enforcement of property rights in the Western Balkans. The protection of property rights is one important condition for fulfilling the EU accession criteria, more specifically: Chapter 23 of the acquis communautaire. For this reason, the status quo of the rule of law and implementation progress is evaluated annually by the European Commission. Overall, in its latest Enlargement Package, the European Commission (2022c) concluded that the Western Balkan countries still show deficiencies in the area of the judiciary and fundamental rights. For Albania, for example, the European Commission (2022a) explicitly pointed out that the registration of property should be done faster. Moreover, it was noted that information on about 80% of registered properties in Albania are not correct and 10% of the land is not registered at all. Similar concerns were raised by The Heritage Foundation (2022). Accordingly, titles are often not clear or even overlap. Similar concerns were raised for Kosovo, where overlapping land claims are considered a legacy of the conflict with Serbia (The Heritage Foundation, 2022). In Bosnia and Herzegovina (European Commission, 2022b), there are deficiencies in interconnecting cadasters and land registration databases over entities. Moreover, titles are often not clear and property cadasters are not reliable. In North Macedonia (European Commission, 2022d) the analog and unregularly updated property registers hamper the protection of property rights.

This overview indicates that Western Balkan countries have to tackle multiple challenges in the field of private property registration and private property right protection. Lengthy and inefficient registration of property, unreliable data, analog cadasters or informal settlements are only some reasons for unclear property rights. Moreover, overall weak institutional frameworks with inefficient judiciary systems and widespread corruption are hampering the protection of property rights in the Western Balkan countries.

2 Property rights from the household perspective

Survey evidence shows, though, that the majority of homeowners either purchased, built or inherited their residence. Indeed, survey results further show that the demographic characteristics of homeowners in CESEE now largely resemble those observed in more mature market settings in OECD countries (Beckmann et al., 2019).

In this section, we address the conundrum of high ownership rates and weak property rights. We present survey evidence on how homeowners assess their ability to document their property rights and whether landownership and homeownership overlap. We analyze whether property rights are correlated with the mode of acquisition and the quality of housing. We further address the question whether there are regional differences in property rights. We conclude by a snapshot on how property rights affect the use of immovable property as collateral.

Data source: OeNB Euro Survey

In each survey wave, a representative sample of 1,000 individuals is polled in each country in a multistage stratified random sampling procedure. The sample is representative of the country’s adult population (aged 18 years and older) with regard to age, gender and region. We use data collected during the survey wave of fall 2017, which included a number of questions related to housing, property rights and collateral. ¹³

For the purpose of our analysis here, we pool the data for all four Western Balkan countries covered by the OeNB Euro Survey and weight descriptive statistics by the population size as well as individual sampling weights. As we are pooling and weighting results by population size, the results can be interpreted as referring to an average adult living in these four Western Balkan countries. We will point out differences between countries, where these are particularly large or relevant.

The OeNB Euro Survey is a survey of individuals. In questions regarding homeownership and other property ownership, respondents are asked to report not only their personal ownership but also that of individuals living in the same household. Beckmann et al. (2019) show that the results from the OeNB Euro Survey are very close to data from EU SILC. ¹⁴

Real estate ownership and land ownership frequently coincide

Other ownership rates are much lower: e.g. an average 30% for other land, based on a range from 41% in Albania and 10% in Bosnia and Herzegovina. Ownership of a secondary residence is most frequent in Serbia at 19% and least common in Bosnia and Herzegovina at 4%. Albania has the highest percentage of individuals who report owning other real estate at 26%; the lowest rate is observed in Bosnia and Herzegovina at 3%.

Clearly, there are large differences between countries in ownership rates. However, these are especially relevant regarding property other than the primary residence and the corresponding land.

The majority of homeowners can prove ownership by means of an official document

Every tenth adult living in a household where the primary residence is owned by the household reports not having any document to prove their property rights.

The right panel (chart 5) shows how the 23% of primary residence owners who do not have a document from a cadaster can prove their ownership. With no document from a government office, these might be particularly affected by overlapping property claims. The right panel shows that about 40% of those who do not have a document from a cadaster, have an official document from a notary or lawyer as proof of ownership. More than 10% can prove ownership based on a document originating in the privatization process. 14% have a document from an unofficial source.

Moving from potentially overlapping claims to a proxy for weak property rights, we further reduce the sample to those homeowners who do not have a document from a cadaster and also do not have a document from a lawyer or notary. In total, this applies to 14% of homeowners. Among these homeowners, 18% report having an unofficial document, 21% report having a document from privatization. The remaining homeowners do not report having any document to prove their ownership.

Are these percentages high or low? A comparison with six CESEE EU member states yields no clear-cut picture. For example, the share of homeowners with documentation from a cadaster is higher in Hungary at 85%, but much lower in Bulgaria at 4%. In Bulgaria, the share of homeowners with documentation from a notary or lawyer is, however, 87%. Compared to six CESEE EU member states, Western Balkan countries do not stand out as having a particularly high share of homeowners who have no official document to prove their homeownership.

