Economic trends in CESEE

Stubbornly high inflation despite cooling economy ^{1 , 2 , 3}

1 Regional overview

CESEE is not yet out of the woods, though. Economic activity continued to weaken in early 2023 (also compared to the euro area) and inflation remains ­stubbornly high despite the notable cooling of the economy. Adjustments to the measures introduced to shield households from spiraling energy prices have ­introduced quite some volatility in headline inflation rates. Underlying (core) price pressures are proving sticky, with labor markets very tight throughout the CESEE region. At the same time, the fast rise in policy rates is starting to bite, and rising (global) financial sector risks could – despite generally solid fundamentals – spill over into CESEE banking sectors. Public support amid the energy crisis and rising government financing costs have consumed fiscal space and are limiting fiscal ­policymakers’ ability to respond flexibly to new challenges.

Economic activity weakened throughout the review period

Output contracted in the CESEE EU member states in Q4 2022

Table 1: Real GDP growth  

	2020	2021	2022	Q1 21	Q2 21	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Period-on-period change in %
Slovakia	–3.4	3.0	1.7	–1.4	1.9	0.3	0.4	0.3	0.3	0.3	0.3
Slovenia	–4.3	8.2	5.4	1.7	2.0	2.9	3.4	1.0	0.8	–1.3	0.8
Bulgaria	–4.0	7.6	3.4	2.7	1.3	1.9	1.5	0.4	0.7	0.6	0.6
Croatia	–8.6	13.1	6.3	7.2	0.5	2.4	2.1	2.4	1.3	–0.5	0.9
Czechia	–5.5	3.6	2.5	–0.5	1.4	1.7	0.8	0.6	0.3	–0.3	–0.4
Hungary	–4.5	7.2	4.6	1.1	2.3	1.6	2.5	1.3	0.7	–0.7	–0.4
Poland	–2.0	6.8	4.9	2.6	2.2	2.1	1.7	4.2	–2.2	1.1	–2.4
Romania	–3.7	5.9	4.8	2.0	1.8	0.8	0.6	1.3	1.2	1.2	1.0
Türkiye	1.9	11.3	5.6	2.6	2.0	2.7	1.6	0.7	1.9	–0.1	0.9
Russia	–2.7	5.6	–2.1	0.7	1.6	0.6	0.9	0.2	–4.6	0.5	0.5
CESEE average1	–2.0	7.8	2.2	1.6	1.8	1.5	1.3	1.1	–1.4	0.4	0.2
Euro area	–6.1	5.3	3.5	0.0	2.0	2.3	0.6	0.6	0.9	0.4	0.0
Source: Eurostat, national statistical offices.
1 Average weighted with GDP at PPP.

Private consumption almost completely disappeared as a central pillar of growth

Gross fixed capital formation advanced by close to 5% on average in the region during the second half of 2022 and was especially buoyant in Slovakia, Croatia and Romania. While nominal financing conditions tightened notably throughout ­CESEE, real interest rates remained firmly in negative territory, and high profitability provided sources for internal financing. Capital formation was also ­supported by the beginning utilization of funds under the Recovery and Resilience Facility (RRF), above-average capacity utilization and/or efforts to save (increasingly scarce) labor in several countries. Stock changes, however, weighed on GDP as the high inventories that were built up in 2021 and early 2022 (mostly related to supply chain issues) were slowly being depleted.

Although net exports slowed down toward the end of 2022, they often made a positive contribution to growth – for the first time since late 2020. Real exports increased more strongly than real imports. This in part reflected the unclogging of supply chains amid order backlogs from the past and stronger than expected ­demand from Western Europe. Exchange rate weakness (for example in Hungary), the strong tourist season (for example in Croatia), consumption restraint and/or lower energy imports due to high world market prices and/or energy-saving ­measures also played a role. In 2022, natural gas demand declined notably in ­almost all CESEE EU member states, most strongly so in Romania and Croatia (–14% and –19%, respectively, compared to the 2019–2021 average). In addition, CESEE countries used 4% to 17% less electricity in 2022 than in 2021, with Slovakia and Romania leading the way.

In the review period, poor economic confidence, weakening loan growth and losses in purchasing power in the wake of strong inflation had a growing impact on consumer spending in the CESEE EU member states. By the fourth quarter of 2022, private consumption growth had declined to only 0.5% on average (and was even negative in Czechia and Poland), delivering a moderate contribution to GDP growth at best. The central pillar of growth over the first half of 2022 has thus almost completely disappeared.

Labor market tightness persists

Earthquakes weighed on activity in Türkiye

Russian economy is weathering Western sanctions rather well

The price cap for Russian oil and the European Union’s import ban increased the price discount of Russian oil vis-à-vis oil from other origins from late 2022 ­onward. This weighed on the ruble’s external value and the currency fell back to its pre-invasion level against the euro in late March 2023 (see chart 2). Inflation spiked at 17.8% in April 2022 but came back to 11% in February 2023. After ­reducing its key rate to 7.5% in mid-September 2022, the Bank of Russia (CBR) has so far left it at this level.

Inflation in CESEE EU stabilizes at a high level amid considerable volatility

However, price dynamics in the region have not yet embarked on a stable und sustainable downward trend. Core inflation, for instance, remained very high and kept on increasing in several countries of the region. This reflected lagged effects of the pass-through of producer price spikes to consumer bills, an expansion of profit margins in some sectors as well as rising (labor-intensive) services prices. The latter could suggest a stronger translation of wage costs into the general price level amid tight labor markets. Nominal wage growth had already accelerated to around 11% on average in the fourth quarter of 2022. However, the risk of a wage-price spiral is mitigated to some extent by the low unionization in CESEE EU member states and easing inflation expectations. Surveys among consumers show that inflation expectations recently converged back to the values reported in 2018. Inflation expectations in industry, retail and services came down as well but have not yet returned to their pre-pandemic levels.

Moreover, aid packages to shield households from spiraling prices (mostly ­energy prices) had to be adjusted in several instances as they negatively impacted national budgets and/or the balance sheets of energy suppliers. This once again boosted (regulated) energy prices, and the average inflation rate in the CESEE EU member states again edged up to 16.9% by February 2023. Hungary, for instance, abandoned its fuel price caps and increased its regulated prices for household ­energy; Czechia introduced a price cap to replace its (subsidized) energy-saving tariff; and Poland removed tax breaks on fuel and energy. Going forward, further adjustments cannot be ruled out, at least in some countries, as the prices for household energy are not yet aligned with world market prices and/or as tax rates (­especially for food and energy) have not yet returned to pre-pandemic levels. However, statistical effects as the war-related price spikes of early 2022 drop out of the base should also contribute to some easing of price pressures going forward.

Tightening cycles near an end

The interest rate ceiling may also have been reached in Romania, after the ­central bank hiked its policy rate by a moderate 25 basis points to 7% at the ­beginning of January 2023. Forward rate agreements for the abovementioned countries indicate that market expectations are broadly in line with current market rates. In Hungary, even some unwinding of the emergency rate step of October 2022 is expected in the course of the year.

In Türkiye, both headline and core inflation decelerated from their peaks (at 85% and 79%, respectively, in October 2022) to 55% and 57%, respectively, in February 2023. In parallel, the Turkish central bank (TCMB) delivered policy rate cuts by 150 basis points each in October and November (to 9%) and another one in February to 8.5%, implying a large negative real key rate. Against this background and despite regulatory measures to foster a “liraization” of banks’ assets and liabilities, the lira depreciated against the euro by 30% in nominal terms since January 2022 (see chart 5).

Most currencies have recovered to levels seen prior to the invasion of Ukraine

Currencies only temporarily affected by international financial market turbulences

Banking sector momentum has weakened

This increasingly restrictive situation in CESEE banking sectors is not yet fully reflected in credit market data and banks’ balance sheets. Credit dynamics in the CESEE region decelerated in the review period, reflecting a slowdown in new lending due to higher interest rates, more early repayments than in previous years and declining volumes in housing transactions. The weakening, however, was not observed evenly across countries and sectors. Credit growth rates, for example, remained broadly stable in Croatia, Bulgaria and Hungary amid some deceleration in growth of credit to households and largely unabated corporate sector credit ­dynamics. By contrast, corporate loan growth weighed heavily on credit market developments in Slovenia, Czechia, Poland and Romania.

Yet banks’ results and balance sheets have remained sound

In Türkiye, the supervisory authority has required since mid-2022 that ­corporations are only granted access to new lira loans if their foreign exchange holdings (including gold) remain below a low ceiling. Moreover, to contain lira loan growth, the central bank has introduced and gradually raised reserve requirement ratios and securities maintenance ratios on selected commercial lira loans, plus additional ratios for banks with high loan growth or relatively high loan interest rates. Despite these measures, growth of credit to the private sector remained well in the double digits. Banking sector profitability increased amid higher operating income and asset growth was reflected in lower NPL ratios.

Even Russia’s banking sector reported a moderate profit in 2022

External balances slid further into deficit amid terms-of-trade effects

Sufficient financing for covering external deficits

Inflation is boosting government revenues and lowering debt ratios

At the same time, the unexpectedly strong rising price level also boosted tax receipts and – through higher nominal GDP – reduced public debt ratios.

The above factors translated into somewhat lower headline deficits across most of the region, with the exceptions of Poland and Türkiye. Deficit ratios, however, remained elevated, with only Croatia and Slovakia staying below the 3% of GDP target. Debt ratios were lower than a year earlier and hovered between 39.4% of GDP (Türkiye) and 73.3% of GDP (Hungary). Only Bulgaria (22.9% of GDP) and Russia (15.1% of GDP) reported lower government debt levels in 2022. ­Concerning public finances in Russia, the general government balance reverted from a small surplus in 2021 to a deficit of 1.4% of GDP in 2022. This reflected rising ­budgetary support for strategic enterprises, SMEs as well as households, expanding arms production, and sharply declining imports and thus import taxes due to Western trade restrictions.

2 Slovakia: one-eyed among the blind? The economy grows dull but scrapes past a recession

Labor market indicators have come close to their pre-pandemic levels over the last months. Following a moderate but continuous decline until July 2022, the ­unemployment rate has remained broadly stable since. Employment, in contrast, has kept on rising, although only marginally as demand for labor has weakened amid elevated uncertainty. Foreign workers, particularly refugees from Ukraine, have continued to fill vacant jobs and thus helped mitigate the notorious skill ­mismatch and lack of (skilled) labor. Nominal wages saw a significant increase, predominantly in the public sector, mainly owing to a previously bargained one-off bonus. Yet, while labor cost increases have outpaced productivity growth, nominal wage growth did not keep up with rising costs of living. Headline inflation continuously headed upward and came in at 15.4% in February 2022. While soaring food and energy prices seem to have peaked in November 2022, core inflation continued climbing to more than 15% most recently. Hence, despite a reduction in the VAT rate for selected goods and services, price hikes have been bloated by nearly all components, most notably food and services.

The general government deficit came in at 2% of GDP in 2022. The reduction compared to 2021 was driven by stronger economic growth, higher tax revenues (not least on the back of high inflation) and lower pandemic-related expenditures. However, these positive factors were counteracted by government expenditures related to the war in Ukraine and measures to compensate firms and households for galloping prices. After the government did not survive the no-confidence vote in the parliament in December 2022, it remains in office with a limited care-taking mandate since snap elections have only been scheduled for end-September 2023. This unusually long run-up has some uncommon consequences such as a power shift toward the parliament, which may also bear some risks.

Table 2: Main economic indicators: Slovakia  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	–3.4	3.0	1.7	1.4	1.3	2.9	1.3	1.4	1.1
Private consumption	–1.2	1.7	5.1	3.0	3.1	9.3	4.2	2.8	4.5
Public consumption	–0.6	4.2	–3.2	1.0	3.9	–1.4	–7.1	–2.1	–2.0
Gross fixed capital formation	–10.8	0.2	6.5	–1.8	5.3	6.4	0.5	8.2	9.8
Exports of goods and services	–6.4	10.6	1.0	–2.0	2.2	–5.8	–0.9	8.8	2.6
Imports of goods and services	–8.2	12.1	3.0	4.4	4.5	–1.5	–1.4	6.9	8.0
	Contribution to GDP growth in percentage points
Domestic demand	–5.0	4.1	3.6	6.6	3.4	7.5	0.9	0.0	6.3
Net exports of goods and services	1.6	–1.0	–1.9	–5.3	–2.1	–4.6	0.4	1.5	–5.2
Exports of goods and services	–5.8	9.0	0.9	–1.6	1.7	–5.8	–0.9	6.9	2.5
Imports of goods and services	7.5	–10.1	–2.8	–3.7	–3.8	1.2	1.3	–5.4	–7.7
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	5.6	2.7	6.6	4.4	5.5	5.4	6.8	8.8	5.6
Unit labor costs in manufacturing (nominal, per hour)	1.5	–3.0	8.6	10.2	7.7	10.2	11.1	3.6	10.1
Labor productivity in manufacturing (real, per hour)	2.6	9.9	–0.9	1.5	6.4	0.5	–0.2	2.4	–5.7
Labor costs in manufacturing (nominal, per hour)	3.6	7.3	7.6	11.9	14.7	10.8	10.9	6.1	3.8
Producer price index (PPI) in industry	–0.5	6.8	27.8	9.3	14.5	24.4	30.6	31.0	25.0
Consumer price index (here: HICP)	2.0	2.8	12.1	3.4	4.8	8.5	11.8	13.3	14.9
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	6.8	6.9	6.2	6.8	6.6	6.4	6.2	6.1	6.1
Employment rate (%, 15–64 years)	67.5	69.5	71.4	70.3	70.8	70.6	71.4	71.6	71.8
Key interest rate per annum (%)	0.0	0.0	0.6	0.0	0.0	0.0	0.0	0.5	1.8
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	4.5	7.3	10.5	5.2	7.3	8.9	11.7	12.0	10.5
of which: loans to households	6.1	8.8	10.3	8.0	8.8	10.5	11.3	11.1	10.3
loans to nonbank corporations	1.4	4.3	10.8	–0.2	4.3	5.5	12.6	13.9	10.8
	%
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	0.0	0.1
Return on assets (banking sector)	0.5	0.7	0.8	0.8	0.7	0.5	0.7	0.7	0.8
Tier 1 capital ratio (banking sector)	18.1	18.3	18.0	18.8	18.3	18.1	17.8	17.8	18.0
NPL ratio (banking sector)	2.3	1.9	1.7	1.9	1.9	1.9	1.9	1.8	1.7
	% of GDP
General government revenues	39.4	40.1	40.2	..	..	..	..	..	..
General government expenditures	44.7	45.6	42.3	..	..	..	..	..	..
General government balance	–5.4	–5.4	–2.0	..	..	..	..	..	..
Primary balance	–4.1	–4.4	–1.1	..	..	..	..	..	..
Gross public debt	58.9	61.0	57.8	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	54.5	52.7	51.2	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	46.6	47.9	48.0	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	1.1	–0.5	–6.2	–2.6	–1.6	–6.7	–4.3	–4.8	–8.9
Services balance	1.0	0.6	0.4	1.2	0.2	0.5	0.1	0.2	0.6
Primary income	–0.8	–1.5	–1.7	–1.4	–2.7	–0.9	–1.9	–1.6	–2.3
Secondary income	–0.7	–1.0	–0.8	–0.8	–0.4	–1.5	–0.9	–1.2	0.4
Current account balance	0.6	–2.5	–8.3	–3.6	–4.5	–8.6	–6.9	–7.4	–10.2
Capital account balance	0.8	1.3	1.3	0.2	0.7	–0.1	1.0	1.1	2.8
Foreign direct investment (net)3	2.6	0.3	–2.2	–1.2	0.7	–1.7	–2.2	–3.0	–1.8
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	119.6	135.0	105.0	116.9	135.0	141.5	129.6	111.6	105.0
Gross official reserves (excluding gold)	6.5	7.0	9.0	7.1	7.0	8.8	9.6	9.3	9.0
	Months of imports of goods and services
Gross official reserves (excluding gold)	0.9	0.9	1.0	1.0	0.9	1.1	1.2	1.1	1.0
	EUR million, period total
GDP at current prices	93,414	98,523	107,730	26,025	25,935	24,076	26,807	28,504	28,344
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: inflation moderates as consumption loses steam and energy prices decline

The budget deficit amounted to 3% of GDP in 2022, down from 4.6% ­recorded in 2021. This improvement was supported by a strong rise in revenues, which were aided by corporate tax proceeds and VAT revenues. At the same time, budget ­expenditures decreased owing to a fall in current transfers as support measures related to COVID-19 were gradually phased out.

For 2023, the government plans a budget deficit of 5.3% of GDP. The ­widening of the deficit is mainly related to increased spending on measures to mitigate the impact of the energy and cost-of-living crisis, but in part also due to increased ­public sector wages and pension outlays. The Fiscal Council has noted that less than 20% of the adopted measures to ease the cost-of-living crisis represent ­targeted measures. It has also criticized that, excluding crisis mitigation measures, budget expenditure growth is expected to be the highest ever. It also warned that the government will likely have to revise the 2023 budget later in the year, as some expenditure items have been underestimated. In fact, in late March 2023, the ­government announced a proposed revision of the 2023 budget, cutting both ­expenditures and the deficit, stating that fewer measures were needed to mitigate the impact of higher energy costs than previously anticipated.

HICP inflation hovered around 10% and 11% between September and December 2022, before falling back to 9.4% by February 2023. The decline in early 2023 was caused mainly by the prices for energy (and, to a smaller extent, unprocessed food), which partly reflected favorable international energy price developments and government measures to mitigate the impact of rising energy prices. By ­contrast, core inflation edged somewhat higher on the back of accelerating price increases for processed food and services.

