Directional Economics CEEMEA: Trade instability – a test of strength

The lesson we’ve learned as analysts from the first few months of 2025 is that we need to be agile. The multi-generational shifts in European security and trade arrangements mean that conviction calls and baseline views need to be seen in the context of tremendous uncertainty.

This is particularly relevant as the world gets to grips with Washington’s reciprocal trade tariffs. What our experienced Central and Eastern Europe (CEE) macro team can offer, however, is a unique assessment of what this all means for local economies. Those insights come through in our key article: ‘Trade Instability: A Test of Strength’. Given the CEE region is historically associated with an export-driven growth model, our article drills down into which countries are more exposed to the US tariff story through their openness, their participation in global value chains, and ultimately their contribution to the valued added in US final demand.

Slovakia, Hungary and the Czech Republic tend to be seen as the more exposed to trade shocks, although the numbers do not seem to be too alarming in the first instance – unless that is, we see a prolonged trade war. When it comes to sector exposure, electronics and transportation stand out in Hungary – EV battery plants could be a focus here, too. We also highlight the metals production and pharma sectors across the region – the latter sector being especially important for Croatia.

But rather than detailing our potential point forecast GDP adjustments based on constantly moving tariff assumptions, our key message in this article is that the region may be more resilient than most think.

And here’s why: the region can tap into new EU-led trade agreements and attract US investment focused on strengthening the military capabilities of NATO’s Eastern flank. It also has opportunities to negotiate lower tariffs, particularly through agreements in the defence and potentially nuclear sectors. Some nations—most notably Hungary—continue to benefit from Asian, especially Chinese, foreign direct investment. And the region is strongly supported by a recovery in domestic demand as well as by EU grants and loans.

We conclude that now is an exceptional opportunity to make productivity-enhancing changes for the region, especially if those investments improve innovation, boost competitiveness through decarbonisation, and reduce security dependencies. Taken together – and even with these trade headwinds – we look for improvements in CEE regional growth both through 2025 and 2026.

Even as domestic demand supports local growth rates, our team expects easing cycles to extend. Most opportunity is seen in Poland, where we look for 100bp of cuts. In the Czech Republic and Romania, 50bp of rate cuts should be coming through. But the vulnerable domestic situation probably means that the room to cut rates in Hungary is very limited.

As we move towards the end of easing cycles, investor appetite for CEE local bonds is starting to wane. In terms of local currencies, we forecast that the Czech koruna is most likely to hold onto multi-quarter gains. Never far from investors’ minds, however, will be the political cycle. Important elections are seen in Poland, Romania, the Czech Republic , and Serbia this year, and in Hungary next year. The outcome of those will be marketmoving – as we’ve seen recently in Romania.

As always, please take a look at our country macro and market forecasts - including FX, local and hard currency bond views. These views extend across the broader CEE region and include Turkey and the CIS. Let us know what you think.

Chris Turner, Global Head of Markets and Regional Head of Research, UK & CEE