Property right documentation is heterogeneous

The percentage of homeowners with cadaster documentation is highest for those who obtained ownership during privatization. The share is lowest for homeowners who obtained ownership through channels other than purchase, inheritance or privatization. The percentage of these homeowners, however, is very low at less than 10%.

Proof of ownership further varies by the degree of urbanization (table 1). In villages, the share of owners with a document from a lawyer or notary is very low at 15%. This share is highest in the capital cities at 30%. At the same time, the share of primary residence owners with a cadaster document is lowest in capital cities at 63% and the share of owners with documents from an unofficial source is highest at 20%.

Table 1: Heterogeneities in ownership documentation by degree of urbanization  

	Proof of ownership originated from...
	Cadaster	Notary or lawyer	Privatization	Unofficial source	No document at all
	% of primary residence owners
Villages	79	15	5	4	10
Towns	80	22	8	5	5
Cities	79	19	5	6	11
Capital city	63	30	5	20	8
Source: OeNB Euro Survey, 2017.

While these figures clearly suggest that documentation of property rights differs within countries, we do not see a strong effect of the various forms of proof of ownership on the quality of housing. Table 2 shows the median age of the buildings in question and the median years since the last major renovation, last renovation of the kitchen or exchange of the windows. Obviously, these are only very rough proxies of housing quality. Nevertheless, it is interesting to note the similarities across primary residences where there is no or only unofficial documentation and those where there is a document from the cadaster or from a notary or lawyer. ¹⁷

Table 2: Quality of housing  

	Proof of ownership originated from...
		Years that have passed since…
	Building age	Last major renovation	Windows were exchanged	Kitchen was renovated
	Years (median)
Cadaster	37	9	8	7
Notary or lawyer	37	7	7	7
Privatization	39	8	7	7
Unofficial source	32	6	6	5
No document at all	37	7	7	7
Source: OeNB Euro Survey, 2017.

Immovable property as loan collateral

Chart 7 indicates that there is a correlation between more secure forms of property right documentation and the use of immovable property as collateral. The percentage of borrowers who use the primary residence as loan collateral is highest among those who can prove their property right by a cadaster document. It is lowest among those with documents from no official sources. Compared to CESEE EU member states, the percentage of borrowers who use the primary residence as collateral is relatively low ranging between 20% in Bulgaria and 38% in Czechia.

Of course, it would be wrong to conclude from this chart that households with poorer property right documentation have worse access to credit. Instead, chart 7 should be taken as pointing to an interesting avenue for further research.

3 Summary

Taken together, survey evidence suggests that, at the individual level, lack of proof of ownership is not a serious issue. Rather, property rights are relatively weak because claims of several individuals conflict or overlap – a phenomenon that has partially developed due to multiple changes in legal and political regimes in the last century, which in turn gave rise to complex and heterogenous property registration systems, most of which are not digitalized yet. Moreover, weak institutional frameworks make property rights protection even more challenging.

Obviously, property rights matter at the individual level and their protection needs to be improved in the Western Balkans. From a financial stability point of view, moreover, a first glimpse at how property rights are associated with financial outcomes suggests that households with “better” documentation of ownership are more likely to use their house as collateral.

References

Beckmann, E., C. Hainz, W. Pyle and S. Reiter. 2019. Homeownership and housing finance patterns one generation after the fall of communism. In: Focus on European Economic Integration Q4/19. OeNB. 79−101.

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Is it easy to hide money in the crypto economy? The case of Russia

Armin Ahari, Johannes Duong, Jakob Hanzl, Elsa Maria Lichtenegger, Lukas Lobnik, Andreas Timel ¹⁸

Russia’s stance on crypto assets has clearly changed since its invasion of Ukraine. Throughout 2021, the Bank of Russia was set on strictly regulating crypto activities, maybe even close to all-out banning them from Russian territory in an attempt to protect investors and to close down on criminal activities. Since the invasion of Ukraine, this has clearly changed, even drastically so. Russia is now considering permitting crypto mining, investment and also payment to some extent. To shed light on possible reasons for this paradigm change, our study examines the potential for sanction evasion through the crypto economy. We show examples of countries that have already developed methods of using the crypto economy to circumvent sanctions more or less successfully. In our work, we distinguish between wealth preservation and the search for alternative payment channels for trade as two central motivations for the circumvention of sanctions, taking a deeper look into the EU sanctions regime as well as crypto market liquidity. Based on real world examples, we derive three hypothetical methods for circumventing sanctions through the crypto economy, i.e. the direct peer-to-peer system, the intermediary model and the escrow model. All these methods have major weaknesses though, and especially in light of low crypto market liquidity, we come to the conclusion that, for the time being, the crypto economy does not seem to offer sufficient potential to governments or major oligarchs for circumventing sanctions on a large scale.