The combined current and capital account recorded a deficit during the second half of 2022 as the surplus on the goods and services balance continued to evaporate while the combined deficit on the other items increased modestly. The worsening of the goods and services balance resulted largely from the deterioration of the terms of trade.

Banking sector profitability worsened modestly in 2022. Operating income improved on the back of intensified lending activity and an improvement in the interest margin, but banks created some additional provisions (despite a modest improvement in the quality of the credit portfolio).

Table 3: Main economic indicators: Slovenia  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	–4.3	8.2	5.4	5.1	10.5	10.2	8.6	3.3	0.2
Private consumption	–6.9	9.5	8.9	5.8	21.2	20.0	12.9	3.2	2.4
Public consumption	4.1	5.8	0.9	5.4	8.3	4.8	0.8	–0.6	–1.0
Gross fixed capital formation	–7.9	13.7	7.8	11.8	13.2	9.4	7.3	8.7	5.9
Exports of goods and services	–8.6	14.5	6.5	12.6	13.8	8.2	9.3	11.9	–2.5
Imports of goods and services	–9.6	17.6	9.8	19.5	18.1	17.2	12.6	12.6	–1.5
	Contribution to GDP growth in percentage points
Domestic demand	–4.3	9.0	7.5	8.3	12.3	16.3	10.4	3.2	1.2
Net exports of goods and services	0.0	–0.8	–2.1	–3.2	–1.8	–6.1	–1.9	0.1	–0.9
Exports of goods and services	–7.2	11.3	5.4	9.5	11.1	6.9	7.8	9.7	–2.1
Imports of goods and services	7.2	–12.0	–7.5	–12.7	–12.9	–13.0	–9.7	–9.6	1.1
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	7.6	0.9	1.1	5.0	–4.3	–5.1	–2.3	4.2	8.7
Unit labor costs in manufacturing (nominal, per hour)	6.8	–3.0	2.0	3.9	–0.9	–3.0	2.7	–1.2	9.6
Labor productivity in manufacturing (real, per hour)	–3.3	9.9	5.3	2.9	10.4	9.7	6.6	5.1	–0.2
Labor costs in manufacturing (nominal, per hour)	3.2	6.8	7.3	6.9	9.3	6.4	9.5	3.9	9.4
Producer price index (PPI) in industry	–0.3	5.5	19.6	7.5	9.9	15.6	21.7	21.2	19.9
Consumer price index (here: HICP)	–0.3	2.0	9.3	2.3	4.5	6.3	9.0	11.3	10.6
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	5.0	4.8	4.0	4.5	4.5	4.3	4.2	4.0	3.4
Employment rate (%, 15–64 years)	70.9	71.5	73.1	73.4	72.4	72.5	73.1	73.9	73.0
Key interest rate per annum (%)	0.0	0.0	0.6	0.0	0.0	0.0	0.0	0.5	1.8
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	–1.0	5.6	10.4	2.2	5.6	8.0	10.4	12.8	10.4
of which: loans to households	0.1	5.0	7.5	3.6	5.0	6.7	7.9	8.2	7.5
loans to nonbank corporations	–2.2	6.2	13.4	0.7	6.2	9.4	13.2	17.6	13.4
	%
Share of foreign currency loans in total loans to the ­nonbank private sector	1.4	1.1	0.8	1.2	1.1	1.0	1.0	0.9	0.8
Return on assets (banking sector)	1.0	1.1	1.0	1.0	1.1	0.7	0.8	0.5	1.0
Tier 1 capital ratio (banking sector)	16.7	16.9	15.9	17.0	16.9	15.7	15.7	15.5	15.9
NPL ratio (banking sector)	1.9	0.8	0.7	0.9	0.8	0.9	0.8	0.8	0.7
	% of GDP
General government revenues	43.7	44.9	42.5	..	..	..	..	..	..
General government expenditures	51.4	49.5	45.5	..	..	..	..	..	..
General government balance	–7.7	–4.6	–3.0	..	..	..	..	..	..
Primary balance	–6.1	–3.4	–1.9	..	..	..	..	..	..
Gross public debt	79.6	74.5	69.9	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	47.8	46.1	43.1	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	27.8	26.4	25.1	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	5.0	1.7	–3.9	0.5	–1.1	–4.1	–4.1	–2.6	–4.9
Services balance	4.4	4.7	6.1	5.4	4.9	4.5	6.0	7.3	6.3
Primary income	–0.8	–1.7	–1.7	–1.1	–2.2	–1.2	–1.6	–2.6	–1.2
Secondary income	–1.0	–0.9	–0.9	–0.7	–0.9	–1.0	–1.0	–0.9	–0.7
Current account balance	7.6	3.8	–0.4	4.1	0.7	–1.9	–0.6	1.2	–0.5
Capital account balance	–0.5	0.1	–0.4	0.3	–0.1	–0.3	–0.3	–0.1	–1.0
Foreign direct investment (net)3	0.6	–0.8	–2.1	–1.3	3.8	–2.7	–1.8	–2.0	–1.8
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	102.1	97.3	88.0	103.1	97.3	96.2	92.8	90.5	88.0
Gross official reserves (excluding gold)	1.9	3.5	3.3	3.4	3.5	3.5	3.5	3.5	3.3
	Months of imports of goods and services
Gross official reserves (excluding gold)	0.3	0.5	0.4	0.5	0.5	0.5	0.5	0.5	0.4
	EUR million, period total
GDP at current prices	47,021	52,208	58,989	13,483	14,009	13,313	15,017	15,309	15,349
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 risks stagflation after fifth inconclusive election

The interplay of wages and prices also influences economic activity. Despite high inflation, real GDP continued to expand by 3.4% in 2022, supported by robust growth in exports and by wage and social transfer increases that compensated consumers for losses in purchasing power. Private and public consumption as well as the buildup of inventories contributed positively to real GDP growth over the year, while net exports and gross fixed capital investment contributed negatively.

Quarterly data reveal a pronounced cycle of inventories, and stock changes started to dampen GDP growth in the second half of 2022. The cycle was driven by disruptions of global supply chains that changed the incentives for firms to maintain stocks of commodities, raw materials and finished products.

The downward trend in fixed capital investment that started in 2021 persisted in 2022. Rising prices of investment goods and political stalemate that delayed the disbursement of NextGenerationEU (NGEU) funds and, more recently, higher interest rates, have been suppressing new investment. However, fixed capital formation started to add to GDP growth in the final quarter of 2022.

The global energy crisis disrupted the recovery in Bulgaria. While industrial production started to shrink in the second half of 2022, the labor market is lagging behind the cycle. Real GDP is expected to slow down considerably in 2023 in line with weak external demand and rising borrowing costs. GDP estimates range between 0.4% and 2.5%.

The snap general election on April 2, 2023, the fifth in two years, produced yet another highly fragmented parliament with little chance to form a regular government. If the political parties cannot form a temporary technocratic cabinet with a specific agenda, then Kremlin-friendly President Radev will continue ruling through caretaker governments until the next snap vote, which is likely to be held together with the local elections in autumn. Bulgaria’s prolonged political deadlock has already forced the country to delay its target date for adopting the euro until 2025. The uncertainty has also hampered Bulgaria’s ability to harness EU post-pandemic recovery funds by delaying significant reforms and infrastructure investments and in turn slowing down economic convergence.

In the absence of a formal 2023 budget bill, the generous support measures for households and firms are still in force. They are mostly untargeted and distorting price signals – and they are increasingly jeopardizing the path to sound public ­finances. While the debt-to-GDP ratio is low, spending pressures related to aging, health and education, as well as infrastructure and the green transition, are mounting. Moreover, rising interest rates and sovereign spreads and the short tenor of public debt have increased the public debt interest burden.

Table 4: Main economic indicators: Bulgaria  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	–4.0	7.6	3.4	8.6	10.2	4.4	3.9	2.9	2.6
Private consumption	–0.6	8.8	4.8	9.8	8.9	5.5	2.1	4.2	6.8
Public consumption	8.3	0.4	6.5	2.9	2.3	6.6	11.6	3.8	4.5
Gross fixed capital formation	0.6	–8.3	–4.3	–11.9	–13.0	–7.4	–11.0	–3.3	2.4
Exports of goods and services	–10.4	11.0	8.3	9.6	9.4	4.8	8.9	9.7	9.4
Imports of goods and services	–4.3	10.9	10.5	13.0	3.9	12.3	12.3	9.2	8.5
	Contribution to GDP growth in percentage points
Domestic demand	0.1	7.4	4.6	10.2	7.3	9.6	6.1	1.7	2.5
Net exports of goods and services	–4.0	0.2	–1.2	–1.6	2.9	–5.2	–2.2	1.2	0.1
Exports of goods and services	–6.6	6.2	5.1	5.4	5.1	3.9	6.0	5.9	4.4
Imports of goods and services	2.6	–5.9	–6.3	–7.0	–2.1	–9.1	–8.2	–4.7	–4.3
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	8.9	3.8	15.6	5.0	2.3	10.3	17.9	16.1	18.8
Unit labor costs in manufacturing (nominal, per hour)	1.6	–1.9	3.8	4.7	3.1	3.0	–1.6	4.5	9.1
Labor productivity in manufacturing (real, per hour)	3.7	8.8	13.6	10.5	9.3	14.5	17.2	13.6	9.5
Labor costs in manufacturing (nominal, per hour)	5.2	7.0	17.9	15.7	12.7	17.9	15.4	18.8	19.5
Producer price index (PPI) in industry	–2.0	15.5	38.3	17.4	28.9	33.9	40.2	50.2	28.8
Consumer price index (here: HICP)	1.2	2.8	13.0	2.9	6.0	8.9	13.4	15.2	14.5
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)	5.2	5.3	4.3	4.6	4.6	5.0	4.7	3.7	3.9
Employment rate (%, 15–64 years)	68.5	68.2	70.4	69.5	68.5	68.4	69.8	71.9	71.5
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	4.3	8.6	12.7	7.5	8.6	10.6	12.5	13.5	12.7
of which: loans to households	6.6	13.4	14.6	11.8	13.4	14.1	14.7	15.2	14.6
loans to nonbank corporations	2.9	5.5	11.4	4.8	5.5	8.4	10.9	12.2	11.4
	%
Share of foreign currency loans in total loans to the nonbank private sector	31.9	29.3	26.2	30.2	29.3	29.0	28.4	27.3	26.2
Return on assets (banking sector)	0.7	1.1	1.4	1.1	1.1	1.6	1.5	1.4	1.4
Tier 1 capital ratio (banking sector)	22.1	22.0	20.5	21.8	22.0	21.4	20.7	20.1	20.5
NPL ratio (banking sector)	4.3	3.7	2.8	3.8	3.7	3.3	3.1	3.1	2.8
	% of GDP
General government revenues	37.7	37.7	38.5	..	..	..	..	..	..
General government expenditures	41.5	41.5	41.3	..	..	..	..	..	..
General government balance	–3.8	–3.8	–2.8	..	..	..	..	..	..
Primary balance	–3.3	–3.3	–2.3	..	..	..	..	..	..
Gross public debt	24.5	24.5	22.9	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	77.1	69.3	60.2	..	..	..	..	..	..
Debt of households and NPISHs3 (nonconsolidated)	24.3	23.8	22.8	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	–3.2	–4.1	–5.8	–2.9	–6.4	–5.8	–3.8	–5.4	–7.8
Services balance	5.1	5.7	6.3	7.9	4.5	5.4	6.4	8.4	4.8
Primary income	–3.5	–3.3	–2.9	–4.2	–3.2	–4.8	0.4	–4.1	–3.0
Secondary income	1.6	1.2	1.7	1.8	0.9	1.0	1.5	1.5	2.3
Current account balance	0.0	–0.5	–0.7	2.5	–4.1	–4.2	4.6	0.4	–3.6
Capital account balance	1.4	0.7	0.9	0.6	–0.4	–2.3	0.0	–0.4	5.3
Foreign direct investment (net)4	–4.5	–1.4	–2.4	–2.2	0.9	–7.0	2.7	–2.7	–3.0
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	63.8	58.4	52.5	60.5	58.4	56.0	54.0	54.5	52.5
Gross official reserves (excluding gold)	46.8	45.7	42.8	44.9	45.7	41.6	40.3	42.9	42.8
	Months of imports of goods and services
Gross official reserves (excluding gold)	10.4	9.2	7.6	9.3	9.2	8.0	7.4	7.6	7.6
	EUR million, period total
GDP at current prices	61,639	71,077	84,561	19,515	20,518	17,248	20,075	22,987	24,251
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: smooth transition into the euro area amid slowing growth

At the same time, the geopolitical and economic environment remains challenging. Croatia’s impressive post-pandemic economic expansion has gradually weakened. GDP growth decelerated notably to 4.6% year on year in the second half of 2022 (6.3% for the full-year 2022). Private consumption growth slowed in the second half of the year, while growth of gross fixed capital formation accelerated strongly. Both components made roughly similar contributions to GDP growth. A relatively strong positive contribution came from changes in inventories. Net exports made a negative contribution in the second half of 2022 as the surplus in the services balance could not keep up with rising deficits in the goods balance. On the output side, all sectors except manufacturing expanded in the second half of the year.

CPI inflation was 11.7% year on year in February 2023 – the strongest contributions came from services and processed food items, while tax changes had a dampening effect. During 2022, the government passed two large policy packages to mitigate the effects of higher inflation (worth roughly 6% of 2021 GDP). On April 1, 2023, another policy package worth EUR 1.7 billion (around 2.5% of 2022 GDP) entered into force. The lion’s share (EUR 1.2 billion) has been allocated to energy price caps, the remainder to various measures to support the most vulnerable citizens and to subsidies. To help finance the packages, the government introduced a tax on excess corporate profits generated in 2022, which will bring in roughly 0.3% of GDP in additional revenues according to estimates by the Ministry of Finance.

Croatia’s public sector gross debt in euro has remained roughly unchanged compared to a year ago. However, in relative terms, indebtedness continued to decline to 70% of GDP, helped by strong economic growth. With these debt levels, Croatia broadly mirrors the EU average, while it has the third-highest public debt level among the CESEE EU member states. The budget deficit for 2022 came in at 1.6% of GDP and is expected to increase to 2.3% of GDP in 2023.

The Croatian National Bank announced an increase in the countercyclical ­capital buffer from 0.5% to 1% from December 31, 2023. It noted that cyclical risks are increasing due to continued strong growth of residential real estate prices, robust mortgage lending activity and very high growth of corporate lending. The latter slowed down somewhat in the second half of 2022. The banking sector’s return on assets was 1% in 2022, 0.3 percentage points lower than in 2021. This was due to lower net operating income. Banks’ tier 1 capital ratio declined from 25.4% to 24% between end-2021 and end-2022, mainly due to unrealized losses from bond valuations and an increase in risk-weighted assets. The NPL ratio continued to decrease to 3% at end-2022, while the share of stage 2 loans increased in the second half of 2022.

Table 5: Main economic indicators: Croatia  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	–8.6	13.1	6.3	16.7	12.2	7.8	8.7	5.2	4.0
Private consumption	–5.1	9.9	5.1	15.8	7.5	6.2	7.5	5.4	1.3
Public consumption	4.3	3.0	3.0	–4.5	14.3	5.8	–2.2	1.3	6.8
Gross fixed capital formation	–5.0	4.7	5.8	0.7	–5.0	2.0	3.9	8.0	9.6
Exports of goods and services	–23.3	36.4	25.4	53.0	34.4	27.8	40.3	23.3	14.2
Imports of goods and services	–12.4	17.6	25.0	19.8	20.1	29.5	26.5	30.5	14.6
	Contribution to GDP growth in percentage points
Domestic demand	–3.1	6.5	6.5	–3.0	8.8	14.1	5.5	2.1	5.7
Net exports of goods and services	–5.4	6.6	–0.2	19.7	3.4	–6.3	3.2	3.1	–1.7
Exports of goods and services	–11.8	15.1	13.0	28.7	13.7	9.4	17.2	17.7	6.8
Imports of goods and services	6.3	–8.5	–13.2	–9.0	–10.2	–15.7	–14.0	–14.6	–8.5
	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)	2.4	–0.9	6.9	3.5	5.3	4.1	8.3	7.3	8.1
Labor productivity in manufacturing (real, per hour)	–2.5	4.7	0.9	1.8	0.7	4.6	–0.2	1.2	–1.8
Labor costs in manufacturing (nominal, per hour)	–0.4	3.9	7.9	5.4	6.0	9.0	8.1	8.6	6.2
Producer price index (PPI) in industry	–3.2	11.7	25.8	13.1	24.6	25.1	32.5	30.2	15.6
Consumer price index (here: HICP)	0.0	2.7	10.7	3.1	4.6	6.4	10.8	12.6	12.8
EUR per 1 HRK, + = HRK appreciation	–1.6	0.1	–0.1	0.4	0.6	0.4	–0.1	–0.3	–0.3
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	7.6	7.6	7.1	6.3	6.3	7.2	7.4	6.8	6.8
Employment rate (%, 15–64 years)	62.0	63.4	65.0	64.6	64.1	64.2	64.9	65.1	65.6
Key interest rate per annum (%)	..	..	..	..	..	..	..	..	..
HRK per 1 EUR	7.5	7.5	7.5	7.5	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	2.8	2.4	10.4	2.8	2.4	3.9	7.2	10.4	10.4
of which: loans to households	1.6	4.1	5.3	4.5	4.1	4.0	5.1	4.9	5.3
loans to nonbank corporations	4.8	-0.1	18.6	0.2	-0.1	3.6	10.4	19.5	18.6
	%
Share of foreign currency loans in total loans to the ­nonbank private sector	52.0	52.2	58.1	51.5	52.2	52.1	52.5	55.1	58.1
Return on assets (banking sector)	0.6	1.2	1.0	1.1	1.2	1.2	1.2	1.3	1.0
Tier 1 capital ratio (banking sector)	25.0	25.4	24.0	25.2	25.4	25.2	24.6	23.5	24.0
NPL ratio (banking sector)	5.4	4.3	3.0	4.7	4.3	4.2	3.8	3.3	3.0
	% of GDP
General government revenues	46.7	46.0	45.7	..	..	..	..	..	..
General government expenditures	54.0	48.5	47.2	..	..	..	..	..	..
General government balance	–7.3	–2.6	–1.6	..	..	..	..	..	..
Primary balance	–5.3	–1.0	–0.3	..	..	..	..	..	..
Gross public debt	87.0	78.4	70.0	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	12.4	11.0	10.1	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	5.0	4.5	4.1	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	–17.6	–19.6	–26.7	–18.5	–20.7	–29.0	–27.0	–25.8	–25.4
Services balance	10.5	16.9	21.0	41.6	8.3	4.7	17.4	46.3	10.5
Primary income	2.5	0.9	0.9	–0.8	2.8	1.6	0.3	–1.1	3.1
Secondary income	4.0	3.6	3.2	3.3	3.0	3.4	3.1	2.8	3.5
Current account balance	–0.5	1.8	–1.6	25.6	–6.6	–19.2	–6.2	22.1	–8.3
Capital account balance	2.1	2.4	2.6	2.2	2.8	2.1	2.1	2.0	4.0
Foreign direct investment (net)3	–1.4	–4.8	–5.6	–7.1	–4.7	–6.8	–4.0	–5.0	–6.7
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	79.6	76.8	74.0	79.8	76.8	80.2	79.8	75.0	73.5
Gross official reserves (excluding gold)	37.6	42.9	41.5	43.6	42.9	40.1	40.4	40.4	41.2
	Months of imports of goods and services
Gross official reserves (excluding gold)	9.3	9.8	7.6	10.3	9.8	8.6	8.1	7.6	7.6
	EUR million, period total
GDP at current prices	50,427	58,269	67,393	16,412	14,823	14,368	16,854	18,922	17,249
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: economy navigating troubled waters; technical recession amid eye-catching imbalances

