CEE Macro Weekly: The rocky road to fiscal consolidation

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TOP MACRO THEME(S):

• CEE inflation on diverging tracks (p. 3) – In 1h25, inflation dynamics across CEE were mixed. Poland experienced notable disinflation, while Romania encountered renewed inflationary pressures. In 2h25, divergence is set to grow, with stable inflation in Czechia and Hungary, further easing in Poland, and rising inflation in Romania.

WHAT ELSE CAUGHT OUR EYE:

• ROM: The opposition failed to pass the vote of no confidence submitted by the AUR party after the government approved a set of fiscal measures using an emergency procedure. Opposition parties (AUR, SOS, POT) do not have enough MPs to pass the vote without the support of some of the members of the ruling coalition, which – as of now – seems rather unlikely. G.Simion, who is an AUR leader, threatened to challenge the fiscal measure bill at the Constitutional Court. The discontent of the opposition is likely to continue as the Prime Minister, I.Bolojan, stated that the next two sets of fiscal measures will be introduced in a similar manner. The second set should be approved by the end of July. It focuses on measures enhancing budget savings and includes among others: increasing retirement age and capping pensions of magistrates, lower subsidies for state-owned enterprises (SOE) and increasing their efficiency through KPIs. The third set is said to include among others restructuring or closing of SOEs that have recorded loss for more than three years. The government argues that the changes are essential to prevent a potential downgrade of Romania’s credit rating – currently at the lowest investment grade level across all three major agencies (S&P, Moody’s, and Fitch) - and to restore access to the EU funding. The first set concentrated on increasing government revenues. It should be a major step in fiscal consolidation as Romania deviates from the rest of the region and the EU, having a relatively low level of government revenues in relation to GDP. Prime Minister, I.Bolojan, said that this year the government targets 8% budget deficit as the initial 7% target is not realistic.
• CZE: According to the Minister of Finance, Z.Stanjura, the impact of US 30% tariffs on EU exports on Czechia’s GDP would be 0.4pp in 2025 and 1.1 in 2026. If tariffs enter into force on August 1, GDP growth could reach 1.6% in 2025 and 1.3% in 2026. We have written more on the possible impact of US tariffs in CEE Macro Weekly: The War of the Worlds. The direct effects should be moderate due to limited bilateral trade with the US, however, some indirect consequences could be felt. Our analysis indicated that Czechia would be indeed the most exposed to the negative impact of tariffs, followed by Poland, Hungary and Romania. Under a scenario of 50% tariffs (at this moment, a 10% tariff rate is in effect, and D.Trump has announced the implementation of a 30% rate starting August 1) the cumulative impact could lead to a decline in GDP across the region ranging from 0.5% to 2%, depending on the country.

THE WEEK AHEAD:

• The coming week will be rich in economic activity data for Poland. These will be June readings, which will allow for a more complete view on 2q25. Our baseline forecast assumes GDP growth will hold at 3.2%; however, stronger-than-expected data could warrant an upward revision. The MNB meeting will also be in the spotlight, although it is not expected to bring any changes to interest rates. However, we do not rule out such a move in the autumn, due to the deterioration in growth prospects.