JEL classification: F51, G15, O30, O38

Keywords: sanctions, cryptocurrency, crypto assets, crypto economy, Russia

Against this backdrop, the question arises if this newly awakened interest in the crypto economy may have a deeper purpose. Could the crypto economy, for instance, open up innovative ways of circumventing sanctions? Is such an idea even plausible on a large scale? And which possible forms of circumvention could be deduced from known illegitimate practices in recent history?

In an attempt to answer a number of these questions, this paper is structured as follows: Section 1 discusses Russia’s recently turbulent history in crypto policy and sheds light on crypto market developments around the Ukrainian invasion. Section 2 provides an overview of the current sanctions regime as it relates to the crypto economy. Section 3 takes a deeper look into potential motivations and methods for circumventing sanctions, also taking into account crypto market liquidity. And Section 4 offers concluding remarks on the main questions at hand.

1 The crypto economy and policy in Russia

1.1 Crypto policy in Russia

In April and June, at last, and after a lot of public speculation, a number of drafts regulating digital token activities in great detail were sent to the Federation Council of the Russian parliament. They aim to introduce new rules regulating digital currencies ²⁰ and amend basic law on digital financial assets from 2021 (Aksakov, 2020). With these draft bills, regulators seem to aim at more detailed, specific regulation but also for more liberties in digital investing (Aksakov, 2022), digital mining (Tkachev et al., 2022) and paying with crypto assets (Aksakov, 2022). They aim to introduce improvements, for instance, for those wishing to purchase crypto assets. This will open up investment into digital assets to all Russians on a limited scale and to professional investors on an unlimited scale. Non-fungible tokens (NFTs), on the other hand, do not seem to factor into the regulatory debate at all for the time being.

Cryptos with payment function are by far the most controversial topic among Russian regulators. The Russian Ministry of Finance supports more flexible regulation on this issue while the CBR mostly opposes it. Although the CBR has recently expressed some leniency in its stance on cryptos that are only used for international payments and do not penetrate the Russian financial system, the debate is still ongoing (Tassev, 2022a). However, there seems to be general institutional consensus that digital financial assets should not be freely used for payment but could still be viable as substitutes for existing US dollar-based financial settlements, euro or other fiat currencies to some extent.

Regarding electronic platforms, their providers will be subject to the “national payment system,” which most probably means that crypto exchanges will have to be registered, will be subject to an extensive record-keeping regime and also subject to CBR rulings in many areas of crypto service provision. Non-Russian exchanges will effectively have to partner up with Russian banks if they want to offer services on Russian territory.

The debate on crypto mining is still very young and there is a clear tendency toward recognizing crypto mining as a regular business activity. Natural persons and companies looking to engage in crypto mining will be expected to register and will be monitored but seem to be subject to special allowances for higher energy consumption and lower taxation as incentives. How far minted crypto tokens may also be allowed to freely circulate inside of Russia is being hotly debated.

In addition to all these currently very lively debates, a Duma representative, who was a central figure in these initiatives, was quoted to have said that the current collapse of the crypto economy is heavily influencing all discourses, too, naturally (Tassev, 2022b).

Because of the tough requirements on identification, recordkeeping and certification, the industry, especially fintechs, reacted critically and complained that regulation could overburden smaller players while favoring bigger players and banks (Kulikova, 2022).

In mid-June, CBR Governor Elvira Nabiullina was quoted by the Russian newspaper Kommersant to have said that volatile crypto assets could be perfectly fine for usage in international settlements. This statement is seen as signal that the Russian government could be opening up to settlements in crypto assets with their global partners (Kolganowa, 2022). Remarkable comments similar to those of Pavel Zavalny, Chairman of the State Duma Committee on Energy, who already in March 2022 suggested accepting bitcoin as payment for Russian oil and gas exports, would fit into this line of thinking. It is still unclear if cooperative countries will be inclined to accept crypto assets as payment but if these ideas make their way into the upcoming regulation this could potentially prepare the legal ground for cryptos as money surrogate in international trade in due time (Liang, 2022).

1.2 Crypto markets in light of the invasion in Ukraine

With the beginning of the conflict, an unusually high increase in volumes of bitcoin-ruble and tether-ruble pairs can easily be observed. In an all-time high, ruble-crypto swaps with volumes as high as 37 million USD in tether and 20 million USD in bitcoin, respectively, were registered on March 7, 2022. It seems that the fears of ruble inflation dropped after the first months following the invasion, though. The crypto donations mentioned above, however, may have become a successful part of Ukraine’s income model for the time being.

2 Sanctions

2.1 Definition and overview

In February 2022, Russian troops invaded Ukraine. As a response, far-reaching sanctions against Russia (and Belarus) ²³ were introduced by the EU. Other countries like the UK, the USA and Switzerland also increased political pressure in a similar way. For the purposes of this study, we will, however, focus on EU-specific sanctions only.