The balance of goods and services turned negative in H2 2022, to a large extent owing to high import prices of energy commodities. This, in combination with a rather high primary income deficit on the back of outflowing dividends, brought about an unusually deep current account deficit (6.1% of GDP in 2022). The ­general government deficit came in at 3.6% of GDP in 2022, while public debt ­increased to more than 44% of GDP. Public finances were burdened by permanent tax reductions implemented during the pandemic, expenditures ­related to the war in Ukraine and incoming refugees as well as by the support to households and firms troubled by strong price increases. These factors notwithstanding, the fiscal outcome was not only significantly better than the Treasury had expected but the deficit was also much smaller than in the previous two years. However, important challenges for public finances remain, e.g. relating to demographics and the pension system. The economic slowdown notwithstanding, the labor market remains rather tight. Despite a very moderate increase, the unemployment rate has stayed contained, hovering at or below 2.5%.

Strong and broad-based price growth accelerated almost continuously throughout 2022 with only a slight breather toward the end of the year owing to some easing in the price pressure of both energy and nonenergy imports. These echoed not only the relaxation on the energy markets but also some easing of the frictions in global supply chains as well as a steadily appreciating koruna. HICP inflation thus averaged just short of 15% in 2022. Yet it accelerated again in January 2023 (19.1%) as a result of electricity prices rising to the government price cap after the energy savings tariff was discontinued. In February, both headline and core inflation eased somewhat, inter alia due to some slowdown of service price growth and imputed rents. The CNB has kept its key interest rate unchanged at 7% since June 2022 as the composition of the CNB board shifted to a more dovish stance. In the new makeup a majority of CNB board members prefer rate stability while ­putting more emphasis on the strong exchange rate to rein in inflation. The CNB expects headline inflation to drop to single-digit levels in H2 2023 and to reach the 2% target in H1 2024.

Table 6: Main economic indicators: Czechia  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	–5.5	3.6	2.5	3.5	3.6	4.9	3.5	1.6	0.1
Private consumption	–7.2	4.1	–0.9	4.8	8.4	8.3	–0.1	–5.0	–5.5
Public consumption	4.2	1.4	0.6	5.1	0.6	1.3	1.7	–1.6	1.1
Gross fixed capital formation	–6.0	0.8	6.2	1.6	0.7	8.0	7.9	6.8	2.7
Exports of goods and services	–8.0	6.9	5.7	–1.7	–3.4	1.2	1.6	11.1	9.3
Imports of goods and services	–8.2	13.3	5.7	9.8	6.1	5.4	3.0	7.5	6.9
	Contribution to GDP growth in percentage points
Domestic demand	–5.1	7.1	2.3	10.7	10.3	7.8	4.4	–0.7	–1.6
Net exports of goods and services	–0.4	–3.6	0.2	–7.2	–6.7	–2.9	–0.9	2.3	1.8
Exports of goods and services	–5.9	4.8	4.1	–1.1	–2.7	1.0	1.3	7.2	6.6
Imports of goods and services	5.6	–8.4	–4.0	–6.1	–4.0	–3.9	–2.1	–4.9	–4.9
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	7.2	1.8	4.8	3.8	1.3	4.2	2.9	4.6	7.4
Unit labor costs in manufacturing (nominal, per hour)	2.9	–2.6	4.5	5.1	5.7	7.0	7.6	0.7	3.2
Labor productivity in manufacturing (real, per hour)	4.5	4.7	1.8	–0.1	–0.7	–0.4	–0.3	5.5	2.6
Labor costs in manufacturing (nominal, per hour)	7.1	2.4	6.5	4.9	4.9	6.6	7.2	6.2	5.9
Producer price index (PPI) in industry	0.6	6.2	18.6	8.1	11.0	16.4	21.3	20.6	16.2
Consumer price index (here: HICP)	3.3	3.3	14.8	3.3	5.0	10.2	15.0	17.4	16.5
EUR per 1 CZK, + = CZK appreciation	–3.0	3.2	4.4	3.8	5.1	5.8	4.1	3.7	4.1
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	2.6	2.9	2.4	2.8	2.3	2.5	2.4	2.3	2.3
Employment rate (%, 15–64 years)	74.4	74.4	75.5	75.0	75.3	75.0	75.2	75.8	75.8
Key interest rate per annum (%)	0.8	0.9	5.9	0.7	2.4	4.2	5.6	7.0	7.0
CZK per 1 EUR	26.5	25.6	24.6	25.5	25.4	24.6	24.6	24.6	24.4
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	3.0	9.7	6.2	6.3	9.7	10.4	9.2	8.6	6.2
of which: loans to households	6.5	9.9	4.8	9.1	9.9	10.3	8.3	6.5	4.8
loans to nonbank corporations	–1.3	9.4	8.3	2.8	9.4	10.5	10.5	11.6	8.3
	%
Share of foreign currency loans in total loans to the nonbank private sector	14.6	14.6	19.4	14.1	14.6	15.6	17.3	19.4	19.4
Return on assets (banking sector)	0.6	0.8	1.1	0.8	0.8	1.0	1.2	1.2	1.1
Tier 1 capital ratio (banking sector)	23.6	22.8	21.6	23.2	22.8	21.7	20.9	21.1	21.6
NPL ratio (banking sector)	2.6	2.3	1.9	2.5	2.3	2.2	2.0	1.9	1.9
	% of GDP
General government revenues	41.5	41.4	41.0	..	..	..	..	..	..
General government expenditures	47.2	46.5	44.6	..	..	..	..	..	..
General government balance	–5.8	–5.1	–3.6	..	..	..	..	..	..
Primary balance	–4.9	–4.3	–2.4	..	..	..	..	..	..
Gross public debt	37.7	42.0	44.1	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	56.1	53.4	51.5	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	34.0	35.7	33.2	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	4.9	1.2	–1.5	–2.0	–1.7	0.4	–2.2	–2.9	–0.9
Services balance	1.8	1.8	1.3	1.9	1.6	1.6	1.8	1.6	0.3
Primary income	–4.2	–3.3	–5.5	–4.7	–2.9	–1.9	–4.3	–11.2	–4.2
Secondary income	–0.5	–0.5	–0.5	–0.5	–0.2	–1.3	–0.4	–0.4	0.1
Current account balance	2.0	–0.9	–6.1	–5.3	–3.3	–1.2	–5.0	–12.9	–4.7
Capital account balance	1.2	1.6	0.1	2.4	2.1	–0.3	0.9	0.8	–1.0
Foreign direct investment (net)3	–2.6	–0.1	–2.5	–0.7	0.3	–1.1	–1.9	–1.8	–5.1
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	76.3	75.5	66.8	73.8	75.5	77.5	72.9	67.3	66.8
Gross official reserves (excluding gold)	62.5	64.1	47.2	62.8	64.1	62.9	57.7	50.8	47.2
	Months of imports of goods and services
Gross official reserves (excluding gold)	11.9	11.0	7.6	11.0	11.0	10.7	9.6	8.2	7.6
	EUR million, period total
GDP at current prices	215,824	238,361	276,659	61,848	63,500	62,484	68,948	71,573	73,653
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: tight monetary policy, weakening consumption and global raw material prices to reduce inflation substantially

The budget deficit declined to 6.2% of GDP in 2022, as revenues were supported by strong economic growth and windfall taxes. Expenditure growth was slowed by the postponement of public investment projects and operational savings to accommodate bigger outlays for the utility bill protection scheme. At the end of 2022, the government modified its 2023 budget deficit target from 3.5% to 3.9% of GDP. This mainly reflected the substantial increase in the cost of the various energy subsidy schemes, but pension outlays, interest expenditure and fiscal ­reserves were also set markedly higher than in the original budget.

In mid-December 2022, the European Commission and the Council of the EU approved Hungary’s recovery and resilience plan (RRP) and the Partnership Agreement with Hungary for 2021–2027. At the same time, the Council decided to withhold EUR 6.3 billion of structural funds until Hungary takes additional measures to safeguard the rule of law. Later on, the Commission specified that it would not disburse any of the EUR 22 billion in cohesion funds until some horizontal enabling conditions are met. These issues mainly concern judicial independence, the so-called “child protection” law and serious risks to academic freedom and the right to asylum. Hungary has pledged to implement the necessary legal requirements but lengthy negotiations with the Commission are ongoing.

Inflation continued to accelerate during the reporting period and presumably peaked at 26.2% in January 2023, before easing to 25.8% in February 2023. However, the decline in February was primarily driven by energy and unprocessed food prices, while core inflation edged up further and price pressures remained broad-based. Increasing fuel shortages forced the government to abandon the price cap on automotive fuels in early December 2022. By contrast, the price cap on selected basic food items was extended until end-April 2023, and the government has indicated that the price cap will remain in place until inflation slows significantly. Nevertheless, food price inflation in Hungary kept on rising during the reporting period and has been the highest in the EU since August 2022.

The MNB maintained its strict policy stance. To additionally absorb banking sector liquidity, it restarted regular auctions of 1-week discount bonds and longer-term deposits from late January 2023 and announced a doubling of the mandatory reserve rate to 10% as of April along with abolishing interest on the first 2.5% of the reserve base. The tight monetary policy together with the MNB’s provision of foreign currency to cover FX liquidity needs in connection with energy imports and news about the approval of Hungary’s Partnership Agreement and RRP supported the forint between mid-December 2022 and mid-March 2023, when it temporarily came under pressure following the outbreak of global banking sector risks (Silicon Valley Bank, Credit Suisse).

Table 7: Main economic indicators: Hungary  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	–4.5	7.2	4.6	6.3	7.6	8.2	6.5	4.0	0.4
Private consumption	–1.2	4.6	6.4	6.5	7.7	11.6	8.4	4.7	1.7
Public consumption	–0.5	1.7	0.8	2.9	–3.1	4.3	2.5	–0.6	–2.9
Gross fixed capital formation	–7.1	6.5	1.2	13.3	1.5	10.9	6.1	1.2	–9.0
Exports of goods and services	–6.1	8.8	11.8	2.3	0.5	9.1	9.9	16.4	12.1
Imports of goods and services	–3.9	7.7	11.1	5.6	1.3	10.9	9.5	13.7	10.2
	Contribution to GDP growth in percentage points
Domestic demand	–2.6	6.2	3.9	8.8	8.1	9.9	6.1	2.1	–1.1
Net exports of goods and services	–2.0	1.0	0.7	–2.5	–0.5	–1.6	0.4	1.9	1.5
Exports of goods and services	–5.0	6.9	9.5	1.8	0.4	8.3	8.1	12.5	9.0
Imports of goods and services	3.1	–5.9	–8.8	–4.3	–1.0	–9.9	–7.7	–10.5	–7.5
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	6.8	2.6	11.8	3.3	2.6	12.5	6.7	12.1	15.9
Unit labor costs in manufacturing (nominal, per hour)	8.4	0.1	8.0	9.3	11.2	6.9	7.5	4.9	12.2
Labor productivity in manufacturing (real, per hour)	–0.2	5.9	3.8	0.2	0.5	4.0	2.6	7.2	1.8
Labor costs in manufacturing (nominal, per hour)	7.4	6.8	12.1	9.5	11.7	11.2	10.3	12.4	14.2
Producer price index (PPI) in industry	4.3	13.5	33.4	14.4	20.7	23.4	32.0	41.2	36.9
Consumer price index (here: HICP)	3.4	5.2	15.3	5.0	7.1	8.3	11.0	18.0	23.3
EUR per 1 HUF, + = HUF appreciation	–7.4	–2.0	–8.3	–0.1	–1.0	–0.9	–7.9	–12.3	–11.3
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	4.3	4.1	3.7	3.9	3.7	3.8	3.2	3.7	3.9
Employment rate (%, 15–64 years)	69.7	73.1	74.4	73.6	74.1	74.0	74.3	74.6	74.5
Key interest rate per annum (%)	0.8	1.1	8.0	1.3	2.0	3.1	5.3	10.6	13.0
HUF per 1 EUR	351.2	358.5	390.9	353.9	364.3	364.1	385.3	403.5	410.9
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	11.0	12.1	9.9	11.6	12.1	9.3	10.2	10.8	9.9
of which: loans to households	14.1	14.9	6.3	16.0	14.9	11.0	8.9	7.6	6.3
loans to nonbank corporations	8.8	9.9	12.6	8.3	9.9	7.9	11.3	13.3	12.6
	%
Share of foreign currency loans in total loans to the nonbank private sector	22.3	20.3	23.3	20.3	20.3	21.3	22.3	23.6	23.3
Return on assets (banking sector)	0.4	0.9	0.7	1.2	0.9	1.1	0.6	0.7	0.7
Tier 1 capital ratio (banking sector)	17.4	18.1	16.7	16.6	18.1	17.3	16.7	16.2	16.7
NPL ratio (banking sector)	2.4	1.6	2.0	1.8	1.6	1.6	1.9	2.0	2.0
	% of GDP
General government revenues	43.6	41.2	41.6	..	..	..	..	..	..
General government expenditures	51.1	48.3	47.8	..	..	..	..	..	..
General government balance	–7.5	–7.1	–6.2	..	..	..	..	..	..
Primary balance	–5.2	–4.8	–3.4	..	..	..	..	..	..
Gross public debt	79.3	76.6	73.3	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	68.6	75.8	79.3	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	20.1	20.4	18.1	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	–1.0	–2.9	–8.8	–5.4	–5.8	–7.4	–6.9	–11.3	–9.3
Services balance	2.9	3.2	4.7	4.2	2.7	4.3	4.9	5.7	4.1
Primary income	–2.6	–3.3	–3.1	–3.6	–3.6	–2.1	–3.4	–3.8	–3.1
Secondary income	–0.5	–1.1	–0.9	–0.7	–0.7	–0.6	–1.0	–1.1	–0.9
Current account balance	–1.1	–4.1	–8.1	–5.5	–7.4	–5.7	–6.4	–10.5	–9.3
Capital account balance	2.0	2.5	2.0	1.9	4.2	4.3	2.6	1.0	0.6
Foreign direct investment (net)3	–1.7	–1.9	–2.3	–2.4	–5.2	4.4	–2.7	–8.2	–1.9
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	81.1	84.7	88.2	87.9	84.7	85.6	83.7	85.0	88.2
Gross official reserves (excluding gold)	23.3	21.7	19.8	22.8	21.7	19.8	19.6	20.1	19.8
	Months of imports of goods and services
Gross official reserves (excluding gold)	3.6	3.3	2.5	3.4	3.3	2.9	2.7	2.6	2.5
	EUR million, period total
GDP at current prices	137,723	154,098	169,726	39,852	44,449	37,627	42,129	43,176	46,794
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: sharp slowdown of growth in the wake of weaker consumption

In the second half of 2022, nominal unit labor costs (ULC) of manufacturing gross value added were higher than a year earlier and their increase exceeded that in the euro area by about 6.5 percentage points, while the złoty’s nominal value in euro was weaker by about 3%. Thus, in real (ULC-deflated) terms, the złoty was stronger by about 3.5%. According to HICP (and national CPI) definition, annual headline inflation stood at almost 16% (17.3%) in the final quarter and at 17.2% (18.4%) in February 2023, while core inflation stood at 13.2% (11.3%) and at 13.6% (12.0%), respectively. Within core HICP inflation, nonenergy industrial goods inflation stood below average at 10.3% in February. The Monetary Policy Council (MPC), pursuing a CPI inflation target of 2.5% ± 1 percentage points, has maintained its main policy rate at 6.75% since its hike in September 2022. In early April 2023, the MPC stated that the earlier strong monetary policy tightening will lead to a gradual decline in inflation toward the target and that this disinflation would be faster if supported by an appreciation of the złoty, which, in the MPC’s assessment, would be consistent with the fundamentals of the Polish economy.

