CEE Macro Weekly: The structural challenge of ageing

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TOP MACRO THEME(S):

• FDI at the crossroads (p. 3) – In 2024, global foreign direct investment (FDI) declined, a trend that was also evident across the CEE region. This downturn was partly attributable to the erosion of certain comparative advantages, suggesting that a recovery in investor interest may follow once these fundamentals are restored. However, the contraction in FDI inflows also mirrors broader global dynamics – structural in nature and less amenable to regional policy responses.

WHAT ELSE CAUGHT OUR EYE:

• CEE: In its Employment Outlook 2025, the OECD highlights a common structural challenge confronting Poland, Hungary, Czechia and Romania over the coming decades: a declining working-age population coupled with a rising old-age dependency ratio. Sustaining economic growth and preserving social cohesion will hinge on mobilising underutilised segments of labour force - particularly women, older workers, and migrants - alongside a concerted effort to raise productivity and strengthen skills development. Absent bold structural reforms, these economies face the prospect of a pronounced deceleration in GDP per capita growth and mounting pressure on social protection systems. While technological advances, including AI, may support productivity gains and prolong workforce participation, they are unlikely to fully offset the impact of demographic headwinds.
• CEE: The European Commission’s 2025 Rule of Law recognises meaningful progress in Poland, Czechia, and Romania in strengthening the rule of law, particularly with regard to judicial reforms and greater transparency in public governance. In Poland, the Commission commends the new government’s sustained efforts to restore judicial independence, curb political influence over judicial appointments, and depoliticise public media. Czechia and Romania have also advanced judicial independence and working conditions for legal professionals, though both continue to grapple with protracted corruption cases. By contrast, Hungary received a notably weaker assessment. Despite limited judicial reforms, key concerns around anti-corruption, media freedom, and civil society remain unaddressed. The Commission urges all countries to strengthen legislative transparency and reinforce anti-corruption safeguards to uphold institutional integrity.
• ROM: The NBR kept its key rate unchanged at 6.50%, a decision primarily driven by a pickup in headline inflation to 5.45% y/y in May and a halt in the decline of core inflation (CORE2), which edged up to 5.4% y/y. Price growth is expected to accelerate further in the coming months due to the removal of electricity price caps and VAT and excise tax hikes taking effect on August 1. However, over the medium term, the government’s fiscal package is expected to act disinflationary by dampening demand and improving the current account balance. The NBR also flagged significant external risks, including U.S. trade policy, wars in Ukraine and the Middle East, and heightened economic uncertainty across Europe.

THE WEEK AHEAD:

• This week will focus on data from Poland amid relatively empty calendar for the rest of the region. Current account data will be published on Monday, and we expect further deterioration of CAB in May, however, export growth should accelerate. Unless the initial CPI estimate for June is revised downwards (Tue.), a minor increase in core inflation is very likely (Wed.).