Regarding the applicability of EU sanctions, all citizens of EU member states and people living in the EU are subject to these measures since the sanctions regulations of the EU are directly applicable. This also covers companies inside or outside the territory of the EU that have been incorporated or constituted under the law of an EU member state as well as their representative offices in sanctioned areas and foreign companies that operate in the EU regardless of their origin. All EU companies operating in the crypto economy are therefore addressed by the sanctions regulations. On the other hand, companies and subsidiaries registered in Russia are seen as independent, liable Russian entities and are therefore not necessarily subject to the EU sanctions regulations (OeNB, 2022).

Table 1: Applicability of EU sanctions by type of entity and location  

	EU entities	Non-EU entities	EU citizens	Non-EU citizens
Inside EU	applicable	applicable	applicable	applicable
Outside EU	applicable	not applicable	applicable	not applicable
Source: Authors’ compilation.

EU sanctions against Russia can be assigned to three different categories: personal sanctions (natural and legal persons), geographical sanctions (Crimea, Sevastopol, Donetsk and Luhansk) and sectoral sanctions (economic sanctions) (OeNB, 2022).

2.1.1 Personal sanctions

As of the editorial closing date of this article, 1,262 natural persons and 118 entities were being targeted by the EU sanctions list concerning Russia.

2.1.2 Sectoral sanctions

Financial sanctions

Economic sanctions

2.1.3 Regional sanctions

2.2 Legal challenges with sanctions targeting crypto assets

Council Regulation (EU) No. 833/2014 for example defines that “‘transferable securities’ means the following classes of securities, including in the form of crypto-assets […].” ³¹ If crypto assets fulfill the requirements of “transferable securities” according to the MiFID ³² they are subject to the regulation regime of the MiFID anyway. However, the term “crypto-assets” itself lacks a clear definition. Without a conclusive definition, the legislative intention to ban crypto assets as a potential tool for circumventing sanctions regulations cannot be effectively fulfilled.

Example

Also, Council Regulation (EU) No. 833/2014 – though it prohibits accepting deposits exceeding EUR 100,000 per EU credit institution – does not specify any reporting obligation for crypto asset wallet, account or custody services providers for crypto assets. Therefore, authorities are not able to monitor crypto stock effectively, which makes supervising these providers and monitoring compliance more difficult.

One main point of criticism has been clarified due to the latest amendment of Council Regulation (EU) No. 833/2014. In practice, compliance with the prohibition regarding crypto assets and its value threshold of EUR 10,000 was more complicated than the prohibition of accepting of deposits over EUR 100,000, since the value of crypto assets is highly volatile. The currently bearish market for crypto assets allowed a higher number of crypto tokens in e.g. a crypto asset account. However, if the value increased again, the value limit could have been exceeded quickly and exorbitantly.

To target crypto assets as part of the financial economy more effectively and to provide legal certainty, EU lawmakers could and should improve and clarify the sanctions regulations in the future. A clear and comprehensive definition of the term “crypto-assets” would lead to more legal certainty and support the target of preventing a possible circumvention of sanctions. A fragmentation of definitions under the MiCAR and the sanctions regulations should be avoided. Furthermore, if crypto assets are targeted by the sanctions regulations, a comprehensive reporting and monitoring system needs to be set up to be able to verify the compliance of VASPs with the regulations.

3 Circumventing sanctions: motives, models and limitations

3.1 Potential motives for circumventing sanctions

3.1.1 Motive: individual wealth preservation

When seeking to evade sanctions, one of the main problems for Russian high net worth individuals is hiding their identity because of the “know your customer” (KYC) regimes most crypto exchanges enforce. Because of these regimes, most major crypto exchanges quickly were forced to put bans on Russian or even dubious crypto accounts since they are bound by the asset freezes under the EU sanctions regulations (Bartenstein, 2022).

With these circumstances in mind, crypto assets may not be a very safe haven for wealth ³⁷ .

Two ways of crypto storage must generally be distinguished. The first one is having crypto assets stored in an anonymous wallet. This type of storage is accompanied by the question if asset transaction attempts from such accounts will be seen as dubious and blocked on principle. Tokens may safely and discreetly accrue in anonymous wallets but converting them into legal currency at gateways subject to KYC regimes has already become challenging and may become outright impossible in the near future.

KYC wallets (i.e. identifiable wallets) are a second option for crypto storage and trade. Identified portfolios are flexible and convenient to use. However, providers of crypto wallets and accounts in the EU and in many other countries are obliged to comply with personal identification regimes, which makes it easy to freeze assets of sanctioned persons.