Regarding fiscal policy, the 2022 general government deficit rose to 3.7% of GDP and, according to the European Commission staff forecast in November, it will increase further to 5.5% in 2023. Despite increased military expenditure and spending on support for displaced persons from Ukraine, the deficit rise resulted primarily from a decline in the revenue-to-GDP ratio induced by anti-inflationary tax policy. The general government debt ratio declined from 53.6% of GDP at end-2021 to 49.1% at end-2022.

Table 8: Main economic indicators: Poland  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	–2.0	6.8	4.9	7.4	9.4	10.5	5.2	4.4	0.5
Private consumption	–3.4	6.3	3.0	4.6	8.3	6.5	6.3	0.7	–1.4
Public consumption	4.9	5.0	–0.3	5.0	5.7	0.8	1.1	0.5	–2.6
Gross fixed capital formation	–2.3	2.1	4.5	5.8	5.7	7.1	9.1	1.6	2.6
Exports of goods and services	–1.1	12.5	4.5	8.0	7.3	4.5	5.2	6.8	1.7
Imports of goods and services	–2.4	16.1	5.5	13.4	12.4	9.5	7.0	6.0	0.1
	Contribution to GDP growth in percentage points
Domestic demand	–2.6	7.9	5.2	9.5	11.4	13.0	5.9	3.9	–0.3
Net exports of goods and services	0.6	–1.0	–0.4	–2.2	–2.0	–2.6	–0.7	0.5	0.9
Exports of goods and services	–0.6	6.6	2.6	4.3	3.9	3.0	3.3	3.8	0.8
Imports of goods and services	1.2	–7.6	–3.0	–6.5	–5.9	–5.5	–4.0	–3.3	0.1
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	7.5	–0.8	9.8	–2.6	–1.6	1.7	10.6	13.9	13.3
Unit labor costs in manufacturing (nominal, per hour)	4.7	–4.6	1.8	0.9	–0.8	–1.6	2.1	2.6	4.3
Labor productivity in manufacturing (real, per hour)	1.9	12.9	8.7	8.8	10.3	12.7	9.7	9.0	4.1
Labor costs in manufacturing (nominal, per hour)	6.2	8.0	10.8	9.8	9.4	10.9	12.1	11.7	8.6
Producer price index (PPI) in industry	–0.5	8.1	23.7	9.6	13.6	18.5	25.3	27.5	23.7
Consumer price index (here: HICP)	3.7	5.2	13.2	5.1	7.3	9.0	12.8	14.9	15.9
EUR per 1 PLN, + = PLN appreciation	–3.3	–2.6	–2.6	–2.8	–2.4	–1.6	–2.5	–3.8	–2.3
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	3.2	3.4	3.0	3.1	2.9	3.2	2.7	3.0	2.9
Employment rate (%, 15–64 years)	68.7	70.3	71.4	71.0	71.0	71.0	71.4	71.2	71.8
Key interest rate per annum (%)	0.5	0.3	5.3	0.1	1.1	2.7	5.1	6.5	6.8
PLN per 1 EUR	4.4	4.6	4.7	4.6	4.6	4.6	4.6	4.7	4.7
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	–1.2	5.0	0.8	2.6	5.0	6.1	6.1	4.8	0.8
of which: loans to households	1.6	4.2	–4.7	4.0	4.2	3.1	0.4	–2.5	–4.7
loans to nonbank corporations	–6.0	6.5	10.8	–0.1	6.5	11.7	16.9	18.5	10.8
	%
Share of foreign currency loans in total loans to the nonbank private sector	19.6	17.5	18.5	18.0	17.5	17.6	17.7	19.0	18.5
Return on assets (banking sector)	0.0	0.2	0.5	0.5	0.2	1.0	0.8	0.3	0.5
Tier 1 capital ratio (banking sector)	18.5	17.4	17.6	18.0	17.4	16.7	17.0	16.4	17.6
NPL ratio (banking sector)	7.0	5.8	5.4	6.3	5.8	5.7	5.6	5.7	5.4
	% of GDP
General government revenues	41.3	42.3	39.8	..	..	..	..	..	..
General government expenditures	48.2	44.1	43.5	..	..	..	..	..	..
General government balance	–6.9	–1.8	–3.7	..	..	..	..	..	..
Primary balance	–5.6	–0.7	–2.1	..	..	..	..	..	..
Gross public debt	57.2	53.6	49.1	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	44.9	43.4	0.0	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	33.7	32.1	0.0	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	1.3	–1.3	–3.7	–2.7	–3.6	–4.2	–3.6	–4.0	–3.1
Services balance	4.4	4.7	5.6	4.6	4.2	5.2	6.6	5.8	4.9
Primary income	–3.8	–4.7	–4.5	–5.5	–3.1	–4.7	–5.5	–5.0	–3.1
Secondary income	0.5	–0.1	–0.3	0.2	–0.3	–0.3	–0.4	–0.4	–0.1
Current account balance	2.4	–1.4	–3.0	–3.5	–2.7	–4.1	–3.0	–3.7	–1.4
Capital account balance	1.4	0.7	0.3	1.0	0.8	–0.5	0.5	0.8	0.3
Foreign direct investment (net)3	–2.4	–4.1	–4.0	–5.9	–2.9	–7.7	–3.1	–4.4	–1.3
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	58.5	56.2	53.0	57.1	56.2	55.1	54.9	53.9	53.0
Gross official reserves (excluding gold)	21.7	23.4	22.0	23.8	23.4	21.8	22.0	22.5	22.0
	Months of imports of goods and services
Gross official reserves (excluding gold)	5.5	5.2	4.3	5.5	5.2	4.6	4.5	4.4	4.3
	EUR million, period total
GDP at current prices	526,034	574,543	654,275	145,387	161,418	149,585	155,613	164,229	184,849
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: economic activity stays resilient, but current account deficit widens further

In the second half of 2022, gross fixed capital formation became the most important growth driver supported by partly EU-funded public investments. Alongside, construction output showed double-digit growth. It is also worth mentioning that substantial investments in the areas of electromobility, electricity storage facilities and solar panels have been launched or announced recently. While domestic credit growth slowed down, it was still positive in real terms within the segment of nonbank corporations, but considerably below the inflation rate in the household segment. Private consumption continued to expand, even though real wage growth remained negative in the second half of 2022 and the unemployment rate edged up in the final quarter. Consumer demand benefited from the energy capping scheme (that was extended until March 2025) and the mild winter that limited utility bills. Net exports contributed negatively to GDP growth in second half of 2022, but the negative contribution decreased in the final quarter. Industrial production continued to shrink in the second half of 2022, as particularly energy-intensive sectors (such as metals and chemistry) were hit by high energy costs. Yet, supply chain bottlenecks in the automotive industry have eased. Meanwhile, unit labor costs in the manufacturing sector grew considerably and the Romanian leu tended to appreciate slightly against the euro in the second half of 2022.

Consumer price inflation stood at 16.4% at end-2022 and came down to 15.5% in February 2023. Remarkably, the National Bank of Romania’s (NBR) estimates that the annual inflation rate would have been about 11 percentage points higher without the energy price capping scheme at end-2022. While headline inflation rate started to decline, core inflation was still rising and reached 15% in February 2023. Against this background, the NBR hiked its key policy rate further to 7% in January 2023, and then left it unchanged at the subsequent two board meetings. The NBR currently projects inflation to go down to 7% at end-2023 and to 4.2% at end-2024. Hence, the central bank assumes that inflation will remain above the upper bound of the inflation target variation band of 2.5% ± 1 percentage point until the end of its forecast horizon. After the general government budget deficit fell to still high 6.2% of GDP in ESA 2010 terms, the budget plan for 2023 envisages a further gradual decline of the budget deficit to 4.4%. Within the framework of the excessive deficit procedure, Romania should put an end to the excessive deficit situation by 2024.

The current account deficit widened to 9.3% of GDP in 2022, compared to 7.2% of GDP in 2021 and 8.2% recorded in the four quarters up to mid-2022. Looking at the full-year comparison, the widening of the deficit was driven by the goods balance and the primary income balance (mainly related to outflows of ­reinvested earnings and dividends). In the fourth quarter, both items tentatively improved compared to the third quarter. Also, the capital account surplus rose in the fourth quarter thanks to increasing EU fund inflows. Nevertheless, the net borrowing position from current and capital accounts remained clearly negative in the fourth quarter as well as over the whole year (6.8% of GDP). Net FDI inflows stayed at an elevated level and covered half of this position in 2022.

Table 9: Main economic indicators: Romania  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	–3.7	5.9	4.8	6.7	2.4	6.3	5.1	3.8	4.6
Private consumption	–3.7	8.0	5.6	9.4	9.8	7.1	7.8	2.8	5.1
Public consumption	0.6	2.0	–3.2	–2.0	4.7	–2.4	0.1	2.6	–7.0
Gross fixed capital formation	1.4	2.0	8.8	–1.8	–6.5	1.4	2.7	11.4	16.2
Exports of goods and services	–9.4	12.8	8.0	7.2	7.9	8.6	9.5	12.9	1.7
Imports of goods and services	–5.8	15.4	9.8	11.5	8.4	10.4	7.0	18.2	3.3
	Contribution to GDP growth in percentage points
Domestic demand	–2.2	7.3	5.5	7.5	3.1	6.9	3.9	6.8	3.1
Net exports of goods and services	–1.5	–1.5	–0.8	–2.1	–0.5	–1.8	0.3	–3.1	–0.5
Exports of goods and services	–3.8	4.6	3.5	2.5	2.8	4.7	4.3	4.2	0.5
Imports of goods and services	2.3	–6.2	–4.3	–4.6	–3.3	–6.5	–4.0	–7.3	–0.9
	Year-on-year change of period average in %
Unit labor costs in the whole economy (nominal, per person)	5.5	–2.0	5.6	–3.1	–0.1	3.4	3.5	8.2	8.8
Unit labor costs in manufacturing (nominal, per hour)	7.7	3.9	14.5	9.1	12.4	11.7	15.1	13.8	17.1
Labor productivity in manufacturing (real, per hour)	0.4	3.1	–1.6	0.3	–4.0	–0.1	–2.5	–0.6	–2.9
Labor costs in manufacturing (nominal, per hour)	8.1	7.1	12.7	9.4	7.9	11.6	12.2	13.1	13.7
Producer price index (PPI) in industry	0.0	14.9	44.7	16.4	30.8	46.2	47.3	50.5	36.2
Consumer price index (here: HICP)	2.3	4.1	12.0	4.3	6.6	8.2	12.4	13.3	14.1
EUR per 1 RON, + = RON appreciation	–1.9	–1.7	–0.2	–1.8	–1.6	–1.4	–0.4	0.4	0.6
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	5.2	5.6	5.6	5.3	5.9	6.0	5.3	5.4	5.8
Employment rate (%, 15–64 years)	65.6	61.9	63.0	62.3	62.1	62.4	63.5	63.4	62.8
Key interest rate per annum (%)	1.9	1.4	4.3	1.3	1.6	2.3	3.4	5.1	6.5
RON per 1 EUR	4.8	4.9	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	4.8	14.2	12.0	12.7	14.2	15.2	17.1	15.7	12.0
of which: loans to households	4.2	9.3	4.3	8.8	9.3	9.3	8.6	6.3	4.3
loans to nonbank corporations	5.5	19.8	20.0	17.3	19.8	21.7	26.4	25.7	20.0
	%
Share of foreign currency loans in total loans to the nonbank private sector	30.5	27.6	31.2	28.4	27.6	27.3	28.0	29.4	31.2
Return on assets (banking sector)	1.0	1.4	1.5	1.5	1.4	1.2	1.5	1.5	1.5
Tier 1 capital ratio (banking sector)	23.2	20.9	18.8	21.4	20.9	19.0	18.9	18.8	18.8
NPL ratio (banking sector)	3.8	3.4	2.7	3.7	3.4	3.3	3.0	2.8	2.7
	% of GDP
General government revenues	32.3	32.7	33.5	..	..	..	..	..	..
General government expenditures	41.5	39.8	39.7	..	..	..	..	..	..
General government balance	–9.2	–7.1	–6.2	..	..	..	..	..	..
Primary balance	–8.0	–6.0	–5.0	..	..	..	..	..	..
Gross public debt	46.9	48.6	47.3	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	33.0	33.1	30.9	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	16.0	15.7	13.8	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	–8.6	–9.6	–11.3	–9.4	–9.2	–12.2	–11.4	–11.7	–10.2
Services balance	4.3	3.9	4.4	3.5	4.0	4.4	5.0	4.1	4.1
Primary income	–1.5	–2.0	–3.0	–2.7	–1.8	–2.2	–3.7	–4.0	–2.1
Secondary income	0.9	0.4	0.7	0.8	0.3	0.4	0.7	0.8	0.6
Current account balance	–4.9	–7.2	–9.3	–7.8	–6.6	–9.5	–9.4	–10.7	–7.6
Capital account balance	1.9	2.2	2.4	1.5	4.1	1.0	2.1	1.5	4.5
Foreign direct investment (net)3	–1.3	–3.7	–3.4	–4.1	–3.5	–5.3	–2.3	–3.9	–2.5
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	57.6	56.6	49.8	56.7	56.6	54.7	52.6	50.4	49.8
Gross official reserves (excluding gold)	17.0	16.8	16.3	17.5	16.8	16.1	16.1	16.0	16.3
	Months of imports of goods and services
Gross official reserves (excluding gold)	4.9	4.3	4.0	4.7	4.3	4.1	4.0	3.9	4.0
	EUR million, period total
GDP at current prices	220,325	241,099	286,526	65,854	72,934	54,572	67,066	79,062	85,825
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: fragile economy hit by earthquake as country awaits election outcome

Both headline and core inflation decelerated from their peaks of 85% and 79%, respectively, in October to 55% and 57%, respectively, in February. In parallel, the Turkish central bank (TCMB) delivered policy rate cuts by 150 basis points each in October and November (to 9%) and another one in February to 8.5%, implying a large negative real key rate. While the lira depreciated by 10% in nominal terms against the euro from August to February, it appreciated by about 11% in real (CPI-deflated) terms. Lira stabilization without interest rate hikes resulted (1) from the continuous requirement for exporters to sell part of their FX revenues to the central bank, (2) from government financing and guarantees for new exchange rate-linked lira deposits stemming from converted FX deposits and (3) from regulatory measures to foster “liraization” of banks’ assets and liabilities. Initially, reserve requirement ratios and requirements to hold lira (government) securities depended inversely on a bank’s share of converted deposits in its total FX deposits. From 2023, required securities maintenance depended inversely on a bank’s compliance (or overcompliance) with the new 60% target share of lira deposits. As a result, in the second half of 2022, the correction of banks’ negative on-balance sheet net FX position continued, lowering their need for entering swaps with the central bank by selling FX initially (given the ban on contracting foreign swap partners). In parallel, nonfinancial corporations reduced their overall negative on-balance sheet net FX position further and their positive short-term on-balance net FX position rose moderately again.

The general government fiscal deficit increased to 3.5% of GDP in 2022, up from 1.1% of GDP in 2021. In the wake of the earthquake and related to upcoming elections, the deficit will likely rise further.

