CEE Macro Weekly: Being strong doesn’t always pay off

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TOP MACRO THEME(S):

• The gains and losses of a strong currency (p. 3) – The recent strong appreciation of the zloty, while contributing to a moderate decline in inflation, has also had a negative impact on GDP. Scenarios of further currency appreciation show lasting decline in prices at the expense of GDP, whereas a return to a weaker zloty would gradually reverse these effects, mitigating the negative economic consequences in the long run.

WHAT ELSE CAUGHT OUR EYE:

• CZE: The government has decided to raise defense spending by 0.2% of GDP annually until 2030, aiming to reach 3% of GDP. Prime minister P.Fiala said that, if necessary, the 2025 budget could be revised to allocate additional resources for military expenditures. Meanwhile, opposition leader, A.Babis, emphasized that diplomacy, not increased arms shipments, is the key to ending the war in Ukraine. He endorsed D.Trump’s statement that V.Zelensky is at risk of provoking WWIII. Babis’ party, ANO, currently leads election polls with app. 33% support (STEM poll) and seems likely to return to power after the parliamentary elections scheduled for Oct. 2025. If that happens, military support for Ukraine might be discontinued, and defense spending (currently at 2% of GDP) may not be increased beyond its current level.
• HUN: Former finance minister, M.Varga, was appointed as the governor of National Bank of Hungary. Upon taking office, he emphasized that stability, independence, and transparency will be the guiding principles of his term, signaling continuity in monetary policy.
• HUN: Economy Ministry has given retailers one week (untill the beginning of next week) to present their plans for curbing inflation by reducing profit margins. Retailers are expected to lower prices on basic food products, including pork, chicken, eggs, milk, and dairy products. The Ministry has also stated its readiness to intervene against price increases if necessary, using all available tools.
• CZE: State budget deficit in the period January-February equaled CZK 68.6bn, translating into 0.8% of GDP. It was lower by 33.1% y/y, in line with the fiscal consolidation process. Revenues increased by 9.9% y/y, driven by social contributions and VAT inflows, while expenditures fell by 2.8% y/y, mainly due to withdrawal of energy subsidies.
• CEE: The harmonized unemployment rate in Poland in January decreased to 2.6% from 2.7% in December 2024, reaching the lowest level in the history of the survey. Poland's unemployment rate is also the lowest in the entire EU (tied with the Czech Republic). The readings for Hungary and Romania stood at 4.3% and 5.5% respectively.

THE WEEK AHEAD:

• Poland’s MPC meeting will be in the spotlight next week, especially taking into consideration new inflation projection, which has been constantly mentioned as a benchmark for the timing of monetary easing. We expect no change in interest rates. Friday will bring decision on Poland’s rating by the Fitch agency. Apart from that we’ll get to know inflation readings from Czechia (full estimate), Poland and Hungary, and several publications on economic activity in January (including industrial production in Czechia, Hungary and Romania and retail sales in the former one).

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