3.1.2 Motive: governmental parties aiming to preserve sectoral trade

However, would Russian trading partners even be willing and able to engage in crypto payment on a large enough scale? The example of Ukraine shows that manufacturers, even military grade manufacturers, are willing and able to accept crypto assets as payment (Singh, 2022). According to official statements, about 40% of Ukraine’s international suppliers show willingness to accept payment against crypto assets, even NFTs (Kharif, 2022).

To better illustrate this case, we want to briefly outline two exemplary but very different sectoral business cases.

Example 1: Importing high-tech parts can be seen as vital for Russia and is naturally strictly sanctioned. ³⁸ For goods this difficult to substitute, such as computer chips and complex software, most countries are dependent on reliable imports. Sympathetic trading partners, unmonitored trade channels und alternative payment options via the crypto economy would therefore understandably become interesting for building new, secure payment lines. Alternative payment methods aside, the challenge may still remain how to transport bespoke goods through customs checkpoints in exporting countries that have implemented sanction regimes against Russia.

Example 2: A very different business case and an example for alternative income would be the oil industry. Commodity trade often is essential for resource-rich, industry-focused countries, and export is a top priority. Nevertheless, import-export bans may entail an accumulation of in-country commodity supplies. Following Iran’s example, there could also be an alternative use for raw materials: Oil can be utilized for cheap energy production. Iran has, for instance, generated new sources of income by subsidizing the crypto industry and crypto mining through cheap domestic energy, offering appealing licensing regimes for token mining and integrating economies of scale-oriented taxation (Reuters, 2021). Such subsidized licensing regimes seem to inspire Russia to follow suit with similar approaches, even more so if stored oil keeps piling up (Tkachev et al., 2022).

3.2 Potential models for circumventing sanctions

• the direct peer-to-peer system, i.e. basic transactions between individuals who discreetly trade assets and goods;
• the intermediary model, which incorporates peer-to-peer trade into networks of inconspicuous middlemen of good standing;
• the escrow model, which incorporates payment facilitators and automates anonymous peer-to-peer trade on small to medium-scale transactions.

3.2.1 Direct peer-to-peer system

Ransoms for clearing malware-infected computers are naturally payable in crypto assets and into anonymous wallets. So, quite obviously there already are professional and profitable business models that conduct their trade through opaque channels of the dark web (Ahmad et al., 2019).

The direct peer-to-peer system is the simplest basis for circumvention in that it may suffice for single or small bundle transactions even if bigger crypto volumes are involved. For systematic, ongoing or automatable trade and business, larger-scale models would be required in our opinion. These might incorporate parts of a peer-to-peer system but would need to be more reliable for large economies and trade. In this regard, we perceive the next two models to be more fitting on a government level.

3.2.2 Intermediary model

If we focus on the obfuscation of transactions, one of the most important components of this model is the complicit partner. Countries like the United Arab Emirates (UAE), which do not seem likely to participate in sanctions against Russia for the time being, could qualify for such a partnership. Shortly after the invasion of Ukraine, Russian wealth, including impressive crypto portfolios amounting to billions of US dollar, was shifted from sanctioning areas into other sympathizing countries without trouble. For instance, UAE-based crypto exchanges helped Russian and Belarusian clients relocate, rearrange or liquidate crypto stocks for further disposal (Alkousaa et al., 2022).

The intermediary model combines layers of middlemen that are used to cover large-scale Russian crypto activities. Looking at the process step by step, we begin in the sanctioned country, where state and state-related actors usually hold a sizable volume of assets in local currency (e.g. ruble in the case of Russia). State-related banks or central banks are then instructed to forward these funds to correspondent banks in a non-sanctioned, sympathetic country (e.g. the UAE). The correspondent bank exchanges the sanctioned country’s local currency for USD or EUR, for example, and passes these funds on to intermediaries, i.e. individuals in good standing or inconspicuous enterprises, in non-sanctioned third countries. The middlemen layer changes the funds into crypto assets and moves them across multiple wallet addresses to disguise the origin of the funds and effectively tries to anonymize it. Then, the crypto asset flowback is either reconverted into fiat money (e.g. US dollar) and returned to the state bank via correspondent banks or left in the crypto economy for other purposes (e.g. crypto lending, peer-to-peer transactions or wallets of state actors for further investments).

From the perspective of a sanctioned country, the advantage of the intermediary model lies in the versatility of business opportunities and in its hypothetical potential for indirectly acquiring stable foreign cash reserves. We also see this model as the only one that is theoretically sufficiently powerful for state-level import-export requirements (the example of North Korea in box 1 validates this point).

However, the disadvantages for those seeking to evade sanctions include the barrier of KYC regimes put in place in third countries to identify sanctioned actors, the potentially high complexity of such business networks and their inherent instability due to middlemen who may end up on sanctions lists themselves at any time. Although the intermediary model is freely scalable, its actual capacities depend on freely available crypto assets. If, for instance, not enough bitcoin are to be had on crypto exchanges, the amount of goods that can be bought or sold is limited as well. And as we will see in subsection 3.3, crypto market liquidity may only suffice for volumes interesting to smaller oligarchs at best.