Table 10: Main economic indicators: Türkiye  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	1.9	11.3	5.6	7.9	9.6	7.6	7.9	4.1	3.5
Private consumption	3.3	15.3	19.6	9.4	20.5	20.7	22.3	20.3	16.0
Public consumption	2.5	2.6	5.1	8.0	1.3	4.5	1.6	4.6	9.0
Gross fixed capital formation	7.4	7.4	2.8	–1.3	2.1	4.5	5.3	–0.9	2.6
Exports of goods and services	–14.4	24.9	9.1	25.9	21.6	14.3	16.4	12.4	–3.2
Imports of goods and services	6.7	2.4	7.9	–8.7	3.2	2.2	5.8	11.9	10.2
	Contribution to GDP growth in percentage points
Domestic demand	4.1	11.4	13.4	6.3	12.7	14.2	15.1	12.6	12.2
Net exports of goods and services	–5.4	5.0	0.5	7.4	4.4	3.0	2.8	0.5	–3.4
Exports of goods and services	–3.8	5.6	2.3	5.3	5.2	3.5	4.1	3.0	–0.9
Imports of goods and services	–1.6	–0.6	–1.8	2.1	–0.8	–0.5	–1.3	–2.5	–2.5
	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)	10.0	19.1	74.3	29.2	26.7	48.4	53.8	93.7	100.0
Labor productivity in manufacturing (real, per hour)	8.3	–0.2	–0.5	–1.1	3.3	2.1	2.6	–1.0	–5.2
Labor costs in manufacturing (nominal, per hour)	18.9	19.1	73.8	27.8	30.9	51.4	57.8	91.9	89.7
Producer price index (PPI) in industry	12.2	43.9	128.5	44.8	60.6	104.7	131.0	146.7	127.7
Consumer price index (here: HICP)	12.3	19.6	72.3	19.2	25.9	54.8	74.1	81.0	77.3
EUR per 1 TRY, + = TRY appreciation	–21.0	–23.2	–39.8	–15.9	–26.4	–43.1	–39.8	–44.3	–32.8
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	13.4	12.2	10.7	11.9	11.2	11.8	10.4	10.3	10.3
Employment rate (%, 15–64 years)	47.5	50.3	52.8	51.6	51.7	50.8	53.0	53.5	54.0
Key interest rate per annum (%)	10.2	17.8	12.9	18.9	15.9	14.0	14.0	13.4	10.2
TRY per 1 EUR	8.0	10.5	17.4	10.1	12.8	15.7	16.8	18.1	19.0
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	4.3	8.6	12.7	14.5	36.1	45.1	60.4	68.7	56.3
of which: loans to households	6.6	13.4	14.6	15.9	20.4	22.7	37.5	42.0	55.4
loans to nonbank corporations	2.9	5.5	11.4	14.7	41.9	52.4	67.4	77.5	56.8
	%
Share of foreign currency loans in total loans to the ­nonbank private sector	30.9	38.1	27.7	32.2	38.1	37.0	33.9	31.1	27.7
Return on assets (banking sector)	1.0	1.3	3.8	1.1	1.3	2.6	3.3	3.5	3.8
Tier 1 capital ratio (banking sector)	14.1	13.2	15.3	12.9	13.2	15.4	13.6	14.4	15.3
NPL ratio (banking sector)	4.4	3.4	2.2	3.8	3.4	3.0	2.7	2.4	2.2
	% of GDP
General government revenues	31.2	31.4	32.1	..	..	..	..	..	..
General government expenditures	35.9	32.5	35.6	..	..	..	..	..	..
General government balance	–4.7	–1.1	–3.5	..	..	..	..	..	..
Primary balance	–1.6	2.1	–0.8	..	..	..	..	..	..
Gross public debt	39.7	41.8	39.4	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	..	..	..	..	..	..	..	..	..
Debt of households and NPISHs1 (nonconsolidated)	..	..	..	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	–5.3	–3.6	–10.0	–3.2	–4.2	–11.8	–9.0	–11.4	–8.4
Services balance	1.6	3.2	5.7	5.3	3.9	3.5	5.3	8.4	4.8
Primary income	–1.3	–1.4	–0.9	–1.1	–1.2	–1.3	–1.2	–0.9	–0.6
Secondary income	0.0	0.1	0.0	0.1	0.1	–0.2	–0.1	0.0	0.1
Current account balance	–5.0	–1.7	–5.4	1.1	–1.4	–9.9	–5.1	–3.8	–4.1
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	–0.6	–0.8	–0.9	–1.4	–0.6	–0.4	–1.8	–0.7	–0.8
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	51.3	50.8	44.0	53.0	50.8	51.6	51.1	51.0	44.0
Gross official reserves (excluding gold)	6.5	9.3	9.1	10.7	9.3	8.3	7.5	8.9	9.1
	Months of imports of goods and services
Gross official reserves (excluding gold)	2.4	3.2	2.6	3.8	3.2	2.6	2.2	2.5	2.6
	EUR million, period total
GDP at current prices	625,392	687,929	853,070	191,802	182,302	160,450	203,933	236,083	252,605
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: high oil revenues keep recession relatively mild despite severe Western sanctions

Russia’s GDP contracted by 2.1% in 2022. Driving forces of the drop in economic activity were the decline of private consumption (–1.4%) and the substantial shrinkage of inventories (following a major buildup in the previous year). On the other hand, economic activity was supported by government consumption (+2.8%) and fixed investment (+3.3%, notably boosted by public investment in transportation infrastructure, enterprise restructuring and increased arms production).

Partly supported by continuing capital controls, the ruble’s exchange rate remained relatively high until November (around RUB 60 per USD), before losing about 20% of its value in late 2022 and early 2023. This downward slide was largely caused by the declining Urals oil price (from USD 67 per barrel in November 2022 to USD 50 in January–February 2023), which was mostly triggered by the abovementioned new EU and US oil sanctions. As of late March 2023, the ­ruble had fallen back to its pre-invasion level (of around RUB 76–77 per USD). Inflation continued to decline to 11% in February 2023 (year on year). After ­reducing its key rate to 7.5% in mid-September 2022, the CBR has so far left it at this level.

The unemployment rate reached a new post-Soviet record low of 3.7% (ILO definition) in January 2023. This i.a. reflects a very tight labor market, after hundreds of thousands left Russia following the start of the Ukraine invasion and the mobilization wave a few months later. Although the average Urals oil price was higher in 2022 than in 2021, the general government balance reverted from a small surplus in 2021 to a deficit of 1.4% of GDP in 2022, on the back of rising budgetary support for strategic enterprises, households and arms production as well as of sharply declining imports and thus import taxes due to Western trade restrictions. The deficit was financed to a larger degree on the domestic debt market, and to a smaller degree by drawing down on the National Wealth Fund. Russia’s low government debt (end-2022: 15.1% of GDP) still provides the authorities with sufficient leeway to take recourse to domestic deficit financing.

The abovementioned substantial dip of the Urals oil price in January–February 2023, combined with (one-off) technical effects of the move to a single tax account system as well as brought-forward VAT refunds, triggered a sharp widening of the budget deficit in those two months. Western oil-related sanctions will likely render the budgetary situation more difficult in 2023. High energy export prices until November 2022 and sharply contracting imports in the wake of sanctions triggered a record current account surplus of 10.2% of GDP in 2022. In the second half-year of 2022, the banking sector managed to offset its initial sanctions-triggered loss and achieve a very modest overall profit of about USD 3 billion in full-year 2022, which is, however, less than one-tenth of the corresponding figure of 2021.

Table 11: Main economic indicators: Russia  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Year-on-year change of the period total in %
GDP at constant prices	–2.7	5.6	–2.1	5.0	5.8	3.0	–4.5	–3.5	–2.7
Private consumption	–5.9	9.9	–1.4	9.8	7.8	5.6	–4.4	–3.6	–2.7
Public consumption	1.9	2.9	2.8	2.6	2.4	1.9	2.3	2.4	4.7
Gross fixed capital formation	–4.0	9.1	3.3	11.3	5.9	7.4	2.7	1.8	3.0
Exports of goods and services	–4.2	3.3	–13.9	8.5	6.8	3.6	–15.8	–26.6	–14.6
Imports of goods and services	–11.9	19.1	–15.0	21.6	19.8	1.4	–27.6	–20.5	–11.2
	Contribution to GDP growth in percentage points
Domestic demand	–3.5	8.2	–1.4	7.0	7.7	1.9	–5.9	–0.1	–1.2
Net exports of goods and services	1.1	–2.5	–1.1	–1.3	–1.6	0.8	1.2	–3.9	–1.9
Exports of goods and services	–1.3	1.0	–4.2	2.5	1.9	1.1	–4.8	–8.1	–4.1
Imports of goods and services	2.4	–3.5	3.1	–3.8	–3.5	–0.3	6.0	4.2	2.2
	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)	7.6	3.3	16.5	3.3	4.4	12.0	14.8	18.8	20.5
Labor productivity in manufacturing (real, per hour)	–1.4	7.2	–1.2	7.7	8.1	4.8	–3.3	–2.1	–3.7
Labor costs in manufacturing (nominal, per hour)	5.9	10.9	15.2	11.3	12.8	17.7	11.0	16.4	16.0
Producer price index (PPI) in industry	–3.7	24.6	12.8	28.2	28.3	25.6	21.4	5.2	–1.2
Consumer price index (here: HICP)	3.4	6.7	13.7	6.9	8.3	11.5	16.9	14.4	12.2
EUR per 1 RUB, + = RUB appreciation	–12.3	–5.3	18.1	–0.3	9.3	–8.7	24.3	42.7	28.6
	Period average levels
Unemployment rate (ILO definition, %, 15–64 years)	5.8	4.8	3.9	4.4	4.3	4.2	3.9	3.9	3.8
Employment rate (%, 15–64 years)	..	..	..	..	..	..	..	..	..
Key interest rate per annum (%)	5.0	5.7	10.6	6.3	7.5	12.7	13.9	8.3	7.5
RUB per 1 EUR	82.6	87.2	73.9	86.6	83.1	98.3	72.0	60.7	64.6
	Nominal year-on-year change in period-end stock in %
Loans to the domestic nonbank private sector1	9.6	15.3	14.0	13.9	15.3	15.6	11.7	12.1	14.0
of which: loans to households	12.9	22.1	9.4	20.7	22.1	20.3	12.2	10.2	9.4
loans to nonbank corporations	8.0	12.2	16.4	10.8	12.2	13.3	11.4	13.0	16.4
	%
Share of foreign currency loans in total loans to the nonbank private sector	12.6	10.8	7.5	10.8	10.8	11.2	7.3	6.7	7.5
Return on assets (banking sector)	1.9	2.4	0.2	2.6	2.4	–0.8	–2.4	–0.9	0.2
Tier 1 capital ratio (banking sector)	9.7	9.6	10.4	9.8	9.6	..	..	10.6	10.4
NPL ratio (banking sector)	17.1	15.1	15.3	15.8	15.1	..	..	15.9	15.3
	% of GDP
General government revenues	35.5	35.6	34.6	..	..	..	..	..	..
General government expenditures	39.5	34.8	36.0	..	..	..	..	..	..
General government balance	–4.0	0.8	–1.4	..	..	..	..	..	..
Primary balance	..	..	..	..	..	..	..	..	..
Gross public debt	17.6	15.5	15.1	..	..	..	..	..	..
	% of GDP
Debt of nonfinancial corporations (nonconsolidated)	..	..	..	..	..	..	..	..	..
Debt of households and NPISHs2 (nonconsolidated)	..	..	..	..	..	..	..	..	..
	% of GDP (based on EUR), period total
Goods balance	6.3	10.4	13.5	11.3	12.4	20.0	17.4	11.4	8.7
Services balance	–1.1	–1.1	–1.0	–1.4	–1.1	–0.9	–0.6	–1.1	–1.2
Primary income	–2.3	–2.3	–2.0	–2.2	–2.6	–2.0	–2.0	–2.4	–1.5
Secondary income	–0.4	–0.3	–0.4	–0.3	–0.2	–0.3	–0.5	–0.3	–0.3
Current account balance	2.4	6.7	10.2	7.4	8.5	16.8	14.3	7.6	5.6
Capital account balance	0.0	0.0	–0.2	0.0	0.0	0.0	–0.2	–0.3	–0.2
Foreign direct investment (net)3	–0.2	1.4	1.3	0.9	2.7	0.2	2.2	1.6	0.9
	% of GDP (rolling four-quarter GDP, based on EUR), end of period
Gross external debt	29.9	27.4	16.5	30.1	27.4	25.4	26.1	22.3	16.5
Gross official reserves (excluding gold)	28.6	28.2	19.3	29.5	28.2	25.9	24.4	21.5	19.3
	Months of imports of goods and services
Gross official reserves (excluding gold)	16.8	16.4	15.0	16.7	16.4	15.0	15.9	15.6	15.0
	EUR million, period total
GDP at current prices	1,301,316	1,558,582	2,162,355	408,332	482,544	370,340	507,680	630,437	653,898
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).

Economic trends in the Western Balkans

Relative resilience in the face of post-pandemic and
war-implied challenges, but pockets of vulnerabilities call for continued vigilance ⁴

Economic slowdown caused by global and domestic factors

Table 1: Real GDP growth  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Annual real change in %
Gross domestic product
Albania	–3.3	8.9	4.8	6.9	5.1	7.0	3.1	4.9	4.7
Bosnia and Herzegovina1	–3.0	7.4	3.9	7.6	7.8	5.9	5.8	2.6	1.7
Kosovo	–5.3	10.7	3.5	14.5	7.9	2.2	0.7	3.9	6.8
Montenegro	–15.3	13.0	6.1	27.9	9.3	4.7	13.6	2.8	4.7
North Macedonia	–4.7	3.9	2.1	1.4	1.2	2.2	4.0	2.0	0.6
Serbia	–0.9	7.5	2.3	7.8	7.2	4.1	3.8	1.0	0.4
WB average2	–3.0	7.8	3.2	8.3	6.5	4.5	4.3	2.2	1.9
Source: Eurostat.
1 Expenditure-side data.
2 Average weighted with GDP at PPP.

Domestic demand drove moderate economic growth while net exports lagged behind

Investment made a positive contribution to economic growth in Albania, ­Bosnia and Herzegovina and North Macedonia. In Albania, it was particularly fixed investment which benefited from a booming construction sector and strong FDI inflows heading into the real estate and tourism industry. In Bosnia and ­Herzegovina, capital formation profited from favorable lending activity and stockpiling of inventories. Similarly, an accumulation of inventories was the predominant driver of capital formation in North Macedonia. This was brought about by an ­increase in the import of intermediary goods, raw materials, energy products, ­machinery and equipment, among others. Yet barring this special case, gross ­investment was rather muted in general, suffering from elevated input costs and geopolitical uncertainty, subdued foreign demand and contracting industrial ­production (Montenegro).

The contribution of public consumption to growth was rather insignificant in most instances or it was slightly negative as earlier pandemic support measures were phased out. While exports of services in the tourism strongholds benefited from a strong tourism season, overall net exports remained subdued in most of the region in 2022, some recovery in Kosovo and Serbia in the second half of the year notwithstanding. This was owed to muted foreign demand in the EU, which is the region’s most important trading partner by far, as well as to the fact that export growth was outpaced by increases in imports (including those of services, e.g. in Albania due to outbound tourism).

Continued labor market tightening, exacerbated by migration and demographic trends

Labor shortages have become more severe in the face of tightening (formal) labor markets exacerbated by outward migration and adverse demographic trends. Labor shortages have been exerting mounting pressure on wages (table 2), especially in the booming sectors. Nominal wage growth accelerated in all WB economies throughout 2022, largely driven by wage hikes in the private sector and amplified by increases in minimum wages. Shortages of skilled labor are increasingly becoming a binding constraint for firms’ ability to do business. Nonetheless, nominal wage hikes mostly did not keep up with accelerated inflation in 2022 so that real wage growth ended up in negative territory except for Serbia and to a lesser extent ­Albania.

Table 2: Labor market  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	Annual change in %
Average gross wages – total economy
Albania	2.7	6.3	8.2	6.9	8.4	5.8	7.0	9.2	10.8
Bosnia and Herzegovina	4.0	4.4	11.7	4.5	5.1	8.2	10.7	13.4	14.4
Kosovo	–2.3	3.9	19.8	. .	. .	. .	. .	. .	. .
Montenegro	1.3	1.4	11.3	1.7	1.9	11.3	10.6	11.4	11.8
North Macedonia	8.3	5.7	11.1	4.8	5.4	7.7	10.4	12.0	14.1
Serbia	9.5	9.4	13.8	9.0	11.8	13.4	13.6	14.8	13.4
	%
Unemployment rate1
Albania	12.2	12.1	11.3	11.6	11.9	11.7	11.5	10.8	11.0
Bosnia and Herzegovina	16.2	17.5	15.5	. .	. .	. .	. .	. .	. .
Kosovo	26.0	20.8	0.0	17.7	19.0	16.6	0.0	0.0	0.0
Montenegro	18.4	16.9	15.1	15.0	15.7	17.0	14.9	13.4	14.9
North Macedonia	16.6	15.8	14.6	15.9	15.3	14.9	14.7	14.4	14.2
Serbia	9.5	11.4	9.7	10.8	10.2	11.0	9.2	9.3	9.4
Source: Eurostat, Macrobond, national statistical offices, wiiw.
1 Labor force survey.

Widening external deficits do not appear a major cause for concern

The development of external accounts was inversely reflected by the level of reserves relative to GDP. It declined in all countries in the region (apart from ­Serbia), reflecting the strong increase in the value of imports (relative to exports) among other factors (table 3). In Serbia, in contrast, international reserves recovered to record highs in absolute terms (more than EUR 21 billion by end-February 2023) thanks to strong FDI inflows and higher external borrowing. The latter ­increased particularly after Serbia had sought help from both the IMF and the United Arab Emirates (UAE) in the second half of 2022 to handle its soaring ­market debt costs. As a result, Serbia turned to the IMF and concluded a Stand-by Arrangement (SBA) and obtained a loan at preferential conditions from the UAE.

Table 3: Reserve assets excluding gold  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	End of period, % of GDP
Albania	28.6	31.9	26.6	19.1	21.8	21.0	20.0	19.6	18.5
Bosnia and Herzegovina	39.1	41.1	34.3	27.7	28.1	26.9	25.7	25.0	23.7
Kosovo1	13.3	13.8	13.1	11.1	9.5	9.8	10.7	11.6	8.8
Montenegro	41.5	35.3	31.4	23.4	23.9	23.6	22.4	23.1	20.9
North Macedonia	27.8	28.1	27.0	20.1	18.7	16.5	15.6	18.6	18.3
Serbia	25.1	27.2	28.7	20.3	18.6	15.4	15.6	16.9	19.4
Source: National central banks, IMF.
1 Reserve assets (including gold).

Despite mostly prudent fiscal stance in the region, pockets of fiscal vulnerability remain and need to be addressed

In general, while the revenue side was aided by the still – relatively – robust economic activity in the region, it was particularly driven up by high inflation. To some extent also tax collection improved, most notably in Kosovo, inter alia thanks to the progressing formalization of the economy. Expenditures also increased in nominal terms. On the one hand, this was predominantly attributable to measures aiming to mitigate inflationary pressures on households and firms such as, inter alia, price caps, (energy) subsidies, bonuses, additional pensions and transfers. On the other hand, in most countries, government expenses such as public sector wages and investment costs increased in response to inflationary pressures. In ­contrast, however, in some instances (e.g. in Albania, Kosovo, Montenegro) low execution of public investment plans dampened the expenditure side and thus contributed to a better fiscal outcome.

General government debt relative to GDP declined in most cases, most significantly in Montenegro. In the latter country, this was – despite the highest fiscal deficit in the region – due to strong nominal GDP growth on the one hand and some debt repayment on the other. Yet, the reduction of public debt in Montenegro notwithstanding, it remains the country with the highest debt among its peers. Moreover, from the current budgetary perspective, the expansionary fiscal stance is envisaged to continue in the medium term ⁷ . This does not only elevate the
fiscal risk but also adds to inflationary pressure, especially in a country with no autonomous monetary policy. Notable fiscal vulnerabilities persist – despite some progress – also in Albania, primarily due to high refinancing requirements and exposure to interest and exchange rate risks amid tightening financial conditions as well as energy price volatility. Against this background, it is key to restore fiscal buffers to be able to cope with future shocks. Rather quick and decisive fiscal ­consolidation is also in the cards for Serbia and North Macedonia, in the former under the auspices of the IMF.

