The Impact of the Top 3 Strategic Imperatives on Central and Eastern Europe (CEE)

Geopolitical Chaos: 

Why: 

• Extended pandemic lockdowns in China followed by the Russo-Ukrainian War resulted in supply chain and energy price shocks which significantly weighed on growth performance of European nations.
• Reshoring and nearshoring has become a key priority for European nations to ensure long-term economic resiliency

Frost Perspective: 

• Continued policy support and existing manufacturing prowess of the CEE region will make it the go-to manufacturing destination, especially for its Western European neighbors.
• Manufacturing subsectors such as automotive, aviation, food and agro-processing, textiles, plastics and metals, and defense will be the key beneficiaries.Reshoring and nearshoring has become a key priority for European nations to ensure long-term economic resiliency.

Disruptive Technologies: 

Why: 

• With digitalization being a key development agenda, manufacturing, healthcare, finance and business service sectors are undergoing rapid digital transformation and with an increased utilization of Artificial Intelligence (AI), automation, Industrial Internet of Things (IIoT), and Internet of Things (IoT).

Frost Perspective: 

• Transforming business models amidst technological integration will drive long-term efficiency and productivity gains for manufacturing and service segments.
• Digitalization of government platforms and cybersecurity targets will drive opportunities for public-private partnerships in the digital technologies and administration space.

Transformative Mega Trends: 

Why: 

• Regional population is forecasted to decline from 114.4 million in 2018 to 109.3 million by 2030.
• In 2023, the share of the elderly population is steadily rising. In Bulgaria, Croatia, and Serbia the share of 65+ years population stood at 23.5%, 22.7%, and 22.1%, respectively, up from 18.8%, 17.9%, and 17.3%, in 2012.

Frost Perspective: 

• Social security expenditure will become a key fiscal burden in the long term and is likely to impact the public investments in sunrise sectors.
• On the other hand, an aging population will bolster growth opportunities in the geriatric and silver economy industries

CEE Economic Environment: An Overview

• In 2023, the CEE* region saw a marked growth slowdown in real GDP growth to 0.8% from 4.3% in 2022. The growth pullback stemmed from inflationary pressures and the energy crisis weighing on economic activity along with the weak export demand from key Western European partners.
• As monetary policy conditions ease over H2 2024, CEE’s real GDP growth is pegged at 2.6% and 3.2% in 2024 and 2025, respectively, with the region likely to post an average real GDP growth of 3.1% in the 2026–2030 period.
• CEE nations are leveraging their cost competitiveness within the European region to further cement their position in regional manufacturing supply chains, a trend which accelerated further amidst the adverse disruptions from the Russo-Ukrainian War. Production incentives such as tax rebates, R&D support, and cash benefits for employment generation will spur competitiveness within regional manufacturing subsectors, such as automotive, defense, food and agro-processing, and textiles.
• Accelerated investments in infrastructure, digitalization, green energy transition, and sustainability will bode well for the long-term growth momentum of sunrise sectors, such as urban and sustainable mobility, urban technologies, and smart cities.
• An aging population will be a key constraint weighing on pension systems and labor force participation. While social security spending will remain a crucial risk to long-term fiscal health, attractive labor migration policies and incentives can help stabilize labor market imbalances.

Economic Growth Drivers

• Massive supply chain and energy price shocks in recent years are driving reshoring and nearsourcing of business operations and production closer to end consumers. CEE’s existing manufacturing prowess in automotive, defense, aerospace, metals, textiles, and food and agro-processing will make the region a go-to manufacturing cluster within Europe.
• The rapid rise in defense spending will continue amidst the ongoing Russo-Ukrainian war. Rising long-term military modernization and local defense manufacturing policy plans will bode well for defense sector growth.
• The availability of an affordable and skilled bilingual labor force will drive investments into CEE’s services sectors as Western European nations look for potential service offshoring alternatives within Europe to curtail overdependence on Asian nations such as China and India.
• Steady fiscal support under the EU Resilience and Recovery funds will bolster investments in digitalization, clean energy, healthcare, and infrastructure. These funds will help modernize regional industries, boost technological adoption, and drive social welfare.
• Inflationary pressures are downward bound and will be returning to their pre-pandemic levels by the end of 2025 or early 2026. Receding price pressures will support medium-term consumer demand and business investments.

Economic Growth Restraints