3.2.3 Escrow model

The essential components of this model are anonymous buyers and sellers, and at least one internet trustee, the escrow, that acts as an intermediary in between. Terms and conditions for the transaction process are predefined by coded script or smart contract. Trading of goods and services can easily be automated. In order to complete a transaction, the predefined conditions must be met by both contracting parties, the buyer and the seller. The escrow holds the assets of the involved parties until all contracting parties fulfill their obligations (Hu et al., 2004). Escrow services are already widely used in the real estate industry: For example, Sberbank offers (classic) escrow accounts through which the purchase of real estate is processed (Mendentseva and Tokmakov, 2017; Confidus Solutions, 2022). This system could also be applied to the crypto economy and the exchange of service or goods for crypto assets (Bonneau et al., 2017).

3.3 Crypto market liquidity

Based on data from Coin Metrics ⁴⁰ as well as data from the CBR – and to gain a good measure for available free tokens of high value – we compared global adjusted bitcoin transaction volumes ⁴¹ , as bitcoin is the crypto asset with the largest market share (about 40%) and the longest market history by far, with Russia’s foreign exchange volumes.

This comparison reveals that, while the global bitcoin market volume rose impressively in the quarters preceding the Ukraine invasion ⁴² , it is still not able to hold up to necessary Russian trade volumes, indicated by ruble foreign exchange volumes. In the time span from October to December 2021, when bitcoin volumes were at an extraordinary all-time high of USD 1,648 billion, the volume of all tradable bitcoins was just 22% higher than required by ruble forex trade. This means that forex compensation via, for instance, bitcoin tokens would have soaked up nearly all of bitcoin’s liquidity, even in this very liquid phase. Therefore, we would not assume shifts into the crypto economy as a sustainable or even realistic perspective for ongoing large-scale business requirements. From 2020 to 2022, the average ratio of bitcoin to ruble volumes was only at 56% (44% lower than ruble spot forex demand), which shows even more clearly that it may still be a long way until bitcoin liquidity would reach any levels necessary.

Widening the portfolio with other reasonably reliable crypto assets does not change the picture significantly either (see chart 3).

Ether is the second-most dominant crypto asset besides bitcoin and has gained significant market capitalization in the last two years, whereas the next-biggest cryptos show nowhere near the same level of capitalization. Taken together, the top seven crypto assets would raise the free-floating crypto capital to somewhere between 130% and 170% relative to ruble forex volumes ⁴³ , which also indicates a rise in volatility brought in by less dominant crypto assets. Because of the currently high uncertainty in crypto markets and uncertain Russian trade perspectives, we refrain from making any predictions with such loosely aggregated figures, though.

According to the Bloomberg Billionaires Index, the richest 15 sanctioned oligarchs have a net worth of USD 190 billion, with USD 83 billion in cash. Even though the net worth of these individuals may theoretically fit into global quarterly crypto transaction volumes, if they all shifted their assets to the crypto economy, this would have significant effects on prices. Therefore, we conclude that even the liquidity of dominant crypto assets like bitcoin does not seem vast enough for subtly and systematically preserving wealth for major individuals. However, liquidity would probably be sufficient for minor oligarchs (Bloomberg, 2022).

We conclude that if crypto liquidity is not nearly sufficient to provide enough crypto assets for Russian foreign exchange, it most certainly is insufficient for sanction evasion on any larger scale. If used in “smaller doses” and only for selected parts of sectors or selected portfolios, there is also the problem that relevant transactions are generally sent over a transparent, public blockchain. Whether for payment purposes or wealth storage, such transactions would still be widely recognizable because of the significant sizes of value involved. Authorities could almost conveniently observe and analyze such transactions in real time (Jiang et al., 2021). Such transactions could even help countries that are trying to implement sanctions to identify intermediary model-style networks and business partners for further action.

In the months following the invasion in Ukraine, crypto prices and crypto market capitalization have dropped significantly, which further strengthens our point that, even with the most liquid crypto assets, wide-ranging sanction evasion is not viable via the crypto economy.

4 Conclusions

We then described the three categories of sanctions imposed by the EU (personal, sectoral and regional), showing that circumventing EU sanctions through the crypto economy is a demanding and potentially complex undertaking with bleak results for circumventors. In light of the official EU sanctions regime and leaving aside regional sanctions, different motives for sanction evasion can be directly derived from personally sanctioned individuals and from sanctions with a sectoral focus.

While influential sanctioned individuals and oligarchs would mainly be interested in preserving and securely storing their wealth, enterprises and businesses faced with sectoral sanctions would be strongly motivated to find solutions for acquiring banned components and material as well as ways to preserve their payment and financing capabilities. Any considerations of sanction evasion via the crypto economy are not made easier by the fact that inherently transparent blockchain-based transactions are currently under scrutiny at the gateways of exchange. Keeping one’s anonymity by using unhosted wallets may seem attractive for obfuscating ownership but may be daunting when attempting to reconvert at exchanges with strict KYC regimes.