Table 4: Fiscal policy indicators  

	2020	2021	2022f	2020	2021	2022f
	General government balance			General government debt
	End of period, % of GDP
Albania	–6.7	–4.5	–3.5	74.5	73.2	69.4
Bosnia and Herzegovina	–5.2	–0.3	–1.0	36.1	34.0	34.0
Kosovo	–7.6	–1.3	–0.5	22.0	21.1	19.6
Montenegro	–11.1	–1.9	–5.6	105.3	82.5	75.5
North Macedonia	–8.3	–5.4	–5.4	51.9	51.8	51.4
Serbia	–8.0	–4.1	–3.9	58.6	57.1	55.2
Ukraine	–5.3	–3.4	–17.0	60.4	49.0	85.0
Source: European Commission (Ameco), Macrobond, national central banks, wiiw.

Gradually moderating yet still high inflation deserves continued vigilance

To prevent a de-anchoring of inflation expectations and to bring inflation back on a downward trajectory, the respective central banks in the three countries with autonomous monetary policy started their monetary policy tightening in March (Albania) and April 2022 (North Macedonia and Serbia), respectively. Since then, key policy rates have been raised in 6 steps (25 or 50 basis points each) from 0.5% to 3% in Albania, in 10 steps (25–75 basis points each) from 1.25% to 5.5% in North Macedonia and in 13 steps (i.e. every month since the start of the cycle, 25–50 basis points each) from 1% to 6% in Serbia (chart 5) ⁹ . In addition, according to the National Bank of Serbia (NBS), it has intervened in the FX market to keep the dinar exchange rate vis-à-vis the euro relatively stable to help contain the ­spillover of rising import prices on domestic prices ¹⁰ . In the three countries without autonomous monetary policy – Bosnia and Herzegovina, Kosovo and Montenegro – the tools to combat inflation are mostly limited to minimum reserve requirements and macroprudential tools. Yet in the current inflationary period none of these tools have been actively used for monetary policy purposes so far. The central banks in the three mentioned WB countries have argued that the current inflation is mainly imported and/or that such instruments are predominantly employed for financial stability objectives. In this context, it is important to again stress the ­crucial role of prudent fiscal policy also in the monetary policy context, especially in countries without autonomous monetary policy.

Looking ahead, inflation is projected to soon start falling noticeably in the ­entire region, including in Serbia, where it has not yet plateaued so far. The ­slowdown is expected to be brought about by weakening global cost-push factors on the back of easing energy and commodity prices as well as global supply chain frictions, among other factors. Moreover, on the domestic front, the impact of tighter monetary policies will take hold and the base effect will start to kick in. Nonetheless, a watchful eye is warranted in light of the persisting geopolitical tensions, rising core inflation, considerably increased inflation expectations in all countries as well as tight labor markets. The risk of potential second-round effects and particularly of wage-price spirals thus needs to be closely monitored ¹¹ .

Financial sector appears resilient to recent external shocks

Banks in the region remain liquid and well capitalized (table 5) while their profitability has improved in most instances on the back of higher interest rates and lower noninterest costs. The concern that asset quality could noticeably deteriorate after a removal of the pandemic-triggered support measures has not materialized so far. The share of nonperforming loans (NPLs) to total loans decreased in all countries in 2022 (table 5). However, in some instances this was the result of a relatively stronger growth of the credit volume in the denominator since the NPL stock increased somewhat in half of the WB economies. While these figures ­appear encouraging at first glance, it is warranted to keep a close eye on future asset quality developments, especially in light of potentially mounting credit, exchange and ­interest rate risks. Apart from the fragile geopolitical situation and challenging macroeconomic environment, the microeconomic perspective also calls for ­caution. According to the most recent OeNB Euro Survey data, about 20% of ­interviewed household borrowers in Bosnia and Herzegovina and up to 60% in Albania report that they are unlikely or very unlikely to repay their debt over the next 12 months. The need for a watchful eye is corroborated also from the banks’ view. According to the EIB Bank Lending Survey conducted in September 2022, banks in all WB economies expected deteriorating NPLs in the short to medium term. What is more, if credit risks materialize, structural obstacles continue to complicate NPL resolution in the region. In particular, collateral execution ­remains a difficult task as protection of property rights keeps on lagging behind ¹² .

Table 5: Banking sector indicators  

	2020	2021	2022	Q3 21	Q4 21	Q1 22	Q2 22	Q3 22	Q4 22
	End of period, annual change in %
Bank loans to the domestic nonbank private sector
Albania1	5.9	9.4	8.9	8.4	9.4	10.7	11.3	11.7	8.9
Bosnia and Herzegovina1	–2.5	3.7	5.3	2.7	3.7	4.6	4.9	4.7	5.3
Kosovo	7.1	15.5	16.0	13.5	15.5	18.4	17.4	18.4	16.0
Montenegro	3.0	3.2	8.7	1.1	3.2	6.5	8.9	8.9	8.7
North Macedonia1	4.3	7.3	8.4	6.2	7.3	8.1	7.8	7.3	8.4
Serbia1	10.9	8.5	5.3	6.8	8.5	9.6	9.8	7.4	5.3
	End of period, %
Share of foreign currency loans2
Albania	48.3	48.8	49.3	47.5	48.8	49.3	49.0	49.6	49.3
Bosnia and Herzegovina	52.2	47.8	41.2	49.1	47.8	45.9	43.9	42.8	41.2
Kosovo	. .	. .	. .	. .	. .	. .	. .	. .	. .
Montenegro3	2.9	3.2		3.1	3.2	3.4	2.7	4.0
North Macedonia	41.5	40.7	42.6	41.3	40.7	40.9	41.4	42.3	42.6
Serbia4	62.8	61.7	65.2	61.4	61.7	62.4	63.1	64.4	65.2
	%
NPL ratio
Albania	8.1	5.7	5.0	6.5	5.7	5.2	5.3	5.1	5.0
Bosnia and Herzegovina	6.1	5.8	4.5	5.5	5.8	5.4	5.2	4.9	4.5
Kosovo	2.7	2.3	2.0	2.4	2.3	2.1	2.1	2.1	2.0
Montenegro	5.5	6.2	5.7	5.6	6.2	6.5	6.3	5.9	5.7
North Macedonia	3.2	3.2	3.1	3.6	3.2	3.3	3.4	3.3	3.1
Serbia	3.7	3.6	3.0	3.6	3.6	3.4	3.3	3.2	3.0
	%
Tier 1 capital ratio
Albania	17.2	16.9	16.9	17.2	16.9	16.7	17.8	18.1	16.9
Bosnia and Herzegovina	18.1	18.7	18.7	18.4	18.7	18.6	18.6	18.4	18.7
Kosovo5	16.5	15.3	14.8	17.9	15.3	15.1	15.1	15.8	14.8
Montenegro5	18.5	18.5	19.3	18.5	18.5	19.2	18.9	18.4	19.3
North Macedonia	15.3	15.8	16.6	15.9	15.8	15.5	15.9	16.3	16.6
Serbia	21.6	19.7	18.8	20.6	19.7	18.9	18.2	18.2	18.8
Source: National central banks.
1 Foreign currency component at constant exchange rates.
2 In total loans to the nonbank private sector. As far as available, including loans indexed to foreign currencies.
3 Share in total loans to all sectors.
4 Including securities.
5 Overall capital adequacy ratio.

Some notable political and institutional breakthroughs?

Yet, the integration progress toward the EU is significantly intertwined with domestic political developments. At end-March 2023, presidential elections took place in Montenegro after a year of political deadlock that had threatened the country’s advancement in EU accession negotiations. The incumbent Milo ­Đukanović, who has served the country as president for more than 20 years (and, taken together with the Prime Minister post, for more than three decades) lost the presidential election to the contender Jakov Milatović. The candidate of the ­Europe Now Movement, who advocates closer ties with both the European Union and ­Serbia won in a close runoff. Further, general elections scheduled for June 2023 could definitely end the long period of political stalemate and instability after two governments did not survive the no-confidence vote in the parliament during 2022. Another noteworthy parliamentary election was held in Bosnia and Herzegovina last October. A new, state-level government was formed in late January 2023. For the EU prospects of Kosovo and Serbia in the period ahead, the so-called Ohrid Agreement will be of utmost importance (see box 1).

With respect to other important institutional relations, in late 2022, the IMF ­approved a two-year SBA for Serbia amounting to about EUR 2.4 billion (equivalent to a 290% of quota). The SBA replaced the previous Policy Coordination Instrument and builds on its reform agenda with appropriate modifications to address new ­policy challenges. In particular, in the context of the energy crisis, the SBA focuses on addressing external and fiscal financing needs, maintaining macroeconomic and financial stability, and fostering structural reforms, especially in the energy sector. In a similar vein, in April 2023, IMF staff and Kosovo authorities reached a staff-level agreement on Kosovo’s economic policies to be supported by a precautionary 24-month SBA worth around EUR 100 million (97% of quota), and an arrangement under the Resilience and Sustainability Facility (RSF) of about EUR 78 million (75% of quota). These requests are subject to the approval of the IMF’s Executive Board, whose considerations about these arrangements are expected to be ­concluded in late May. According to the IMF, the SBA would provide liquidity in case downside risks – including those arising from Russia’s war in Ukraine – materialize. In contrast, the RSF is supposed to provide affordable financing to support Kosovo’s climate change mitigation and adaptation efforts, greener electricity production, and long-run growth prospects. Moreover, it is expected to catalyze other climate financing. Kosovo’s RSF is the first in Europe.

Green transition in CESEE: sectoral emissions and EU recovery plans

Andreas Breitenfellner, Mathias Lahnsteiner, Thomas Reininger ¹⁶

The EU’s financial response to the pandemic was designed to also promote climate ­action. This descriptive study investigates to what extent the recovery and resilience plans (RRPs) of EU member states in Central, Eastern and Southeastern Europe (CESEE) address some of the most pressing issues regarding their greenhouse gas (GHG) emission levels ­compared with other EU countries (EU-16). We assess that the ex ante allocation of spending within climate-related RRP spending in CESEE EU countries appears to be broadly ­appropriate. First, their plans’ focus on renewable energy and networks is particularly important given that their per capita GHG emissions in energy industries were, on average, more than 50% higher than in the EU-16 in 2019, despite lower per capita GDP levels. These high emissions result, to a large extent, from a small group of economically significant countries that substantially use coal for power generation and district heating/cooling (as well as directly in the household sector). Given generous financial support, more ambitious coal-exit strategies could have been expected. Second, the focus of CESEE EU countries’ RRPs on energy efficiency is welcome, given high energy intensity in manufacturing and poorly insulated buildings, which are an ­additional cause of high energy industries’ emission levels. In some countries, this area would clearly deserve being made a higher spending priority. Third, the RRPs’ focus on sustainable mobility is justified by the dynamic rise of transport sector emissions in CESEE EU (particularly in international aviation), even though per capita GHG emissions in transport are still lower in most CESEE countries than in the EU-16. While our findings support the general judgment that the RRPs’ spending structures indeed correspond to major country-specific climate-­related weaknesses, we do not assess whether the plans are sufficient to put countries on track to their net-zero goals or whether individual measures are appropriate. Needless to say, the ­current energy crisis related to the Russian invasion in Ukraine and Russia’s earlier restrictions on gas exports already in 2021 adds to the urgent need to steer energy production and ­consumption away from fossil sources and to advance energy saving.

JEL classification: O1, O52, Q54, Q56

Keywords: climate change, low-carbon transition, EU fiscal policy instrument, Central, Eastern and Southeastern Europe

The European Green Deal envisaged by the European Commission in 2019 and the emergence of the COVID-19 pandemic in 2020 led to significant adjustments in the European Union’s multiannual financial framework (MFF) 2021–2027 (­European Commission, 2019; European Union, 2020a). Moreover, in response to the pandemic, the European Union agreed on establishing a European Union ­Recovery Instrument (EURI) complementary to the regular EU budget provided by the MFF. ¹⁸ The cornerstone of the EURI is the Recovery and Resilience Facility (RRF), which provides funding for EU member states according to national ­recovery and resilience plans (RRPs) if jointly agreed upon at the EU level. The established common guidelines for these RRPs stipulate a minimum share of 37% for a “green pillar” in the RRP expenditures of each member state (European Union, 2020b, 2021; Reininger, 2021).

After Russia already used its energy export policy for strongly driving up EU gas prices in 2021 and then escalated its war against Ukraine, the implementation of the RRPs’ green pillars is both more challenging and even more urgent in most EU member states. Against this background, the REPowerEU Plan aims to reduce the EU’s energy dependency and greenhouse gas (GHG) emissions faster, even if temporary deviations from its ambitious climate goals are tolerated (European Commission, 2022a). National policies, however, are in part undermining these goals, as several member states have been shielding consumers and companies from rising energy prices by (partially) suspending market mechanisms and thus reducing incentives for emission cuts (Sgaravatti at al., 2022).

Against this policy background, this study provides a stocktaking of issues ­related to GHG emissions in EU member states, particularly in Central Eastern and Southeastern Europe (CESEE) in the year 2019, prior to the COVID-19 pandemic. It builds on a previous study which focused on the developments regarding the green transition in the period between 1990 and 2018. In our earlier study, we had confirmed broad compliance with climate policy commitments in both sub­aggregates of 11 EU member states in CESEE (CESEE EU) and 16 other EU member states (EU-16) while highlighting the challenges ahead (Breitenfellner et al., 2021).

This study focuses on the status quo in the year 2019 and only ­occasionally ­refers to developments in the decade following the global financial crisis in 2008. Moreover, it provides comprehensive country-specific information as well as deeper sectoral insights. Following a descriptive and comparative ­approach regarding the European Union, it uses the EU-27 aggregate and the 16 other EU member states, both individually and as EU-16 aggregate, as benchmarks for CESEE EU member states and their aggregate. Methodologically, like in the previous study, we apply the Kaya decomposition to gain a deeper understanding of the relative intensities involved in these countries and sectors (Kaya and Yokoburi, 1997; ­Umweltbundesamt, 2021). According to the Kaya identity, total ­anthropogenic GHG emissions of an economy are the product of four multiplying factors: GHG emission intensity of the energy mix, energy intensity of GDP, GDP per capita, and population. In our paper, the term “carbon intensity” refers to the product of emission intensity and energy intensity and, hence, relates GHG ­emissions to GDP. After presenting an overview on the size of the national RRPs and on the structure and quantitative design of their respective green pillars, the study explores whether the ex ante allocation of spending under these RRPs is ­appropriate to address ­general or country-specific weak spots that emerged in the preceding stocktaking exercise. In no way, however, do we claim to comprehensively assess whether these plans are adequate or whether individual measures ­envisaged therein are sufficient or timely.

The study is structured as follows: Section 1 provides an analysis of various ­aspects of GHG emissions in EU member states, with subsection 1.1 focusing on GHG emissions per capita and their structure by sectors, and subsection 1.2 ­dealing with the economy-wide and sectoral decomposition of these emissions into intensities. Section 2 gives an overview of the RRPs and their green transition ­pillars, especially in CESEE EU member states. In section 3, we wrap up and draw some conclusions.

1 Analysis of GHG emissions in EU member states

1.1 GHG emissions per capita and structure by sectors

1.1.1 GHG emissions per capita in 2019

However, this comparison does not condition on different GDP per capita ­levels, and we will turn to this issue further below.

1.1.2 Uneven decline in GHG emissions between 2008 and 2009

In general, the dynamics observed from 2008 to 2019 do not fundamentally change when considering demographics and looking at GHG total. Not only per capita but also in terms of total GHG emissions, the decline was far more ­pronounced in the EU-27 than in CESEE EU, as population figures changed only modestly, rising by 2% in the EU-27 but declining by 3% in CESEE EU. ²⁰ ­However, the relative position of a few CESEE EU member states shifts considerably when looking at total emissions. In Romania, where the decline in per capita emissions roughly equaled the EU-27 average, the accompanying substantial population ­decline resulted in a decline of total emissions that was larger than the EU-27 ­average. In Croatia, substantial population decline coupled with a decline in per capita emissions that was smaller than the EU-27 average resulted in a decline of total emissions that roughly equaled the EU-27 average.

1.1.3 The sectoral structure of GHG emissions

Moderately different sector structure results from Eurostat’s Air Emissions ­Accounts (AEA) data. The AEA data follow the residence principle, with emissions assigned to the country where the economic operator causing the emission (the operator of the ship/aircraft in the case of international navigation and aviation) is resident and are classified by economic activity (NACE) (Eurostat, 2022). The UNFCCC data, reported to international conventions, follow the territory ­principle, with emissions assigned to the country where the emission takes place (or, in the case of international navigation and aviation, where the associated fuel is bunkered), and are classified by the type of technical process (UNFCC, 2006). ²² On aggregate, for the EU-27, the difference between the AEA total GHG ­emissions and the UNFCCC total GHG emissions ²³ was about 0.5% in 2019. However, in some small and open countries (especially those considerably involved in inter­national navigation and/or aviation) the difference may be substantial. ²⁴

For the sectoral structure, part of AEA emissions may be clustered into the category of “services,” both commercial and public services, which, in turn, ­comprise some emissions covered by the categories “transport sector” and “other items” in the UNFCCC reporting. On the EU-27 aggregate level, the share of ­services accounted for slightly more than 10% of total emissions in 2019, lowering, in turn, the transport sector’s share according to AEA data to the still large size of nearly 25%.

