CEE Macro Weekly: June weakness did not derail overall positive trend

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TOP MACRO THEME(S):

• Poland powers ahead on domestic demand strength (p. 3) – Poland’s economy gained momentum in 2q25, driven by strong domestic demand, a rebound in industry and services, and improving investment activity. Despite external headwinds, growth accelerated, with our nowcast pointing to solid expansion in the second quarter.

WHAT ELSE CAUGHT OUR EYE:

• HUN: The MNB left interest rates unchanged, maintaining the base rate at 6.50%. The central bank assessed that high-frequency indicators suggest weak economic activity in 2q25, although a gradual recovery is expected from 2026 onwards. Despite both mandatory and voluntary price caps, the central bank continues to observe strong corporate price adjustments. Inflation is projected to remain above the tolerance band for the remainder of the year, returning within the band in 2026 and converging to the target level in 2027. The MNB reduced the required reserve ratio from 10% to 8%, describing the move as a technical adjustment with no implications for monetary transmission. Given the subdued economic outlook, we continue to see room for further monetary easing in late 2025.
• CEE: According to Eurostat, general government debt levels in the CEE countries after 1q25 remained below the EU average of approximately 82% of GDP. Hungary recorded the highest public debt ratio in the region, at 75.3% of GDP, thus exceeding the 60% threshold set by the Maastricht criteria. Next in line were Poland and Romania, with debt levels at 57.4% and 55.8% of GDP, respectively. In Romania’s case, the debt-to-GDP ratio has followed a clearly upward trajectory since the onset of the Covid-19. Poland has also seen a rising debt burden since 2023. According to the European Commission’s Spring Forecast, both countries are projected to breach the 60% of GDP debt limit in 2026, although we believe there is a material risk this could happen already in 2025. Romania reported the highest fiscal deficit in the EU after 1q25, at 8.7% of GDP. Its debt structure is particularly vulnerable, with foreign currency-denominated liabilities accounting for over 50% of total debt, compared to less than 30% in other CEE economies. In this context, any fiscal impasse of political instability – should it trigger further depreciation of the RON – could significantly increase debt servicing costs. Poland’s fiscal deficit amounted to 6.9% of GDP. We forecast that the full-year 2025 deficit could narrow 6.4% of GDP, reflecting a rather modest consolidation effort based primarily on the continued freeze of PIT thresholds and higher excise duties. Among CEE countries, only Czechia remains in full compliance with the Maastricht benchmarks, with a fiscal deficit at 2.3% and general government debt at 43.4%, placing it among the 10 least indebted UE states.
• POL: Prime Minister D.Tusk has unveiled the composition of the new cabinet, reducing the number of ministers to 21 from the previous 26. The current Finance Minister, A.Domański, will lead the newly established Ministry of Finance and Economy.

THE WEEK AHEAD:

• This week will bring preliminary GDP figures for 2q25 from Hungary and Czechia. In the former, a quarterly contraction cannot be ruled out. On Thursday, Poland’s flash CPI for July will be released, with expectations that it has returned within the central bank’s tolerance band (1.5-3.5%). Later during the week we will get regional PMI data.