Furthermore, we categorized three potential methods for sanction evasion: the direct peer-to-peer system, the intermediary model and the escrow model. All three are based on cases observed in the global crypto economy and have been applied to varying degrees. The direct peer-to-peer system is the simplest method, involving simple digital trade between two peers, and to some extent forms the basis for the other two models. As for usage on a big and systemic scale, we argue that this method is rather simple and not sufficiently automatable and scalable.

The intermediary model is a more fine-tuned and complex model for sanction evasion. It relies on the exchange of money via correspondent financial institutions in sympathetic countries and a large number of coordinated peer-to-peer transactions carried out to exchange and broadly invest crypto assets outside of the sanctioned country and then channeling them back there. While the intermediary model offers advantages like versatility for oligarchs trying to circumvent sanctions or for sanctioned states looking to keep up imports and exports in an alternative way, there are also significant downsides. There is the constant possibility that middlemen might be recognized and end up on sanctions lists themselves. Also, the model depends on highly complex business networks and dedicated efforts and costs to keep these networks running. Nevertheless, in theory, the intermediary model may be a feasible option for major oligarchs and the most viable way of systemic sanction evasion on a national level.

The escrow model builds on peer-to-peer interactions but supplements them with automated smart contracts as facilitators and reputable intermediaries providing escrow services. The escrow model is versatile, discreet and builds on an already highly accepted business model as we show in an example. That said, it still mostly qualifies for small-scale trade, and we currently do not see a larger-scale applicability of this model.

Last but not least, we examined available crypto market liquidity. We can see that the crypto economy grew significantly in the years before Russia’s invasion in Ukraine, but even so, the adjusted global bitcoin transaction volumes are not sufficient to cover required ruble foreign exchange capacities. Following Russia’s invasion of Ukraine, crypto valuations strongly dropped, which further underlines that crypto assets do not seem to be perceived as a viable option for large-scale sanction evasion (otherwise prices would have increased). There may be ways for businesses or parts of the economy to use the crypto economy to circumvent sanctions, but we conclude that, in the current situation, such attempts would mainly be doubtful emergency measures for preserving parts of individual wealth.

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90th East Jour Fixe

Can we win the battle against uncertainty? New approaches to macroeconomic forecasting in CESEE

Compiled by Katharina Allinger and Thomas Scheiber

In her welcome remarks, Birgit Niessner (Director of the Economic Analysis and Research Department, OeNB) highlighted the OeNB’s long track record in forecasting GDP for selected economies in Central, Eastern and Southeastern Europe (CESEE) and the current challenges associated with producing timely and accurate forecasts. This was followed by a lecture by Robert C. M. Beyer, economist at the IMF, on satellite imagery as a proxy for economic data in uncertain times. Beyer highlighted that satellite data in general have four main advantages: usually, they (1) contain information that is difficult to obtain with other data, (2) are available at high spatial resolution, (3) have high geographic coverage and (4) have low financial costs. He proceeded to talk about nighttime light data as one form of satellite data that has been frequently used by economists. The provision of annual DMSP-OLS data was discontinued in 2013. According to Beyer, research based on monthly VIIRS data, available from 2012, is still lacking. He highlighted that any nighttime light data have shortcomings, e.g. noisiness, but showed examples of interesting questions that can be answered with these data. For instance, Beyer talked about studies estimating the economic impact of COVID-19 containment measures and natural disasters. Regarding the use of nighttime light data for forecasting, Beyer noted that first efforts have been made. So far, it seems that the benefits of using these data are particularly high when there is little other data available. He also highlighted that a lot of work still needs to go into the meaningful aggregation of nighttime light data.

Session 1 was chaired by Julia Wörz (Head of the Central, Eastern and Southeastern Europe Section, OeNB). Alexander Plekhanov (Director for Transition Impact and Global Economics, European Bank for Reconstruction and Development) elaborated on his experience in gauging economic activity during the COVID-19 pandemic with high-frequency mobility data. Mobility turned out to have high predictive power for tracking the COVID-19 downturn and recovery in most countries, but some measurement issues challenged the use of mobility indices for nowcasting, particularly noise in the data and country-specific mobility patterns. Estimates yield that a 10% drop in mobility translated into an approximately 2% drop in GDP growth. Over the course of the pandemic, some of the cyclical differences in mobility have become structural, which implies that the link between mobility and economic activity has changed. Still, stronger economic activity later in the pandemic can be attributed to recovering mobility – but mobility itself did not recover fully in all places. In general, mobility-based nowcasts performed better than random walk and other naïve forecasts, except for Ireland, Greece and Russia, where the nowcasts performed poorly for different reasons. Plekhanov concluded that, as with nighttime light as a proxy for economic activity, forecasters have to be aware of what they are trying to estimate and what information their input signals transfer.