This subsection continues to focus primarily on the sector structure derived from the UNFCCC data, while subsection 1.2 uses AEA data when investigating sectoral decomposition and intensities, as the classification of these emissions data is comparable to that of economic structure.

1.1.4 Differences in the sectoral structure of GHG emissions

The highlighted differences in the sector shares are also reflected in the differences in 2019 sector-specific per capita GHG emissions between CESEE EU on the one hand and the EU-16 and EU-27 on the other hand, given the almost equal level of total per capita emissions.

To put these differences into perspective, note that the (still) lower shares and per capita emissions of the transport sector in CESEE EU do not leave room for complacency. First, these emissions have been growing very dynamically in the relevant CESEE EU subaggregate in both the international and the domestic ­segment while declining in the EU-16 in both segments in recent years. And ­second, particularly the per capita emissions from international aviation in CESEE EU are very likely to rise further from their current, comparatively lower level.

More obviously, the higher shares of energy industries, fugitive emissions and waste emissions and the higher per capita emissions in these sectors in CESEE EU call for specifically targeted climate policy action.

At the same time, even shares and per capita emission levels in manufacturing, the residential sector and agriculture, which are comparable to the EU average, are no excuse for inaction in these countries.

At this point, let us emphasize the distinction between emissions from fuel combustion by the residential sector, which is an activity category in the UNFCCC statistics, and all emissions caused by the energy supply for residential buildings demanded by households. As pointed out above, emissions by the residential sector comprise only emissions directly generated within residential buildings, e.g. by burning fossil fuels. In addition, there are emissions indirectly caused by energy supply for residential buildings, namely emissions generated by the energy industry when producing electricity and heating/cooling for delivery to households. The latter emissions are part of total emissions by energy industries. For emissions from fuel combustion by the commercial/institutional sector, the case is similar. Avoiding this confusion is so important, as for both residential and commercial buildings there is large scope for energy saving via thermal insulation and a change of heating systems both in CESEE EU and in the EU-16. These energy-saving ­measures do not only help reduce per capita emission levels in the residential sector but also the per capita emission levels in energy industries, which are generally far higher than those in the residential sector and – as mentioned above – comparatively even higher in CESEE EU than in the EU-16. ²⁶

Table 1: Sectoral greenhouse gas emissions per capita (2019)  

	CZ	EE	PL	CESEE EU	EU-27	EU-16	BG	SI	LT	SK	HU	LV	HR	RO
	Tons of CO2 equivalent per person
Total greenhouse gas emissions	11.7	11.6	10.4	8.7	8.7	8.7	8.6	8.5	7.6	7.3	6.7	6.6	6.2	5.9
Energy industries	4.6	6.2	4.0	2.8	2.0	2.0	3.2	2.2	0.8	1.3	1.3	1.0	1.0	1.1
Manufacturing (including industrial processes and product use)	2.4	1.0	1.5	1.6	1.7	1.7	2.1	1.4	1.7	2.8	1.3	0.8	1.5	1.4
Transport sector (including international bunkers)	1.9	2.4	1.9	1.7	2.5	2.5	1.6	3.0	2.6	1.5	1.6	2.5	1.8	1.0
Residential sector	0.8	0.2	0.9	0.6	0.7	0.7	0.1	0.4	0.3	0.6	0.8	0.3	0.4	0.4
Agriculture ­ (including energy use)	0.9	1.4	1.2	1.0	1.0	1.0	1.0	0.9	1.6	0.5	0.9	1.4	0.8	1.1
Other items	1.0	0.5	1.1	0.9	0.7	0.7	0.7	0.6	0.6	0.6	0.8	0.6	0.7	0.9
Source: Authors’ calculations, Eurostat, UNFCCC.

In which sectors do individual CESEE countries differ markedly from the overall ­regional structure? If we compare chart 2 and table 1, we find that differences in the sector structure of emissions reflect differences not only in the countries’ ­economic structure but also in (past) energy and climate policy. The share of energy ­industries as well as related per capita emissions are markedly lower in Croatia, Slovakia, Hungary and Romania, and particularly high in Estonia, Czechia, Poland and ­Bulgaria. In manufacturing, Slovakia and Czechia do not only have above-average shares but also above-average per capita emission levels. In the transport sector, Slovenia, Lithuania and Latvia stand out with above-average figures, and in the residential sector, Poland, Hungary and Czechia. In agriculture, Romania and Croatia have above-average figures in terms of shares, Poland in terms of per capita emissions and the Baltic countries in terms of both shares and per capita emissions. In the category “other items,” Romania has a particularly high share and Poland clearly above-average per capita emissions; in both cases, this is attributable to the subitem of fugitive emissions from fuel. In addition, within “other items,” per ­capita emissions from waste are particularly high in Czechia, Croatia, Bulgaria and Hungary. Finally, note that there is sizable heterogeneity in sectoral per capita emissions also among the EU-16 countries.

1.2 Intensities in the overall economy and in different sectors

1.2.1 Carbon intensity: GHG emissions per unit of GDP and GVA

Obviously, for cross-country comparison, the question arises whether GDP and GVA are measured in euro at purchasing power parity (PPP) or at market ­exchange rates. Focusing on the volume of GHG emissions associated with ­comparative income levels would suggest applying PPP. In contrast, focusing on the volume of GHG emissions associated with international competition in ­tradable goods and economic activities related to their production would suggest using the market exchange rate. Hence, for GDP we consider PPP more appropriate, while for the GVA of ­internationally exposed sectors we ­prefer using the market ­exchange rate. However, for the sake of transparency and comparability between the total economy and individual sectors, we will look at both measures regarding GDP, focusing primarily on the PPP-­related measure while highlighting if the exchange rate-related measure yields considerably different results. The substantially higher GDP-based carbon intensity levels in CESEE EU (according to both measures) ­reveal the need of their further lowering in order to allow per capita income ­convergence within ecologically sustainable limits. Based on GDP at PPP, average carbon ­intensity for CESEE EU was one-third above the EU-27 average, while the EU-16 carbon intensity was 7% below this average in 2019 (see table 2, first ­column). Based on GDP at market exchange rates, CESEE EU carbon intensity was more than 110% higher than in the EU-27 while EU-16 carbon intensity was 13% lower (see table 2, second column). Thus, in chart 3, the dot for CESEE EU lies clearly above the 45° line. According to both measures, carbon ­intensity was above the EU-27 average in each CESEE EU country, with Bulgaria, Estonia, ­Poland and Czechia belonging to the most carbon-intense economies in the EU-27. Among the EU-16 member states, only Malta, Greece and Cyprus were close to such high levels of carbon intensities. On a PPP basis, Belgium and the Netherlands had carbon intensities below those in the four CESEE EU member states mentioned above (and thus also below the CESEE EU average) but higher than those in the remaining seven CESEE EU member states ²⁷ , which in turn had carbon intensities up to 12% above the EU-27 level on a PPP basis (but exceeded that level by at least 30% on an exchange rate basis).

Looking at the dynamics (on PPP basis), carbon intensity declined in each EU member state from 2008 to 2019 and on average by 26% in the EU-27. On the positive side, the decline was stronger on average in the CESEE EU member states, amounting to 32%, with above-average declines in Poland and Estonia, two of the four countries with still above-average levels in 2019. However, among the CESEE countries, Bulgaria together with Latvia and Croatia showed less progress than the EU-27.

1.2.2 Possible explanations for country differences in carbon intensity

Emission intensities of total economies in CESEE EU were on average 29% higher than in the EU-27 in 2019 (see table 2, third column). This mirrors the above finding that CESEE EU carbon intensity (based on GDP at PPP) was 34% higher than in the EU-27. Moreover, those four CESEE EU countries with carbon intensity above the CESEE EU average (Bulgaria, Estonia, Poland, Czechia) were those (together with Romania) that had above-average emission intensities. The same applies to Greece as one of the three EU-16 countries with above-average carbon intensity. Congruently, five of the seven CESEE EU countries with the lowest carbon intensities (Hungary, Lithuania, Slovakia, Croatia, Slovenia), which exceeded the EU-27 level by only 12% or less, had emission intensities close to the EU-27 average. (Latvia was the only CESEE country with an emission intensity far below the EU-27 average.)

Thus, the emission intensity ranking of most CESEE countries among all EU-27 countries matched their ranking with respect to carbon intensity and, in ­addition, the heterogeneity in carbon intensity resulted mainly from the hetero­geneity in emission intensity. This means that in the CESEE EU countries energy intensity, i.e. the second factor determining carbon intensity, was relatively close to the EU-27 average. At the same time, in each CESEE EU country (except for Romania), energy intensity was above the EU-27 level (see table 2, fourth column). Romania and Latvia were the outliers among CESEE countries, with their ­emission and carbon intensity rankings not matching each other and their energy intensity deviating strongly from the EU-27 average, as Latvia had particularly high and ­Romania particularly low energy intensity in 2019.

Besides, if measuring carbon intensity and hence energy intensity is based on GDP at market exchange rates, then the energy intensity of CESEE EU countries is driven up and is shown to be even more important than emission intensity for determining the above-average carbon intensity levels of CESEE EU countries and the heterogeneity in carbon intensity within the EU-27 (see table 2, fifth column).

This decomposition shows that both saving energy and expanding low-emission energy sources, particularly renewable energy, are even more urgent challenges for the CESEE EU than the EU-16 countries. The scope for reducing carbon intensity toward the lower EU-16 levels is particularly large with respect to emission ­intensity.

Table 2: Decomposition of total emissions  

	Carbon intensity (with GDP at PPP)	Carbon intensity (with GDP at ­market exchange rates)	Emission intensity	Energy intensity (with GDP at PPP)	Energy intensity (with GDP at ­market exchange rates)
Malta	223	258	89	251	291
Bulgaria	194	356	165	118	216
Estonia	163	202	136	120	148
Greece	156	194	137	114	142
Poland	155	268	146	107	184
Cyprus	153	171	121	127	141
Czechia	145	200	134	108	149
CESEE EU	134	216	129	104	167
Belgium	128	113	90	142	125
Netherlands	117	102	97	120	105
Slovenia	112	133	97	115	137
Croatia	109	165	98	110	168
Latvia	108	149	77	141	193
Finland	107	85	59	181	145
Slovakia	105	154	99	107	156
Lithuania	105	158	101	104	157
Romania	105	186	132	79	141
Hungary	101	162	96	105	169
EU-27	100	100	100	100	100
Portugal	99	120	101	99	119
Germany	96	87	102	94	85
Spain	95	104	100	95	104
EU-16	93	87	94	98	92
Italy	90	88	99	90	89
Luxembourg	87	73	70	125	104
Austria	85	75	78	108	96
Denmark	81	60	89	91	68
France	77	69	84	91	82
Ireland	74	65	129	57	50
Sweden	55	46	49	114	95
Source: Authors’ calculations, Eurostat, UNFCCC.
Note: Indexed values, EU-27/2019 = 100.

1.2.3 Why was emission intensity so much higher in CESEE EU than in EU-16 countries?

Table 3: Energy industries  

	Emission intensity	Share of coal, oil and gas	Share of coal
		%	%
Poland	253	85	77
Cyprus	221	94	0
Greece	220	81	33
Estonia	187	5	0
CESEE EU	169	59	47
Germany	162	51	34
Malta	158	93	0
Bulgaria	145	48	40
Czechia	143	53	46
Netherlands	139	71	16
Ireland	135	61	3
Romania	128	55	32
Croatia	120	48	17
Italy	110	61	8
Slovenia	108	37	32
Hungary	101	36	11
EU-27	100	39	19
Portugal	95	58	15
Latvia	87	48	0
EU-16	83	34	12
Luxembourg	79	23	0
Denmark	67	26	13
Finland	66	16	8
Spain	65	40	7
Belgium	61	21	0
Lithuania	60	17	0
Slovakia	55	24	10
Austria	53	28	4
Sweden	14	1	0
France	14	7	1
Source: Authors’ calculations, Eurostat.
Note: Indexed values in the first column, EU-27/2019 = 100, percentage shares in total energy used in the ­second and third columns.

A considerable part of electricity and heating/cooling provided by energy ­industries is delivered to households’ residential buildings. In turn, these deliveries constituted a substantial part of total energy used in households for electricity and heating, namely about 33% in the EU-16 and 31% in CESEE EU. The other part is made up by energy that is used to generate electricity and mainly heating directly within households. The relative size of these two parts varies substantially within both country groups as can be seen from table 4, first column.

Table 4: Residential sector  

	Energy used to generate E&H ­directly within HH	Thereof:			Emission intensity
	Share of coal and peat	Share of oil	Share of gas
	% of total energy for E&H used in HH	%
Ireland	76	16	54	27	158
Malta	29	0	53	0	145
Belgium	80	1	37	52	133
Luxembourg	83	0	30	64	126
Netherlands	76	0	1	92	118
Poland	71	34	4	25	114
Portugal	61	0	23	16	111
Greece	62	0	45	15	108
Bulgaria	43	11	2	9	106
Germany	74	1	28	52	106
Spain	57	1	29	42	104
Cyprus	58	0	53	0	103
EU-16	67	1	21	51	102
Italy	79	0	8	66	100
EU-27	67	5	17	48	100
France	62	0	18	46	95
Hungary	74	2	2	66	94
CESEE EU	69	16	4	35	92
Czechia	67	14	1	38	92
Slovakia	67	2	0	63	85
Austria	65	0	21	33	81
Romania	77	1	5	43	64
Lithuania	52	6	8	21	63
Slovenia	65	0	18	15	57
Denmark	43	0	11	33	57
Croatia	71	0	6	29	53
Latvia	57	1	8	16	52
Estonia	47	0	2	13	38
Finland	37	0	14	1	34
Sweden	14	0	19	2	30
Source: Authors’ calculations, Eurostat.
Note: E&H = electricity and heating, HH = households; percentage shares in columns 1 to 4; indexed values in column 5, EU-27/2019 = 100. ­Columns 2 to 4: shares in 100 = energy used to generate E&H directly within HH in the respective countries.

The generation of electricity and heating directly within households causes those GHG emissions that are attributed to the residential sector’s activity. Relating these GHG emissions to the energy used for producing electricity and heating ­directly within households yields the corresponding emission intensity. Unlike in energy industries, households’ residential sector had emission intensity levels that in CESEE EU were moderately lower (by 8%) than the EU-27 average, while slightly higher by 2% in the EU-16 in 2019 (see table 4, fifth column). However, these average figures also mask considerable heterogeneity within both country groups. At the high-intensity end of the spectrum, there are EU-16 countries (­Ireland and Benelux) where the emission intensities were higher than the EU-27 average by 18% (Netherlands) to 58% (Ireland), driven by the overall high share of fossil energy (that is, the combined share of coal, peat, oil and natural gas), partly coupled with a substantial share of oil (and coal and peat in Ireland). This is ­followed by the country with the highest emission intensity in CESEE EU, which is Poland, exceeding the EU-27 average by almost 15%. Here, the high share of coal played a decisive role in the relative level of emission intensity. While Poland had a visibly lower overall share of fossil energy than the Netherlands, the large weight of coal within that share caused Poland’s emission intensity to be almost as high as that of the Netherlands (see table 4, second, third and fourth column). ³⁰ In 2019, more than three-quarters (76%) of total coal used by the residential sector (households) in the EU-27 aggregate were used in Poland, further 10% in Czechia, 5% in ­Ireland and 2% in Bulgaria. Note again that these emission intensities do not provide any information about the extent to which above-average volumes of energy may be employed in residential heating and, more generally, about the varying scope for energy saving (e.g. via thermal insulation) across countries in this sector.

1.2.4 Carbon intensity of industry and its decomposition

Table 5: Decomposition of industry emissions  

	Carbon intensity	Emission intensity	Energy intensity
Bulgaria	319	133	240
Greece	294	197	149
Slovakia	237	120	197
Cyprus	228	256	89
Poland	206	140	147
Romania	201	148	135
Croatia	197	140	141
CESEE EU	184	127	145
Luxembourg	148	97	154
Lithuania	145	144	101
Belgium	143	93	153
Portugal	142	107	133
Czechia	140	109	129
Hungary	131	86	153
Spain	120	116	103
Ireland	118	123	96
Slovenia	117	113	103
Latvia	112	69	161
Netherlands	112	90	124
Austria	101	92	110
EU-27	100	100	100
Estonia	96	104	92
France	93	105	89
Other EU	87	94	93
Italy	85	111	76
Finland	77	34	228
Germany	66	87	76
Sweden	64	47	138
Malta	49	102	48
Denmark	46	105	44
Source: Authors’ calculations, Eurostat.
Note: Indexed values, EU-27/2019 = 100.

Emission intensities of industry in ­CESEE EU were on average 27% higher than in the EU-27 in 2019 (see table 5, second column). Thus, in CESEE EU countries, the extent to which industry’s emission intensity surpassed the EU-27 average was roughly equally ­pronounced as in the case of the total economy’s (GDP’s) emission intensity. At the same time, both emission intensities surpassed the EU-27 average to a considerably lesser extent than the ­respective carbon intensities of industry and GDP exceeded the EU-27 average.

The combination of the carbon ­intensity of industry in CESEE EU that exceeded the EU-27 average to a very large extent and emission intensity that surpassed the EU-27 average to a considerably lesser albeit still substantial extent implies that the energy intensity of industry in CESEE EU was much higher than the EU-27 average, namely by 45% (see table 5, third column). Thus, like for carbon intensity, in CESEE EU countries, the order of magnitude by which industry’s energy intensity exceeded the EU-27 average was comparable to that observed for energy intensity of GDP measured at market exchange rates, which was 67% higher than in the EU-27. Hence, CESEE EU’s relative position with respect to industry’s intensities was roughly comparable to its relative position with respect to GDP’s intensities measured at exchange rates. In contrast, for GDP measured at PPP, CESEE EU’s energy intensity and thus its carbon intensity exceeded EU-27 levels to a considerably smaller extent, leaving its emission intensity as the considerably more important factor for explaining its higher carbon intensity.