Olga Pindyuk (Senior Economist, Vienna Institute for International Economic Studies) discussed the literature on the role of expert judgment in short-term economic forecasting. Macroeconomic forecasts should be treated with caution, especially in times of crisis. Forecasting models are far from accurately capturing complex, dynamic modern economic and commercial systems in which humans play a decisive role. Forecasters make systematic errors when economies are subject to major perturbations. They tend to overestimate growth in downturns, miss the onset of recessions and underestimate recoveries and booms. Still, forecasts are crucial for policymaking. Like medical doctors, they cannot predict illness but help us understand why one got sick. Forecasts provide information on the main interaction forces in the economy and assess the balance of risks and uncertainties regarding the economic outlook and policy responses. Pindyuk stressed that expert judgment improves forecasts’ precision, particularly in shorter-term forecasting. It is especially useful if important variables are missing from the causal model, data are poor, relationships are mis-specified or may have changed, or the environment has changed. To exploit the benefits, it is necessary to address the caveats too. Cognitive factors and motivational biases can lead to the inefficient use of information by experts. Therefore, the wiiw implemented several support systems to support the accuracy of expert judgment and as a result of the forecasts.

Svetlana Makarova (Associate Professor, University College London, Vistula University, Poland) presented insights from her research on economic uncertainty and natural language processing for the case of Russia. Makarova and her coauthors were able to construct a text-based country-specific (economic policy) uncertainty index based on media publication in Russian – capturing linguistic undertones, sentiments and reporting styles more accurately than English translations. Moreover, the lexicon-based approach outperformed machine learning because of the complex conjugation that is typical for Slavic languages. The derived uncertainty index for Russia tracks the underlying series of predefined uncertainty-generating events with an accuracy of 92%. Based on Bloom et al. (2018) ⁴⁵ , Makarova showed that the uncertainty shocks as signaled by the uncertainty index have predictive power for negative real effects in Russia.

Session 2 was chaired by Gerhard Fenz (Head of the Business Cycle Analysis Section, OeNB) and featured three presentations. Nikodem Szumilo (Associate Professor, University College London) discussed a recently produced Warcast Index, which tracks economic activity during the war in Ukraine. The index was designed specifically for use by the Ukrainian authorities, who were interested in timely estimates for regional economic developments. The model was designed to be simple (linear OLS model) and uses publicly available data only. Specifically, Szumilo and his coauthors were able to calibrate a model that very closely tracks Ukrainian pre-war GDP by using nighttime light data, Twitter data and Google Trends data. Szumilo highlighted that the model was a black box and recapped points made in session 1 about the difficulties associated with deciding and understanding what kind of activity a model actually measures or should measure. The presentation contained a visualization of the results until May 2022 for a number of regions, which showed that the war led to a dramatic decrease in economic activity in all regions, but in safe areas the economy quickly rebounded. Economic activity in Western regions rose to above pre-war levels, while occupied regions recovered slowly, even though liberating a region accelerated its economic recovery.

Klaus Vondra (Principal Economist, Business Cycle Analysis Section, OeNB) presented forecast efforts of the OeNB during the pandemic. He showed the weekly GDP indicator that was based on novel, partially confidential daily and weekly data. He showed that the indicator worked very well in forecasting realized GDP during the COVID-19 pandemic but noted that it required a lot of time and effort and data mining. These challenges are part of the reason why the indicator was discontinued during the summer of 2022. However, the OeNB still uses credit card payments data to forecast tourist overnight stays for the purpose of nowcasting. This approach produces very accurate results and improves the nowcast, given the high importance of tourism for the Austrian economy. The OeNB’s Business Cycle Analysis Section has been continuously working on improving its models and forecasting methodology.

Finally, Thomas Warmedinger (Deputy Head of Division, Business Cycle Analysis, European Central Bank) talked about the learning experiences of the ECB regarding forecasting during the COVID-19 pandemic and since the start of the war in Ukraine. He highlighted four main lessons learned: First, narratives are vital in communicating forecasts, as they provide a consistent story that includes underlying assumptions. Second, developing and utilizing new tools and indicators is important, particularly during crises. For instance, the ECB expanded its use of high-frequency indicators and nonlinear modeling and put more emphasis not only on shocks to growth but also on the trajectory of GDP levels. Third, forecasters need good approaches to deal with uncertainties. These could be projection ranges or scenarios, for instance. In all cases, transparency regarding assumptions is crucial. Finally, the ECB adapted standard models and procedures. For instance, it allowed more flexibility in certain procedures to accommodate exceptional, last-minute updates of data or information. In the Q and A session, Warmedinger and Fenz also briefly discussed difficulties and ongoing efforts to improve high-frequency inflation forecasts.