Note that four of the five CESEE EU countries whose industrial sectors ­recorded carbon intensity levels above the CESEE EU average (Bulgaria, Poland, Romania, Croatia but not Slovakia) were those (together with Lithuania) that showed above-average emission intensities. The same applies to Greece and Cyprus among the EU-16 countries. Slovakia registered particularly high energy intensity, and the same is true for Bulgaria, in addition to its emission intensity being only moderately above the CESEE EU average.

In almost all EU countries, more than half of industry’s GHG emissions stem from three manufacturing branches: metal industry, chemical and petrochemical ­industry and non-metallic minerals. On average, their combined share amounted to 65% of GHG emissions in industry in the EU-27, 58% in CESEE EU and 67% in the EU-16 in 2019 (reaching even close to 80% in Lithuania, Luxembourg, ­Cyprus, Austria and Belgium, hence in several of the EU countries with the highest per capita emissions in industry). In contrast, these three branches together ­accounted for not more than 13.8% of total industry’s GVA (at market exchange rates) in the EU-27, 11% in CESEE EU and 14.3% in the EU-16, with the highest share among the EU-16 countries seen in Belgium (32%) and, among CESEE EU countries, in Slovenia (21%). However, the output of these manufacturing branches constitutes important intermediate consumption goods for other branches of ­industry, like e.g. machinery, with substantial gross value added.

If we briefly turn to agriculture, forestry and fishing as the other internationally exposed sector of the economy ³² , we see that the average carbon intensity in CESEE EU (based on GVA at market exchange rates) surpassed the EU-27 level by 40% – thus less strongly than in industry. Moreover, unlike what we saw for industry, there are more EU-16 countries (Ireland, Luxembourg, Belgium, Denmark) than CESEE countries (Poland, Bulgaria, Lithuania) in the group of countries whose carbon intensities are above the CESEE EU average, with intensity levels in Ireland and Luxembourg exceeding the Polish level. Overall in the EU-27, carbon intensity in agriculture is seven times higher than in industry. Note that agricultural GHG emissions do not primarily stem from final energy used but from agricultural processes, which would render decomposition into emission intensity and energy intensity less meaningful.

For the sake of completeness, note that services comprise a large number of ­economic activities as classified by NACE (C33, E, G, H52–53, I to S, and U) and their GVA constitutes a predominant share of the total economy’s GVA (and GDP), but their overall carbon intensity based on PPP (given the largely nontradable ­character of services) amounts to only about one-sixth of total economy’s carbon intensity in absolute terms in the EU-27. Thus, differences relative to the EU-27 average in services, have an only minor effect on the overall ranking of most ­economies’ carbon intensity. Carbon intensity was about two-thirds higher on ­average in the CESEE EU member states than in the EU-27, while 10% lower in the EU-16.

2 The green transition pillar within recovery and resilience plans

2.1 Overall size and structure of national recovery and resilience plans

Turning to the overview on RRPs, it is worth noting that CESEE EU member states are among those EU countries that are entitled to receive comparatively large amounts of RRF grants when compared to their GDP. Maximum allocation of multiannual RRP grants (for payout in the years 2021 to 2026) as a percentage of annual GDP in the year 2021 amounts to between 8% and 10% in Bulgaria and Croatia and stands between about 3% (Estonia, Slovenia, Czechia) and 6% (­Slovakia) in the remaining CESEE EU countries. In the CESEE EU aggregate, this ratio amounts to 4.5%. Among the EU-16 member states, Greece (9.5%) matches the level of Croatia and Bulgaria, followed by Portugal (7.5%); Spain (6%), Cyprus and Italy (each 4%) come next, lying in the range of the other CESEE EU ­countries. In contrast, Luxembourg, Ireland and Denmark receive the lowest amounts of multiannual RRP grants, reaching not more than 0.5% of GDP 2021. On top of grants, EU member states are entitled to apply for loans amounting to 6.8% of GNI at terms and conditions that are favorable for the majority of member states, including all CESEE EU member states. Remarkably, among CESEE countries, only Romania requested the full amount of available loans, as did Italy and Greece. While the RRPs of Poland and Slovenia involved requests for portions of the ­available loans, other CESEE countries opted for relying on grants only. Hence, the full potential of the RRF is not going to be used. In several CESEE countries, this might signal authorities’ awareness of some limits of absorption capacity and/or their aim to contain the rise in public indebtedness already pushed up by the pandemic-related crisis.

The RRF regulation (European Union, 2021) obliged each member state to dedicate at least 37% of total RRP expenditures (i.e. grants) contained in its RRP to measures contributing to climate objectives (and at least 20% to digital ­objectives) ³⁴ . Within CESEE countries, Bulgaria surpassed this benchmark with the widest margin (59%). Most CESEE countries (Slovakia, Poland, Slovenia, ­Czechia, Estonia, Romania and Croatia) show a climate spending share between 40% and 45%. Thus, this share tends to be somewhat higher in CESEE EU ­countries than in those EU-16 countries that are also set to receive similarly high amounts of RRF grants relative to GDP. In Greece, Italy, Portugal, Spain and ­Cyprus the share of expenditures devoted to climate objectives ranges from 37% to 41%. For all EU member states taken together (referred to as the “EU-27” but effectively EU-26, as Hungary’s RRP data were not available at the time of ­writing), estimated climate expenditures amount to about 40% of their total RRF grants.

2.2 The structure of expenditure toward climate objectives under the RRPs

The relative importance of the three individual areas also varies widely across CESEE countries.

Bulgaria stands out with a particularly high share of expenditure for renewable energy and networks; Lithuania, Poland, Estonia, Croatia and Czechia also are above the EU average in this respect. Bulgaria inter alia defined the aim of tripling the power generation from renewables, and, at the same time, committed to set out a framework for the coal phaseout (phaseout as soon as possible and at the latest by 2038). In this context, Bulgaria’s RRP also includes binding targets for the ­reduction of the CO2 emissions associated with electricity generation by 40% ­below 2019 levels to be achieved by 2025 ³⁵ as well as a regulatory cap on carbon dioxide emissions from coal and lignite power plants applicable as of January 1, 2026. Various types of investments in renewables and grid and storage capacity are part of most CESEE countries’ RRPs. The Polish RRP envisages funding for offshore wind energy plants and terminal infrastructure, as well as regulatory changes facilitating the construction of onshore wind energy plants. In parallel, the Polish RRP is based on the National Energy and Climate Plan 2021–2030 and a strategy entitled Energy Policy of Poland until 2040 (Polish Ministry of Climate and Environment, 2021), which provides for a reduction of the share of coal in electricity generation to 56% by 2030 (from 73.6% in 2019) and 11% to 28% in 2040 as well as the abandonment of direct use of coal in households in cities by 2030 and in ­rural areas by 2040. This strategy is currently under review, following the Russian invasion of Ukraine. On top of this, in late 2020, the Polish government and trade unions agreed a plan to phase out coal mines by 2049. Czechia had a coal phaseout target of 2038 at the time of drafting the RRP. However, in early 2022, the Czech government announced plans to prepare for the phaseout of coal already by 2033. In Romania, the RRP includes reforms to phase out coal-based power production by 2032.

In some CESEE countries, the use of biomass as a renewable energy source for ­heating and electricity generation is a critical issue due to sustainability concerns (see Heilmann et al., 2020). In the context of the EU recovery and resilience plans, an important criterion is the “Do no significant harm” (DNSH) principle ³⁶ . It is worth mentioning that in the framework of Czechia’s RRP investment in biomass (with the aim of reducing coal combustion for heat production and electricity ­generation) is subject to specific conditions and the sustainability criteria for ­renewable energy sources set out in the EU’s Renewable Energy Directive (RED II) ³⁷ . Only biomass waste and residues that can be extracted in a sustainable ­manner shall be used. Moreover, milestones under the RRP include an assessment for the decarbonization of district heating as well as of the trajectories of sustainable use of bioenergy and supply of biomass to be prepared by the Czech authorities (see Council of the European Union, 2021). Within other CESEE countries’ RRPs, biomass projects are also linked to certain criteria and conditions and must comply with the RED II. In Romania, reform measures contained in the RRP aim at ­combating illegal logging and setting out sustainability criteria for forest biomass for energy use.

The share of spending for energy efficiency is particularly high in Slovakia, and it is also above EU average in Latvia, Czechia, Bulgaria and Romania. Expenditures in this area reflect, to a considerable extent, renovation initiatives with regard to public and private buildings. (For a more general discussion on EU policies aimed at reducing emissions related to buildings, see Rochet et al., 2021.) Yet, some countries’ RRPs also contain measures to promote energy efficiency in industry (e.g. Croatia, Romania, Slovenia, Slovakia and Poland), hence supporting industry decarbonization.

In Romania, Latvia and Lithuania, the share of planned expenditures for ­sustainable mobility is above the EU average share. Key measures include: investments in railway and urban transport infrastructure in Romania; an overhaul of the Riga metropolitan area transport in Latvia; phasing out the most polluting road transport vehicles (private, public and commercial); and increasing the share of renewable energy sources in the transport sector in Lithuania. Hanzl-Weiss (2022) points to the fact that CESEE’s automotive industry lags behind in car ­electrification, possibly also due to dependency arising from foreign ownership. In a joint EIB-OeNB-wiiw study (Delanote et al., 2022), the authors criticize the apparent lack of attention given to this issue in the RRPs of most countries. One might, however, argue that the gap in public transport is even more critical.

Going beyond these main three policy areas, chart 4 shows that some CESEE countries (Estonia, Poland, Lithuania, Slovenia, Slovakia and Croatia) have ­earmarked RRF funds for research, development and innovation (R&D&I) in green ­activities, with Estonia and Poland lying above the EU average.

It is also worth highlighting that Estonia shows a relatively high share of ­expenditure in the area of other climate change mitigation. This reflects measures aimed at speeding up the green transition in the business sector, inter alia through a green fund set up to finance innovative green technologies that contribute to solving environmental problems.

Expenditure for climate change adaptation plays a large role in Slovenia and is also above the EU average in Czechia and Romania, with measures addressing flood risks being part of the RRPs in these three countries.

Croatia’s RRP features a relatively high share of expenditures devoted for the transition to a circular economy (e.g. investments to upgrade water and ­wastewater systems). Compared to the EU average, this policy area also plays a larger role in Slovenia (e.g. upgrading energy-efficient wastewater and drinking-water systems), Czechia (e.g. constructing recycling infrastructure and generating water savings in the industrial sector), Romania (e.g. investments in municipal waste management systems) and Bulgaria (e.g. support for companies in modernizing their technology and in their transition to green and circular business practices).

3 Conclusions

The comparatively higher GDP-based carbon intensity in all CESEE EU countries resulted mainly from higher emission intensity (measuring GHG emissions per unit of energy used), but also from above-average energy intensity (measuring energy used per unit of GDP). This outcome indicates that both saving energy and expanding low-emission sources of energy, particularly renewable energy, are even more ­urgent challenges for the CESEE EU countries than for the EU-16. The higher GDP-based emission intensity in CESEE EU resulted mainly from energy industries for generation of electricity and heating/cooling. Moreover, higher GDP-based ­emission intensity is being driven up by the emission intensity of industry and, ­particularly in Poland, by the intensity of emissions directly generated within ­residential buildings due to the widespread use of coal. The comparatively higher carbon intensity of industry in CESEE EU resulted mainly from higher energy ­intensity.

How do the results of our stocktaking exercise relate to the CESEE EU countries’ spending preferences within climate-related RRP expenditures? Overall, the ex ante ­allocation of spending within climate-related expenditures in the framework of CESEE EU RRPs described in section 2 appears to be broadly appropriate, in as far as the three largest spending categories relate to areas where weaknesses emerged in CESEE. We caution that in no way should this be regarded as a sufficiently detailed assessment of whether the RRPs are adequate in general or whether individual measures envisaged in these plans are sufficient in terms of content or timeliness. The focus on renewable energy and networks is particularly important in view of the fact that, in CESEE EU, per capita GHG emissions in energy industries ­(generation of electricity and heating/cooling as well as refineries for oil products and coke ovens) were on average more than 50% higher than in the EU-16 despite the lower per capita GDP level. At the same time, we appreciate that the RRPs do not ­endorse the expansion of any type of renewable energy production but must ­comply with the “do no significant harm” principle and sustainability criteria. Therefore, regarding the use of biomass, only biomass waste and residues that can be ­extracted in a sustainable manner shall be used and reforms and milestones that advance such types of biomass shall be implemented in the context of the RRPs. The focus on energy efficiency, that is the inverse of energy intensity, at first glance does not ­appear to be much more important in CESEE EU than in the EU-16 if energy ­intensity based on GDP at PPP is taken as the yardstick, while in fact it certainly is an urgent challenge for the EU-16 and hence for CESEE EU, too. Moreover, if we look at energy intensity based on GDP at exchange rates or at energy intensity in industry, the need for catching-up in CESEE EU is still quite substantial indeed. More specifically, energy-saving measures, particularly in residential and commercial or institutional buildings, would be instrumental in lowering per capita ­emissions generated directly within these buildings and lowering per capita emissions in energy industries, which are far higher in CESEE EU than in the EU-16. The focus on sustainable mobility at first sight appears to be even less important in CESEE EU than in the EU-16 when looking at per capita GHG emissions in transport. However, as argued above, both the far more dynamic rise of these emissions in CESEE EU and the expectation of gradual structural alignment of CESEE’s ­participation in international aviation call for sustainability-oriented action in the transport sector early on.

Looking into country-specific spending preferences generally confirms the broad picture for the three largest climate-related spending categories in RRPs, even though some questions arise. In the area of renewable energy and networks, the above-average shares of expenditure in Bulgaria, Poland, Estonia and Czechia ­address these countries’ far above-average per capita GHG emissions in energy ­industry. In this area, coal phaseout is an important issue in the small group of countries that still use coal to a non-negligible extent in energy industries for ­generation of electricity and heating/cooling and directly in the residential sector (households). It appears that this issue is generally addressed in the RRPs or in ­related plans and strategies, but to different extents and with quite different time frames concerning the coal phaseout. While the RRPs of Bulgaria and Romania refer explicitly to their plans to phase out the use of coal, Czechia and Poland ­published phaseout targets only in related documents. Romania appears to pursue the most ambitious target, while Poland seems to have positioned itself at the other end of the spectrum with reduction targets for coal-based power production to be achieved by 2030 and 2040 but no clear target year for the ultimate phaseout. It would be highly welcome if Poland set an ambitious target date for the ultimate phaseout of coal-based power production and adopted a more ambitious approach with respect to the phaseout of coal use by households in rural areas (combined with a strong effort to promote heat pumps).

In the area of energy efficiency, the above-average shares of expenditure in Latvia and Bulgaria address their considerably above-average energy intensity based on GDP at PPP, and in Slovakia and Czechia, spending reflects intensities that exceed the average as well, albeit by a smaller margin. In the case of Estonia, which also shows high GDP-based energy intensity, only a rather modest share of total RRP spending explicitly addresses energy efficiency (especially in dwellings); but the particularly large and somewhat opaque item of “green transition in business” may inter alia advance economy-wide energy efficiency. For Latvia and Bulgaria, it would be important that their energy efficiency plans also comprise significant measures for industry, given the high intensity levels in their industrial sectors. However, the Bulgarian RRP measures for industry contain an only moderate share that contributes to climate objectives and the Latvian RRP hardly mentions climate issues related to industry. In contrast, it is particularly welcome that ­Slovakia’s energy efficiency plans also cover the industrial sector, given the ­particularly high energy intensity of that sector. In this context note that also the RRPs of Croatia, Romania and Poland address their above-average energy ­intensities in industry. In view of the above-mentioned fact that energy-saving measures also help lower per capita emissions in energy industries, a larger general effort to promote energy-saving measures would be very welcome in Poland, given its far above-average per capita emissions in energy industries.

In the area of sustainable mobility, the above-average shares of expenditure in Lithuania, Latvia and Romania address the fact that the per capita GHG emissions in transport were considerably above the EU-27 average in Lithuania and Latvia and that the growth rates of these emissions were particularly high in these two countries and in Romania. In Slovenia, characterized by high per capita GHG emissions in transport, and in Poland, where transport emissions grew particularly rapidly, expenditures for sustainable mobility also play an important role, accounting for the largest share in both countries’ total RRP spending, though they do not exceed the corresponding spending share for the EU-27.

Apart from these three major climate-related spending categories, note that the category of transition to a circular economy, which particularly includes waste management and wastewater treatment, accounts for an above-average share of spending within the RRPs’ climate-related expenditures in Croatia, Czechia and Bulgaria (among others), hence in those countries where (together with Hungary) per capita GHG emissions from waste are above the CESEE EU average and ­between 50% and 110% higher than in the EU-16.

To sum up, the national recovery and resilience plans of CESEE EU member states form part of a sizable EU-coordinated policy intervention effort. Overall, the ex ante allocation of spending within climate-related expenditures under these plans appears to be broadly appropriate in general, in as far as the three largest spending categories relate to areas where CESEE countries exhibit particular weaknesses. Future research may use the updated dataset on climate-related intensities for deriving an output-/performance-based ex post assessment of the actual achievements of this policy effort. But there is ample room for further research even today. One strand could be to add further elements to the emission-related analysis. For instance, a country- and sector-specific dynamic perspective could enrich the analysis and add to policy insights. Also, a look at the country-specific efficiency in electricity and heat supply (e.g. relating energy input to energy ­output) would be interesting. Another strand would be to scrutinize in depth the wide range of measures envisaged under the RRPs to derive detailed policy assessments and recommendations on top of the already existing literature.

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