Economic outperformance attracts investors to CE3

Economic outperformance is the main reason why Central European countries continue to be attractive to investors, delegates heard at Garbe’s Investment briefing on the Outlook in CE3, which took place online this week.

For the past 25 years or more, GDP per capita in Poland, Slovakia and the Czech Republic has grown at over twice the average rate in the European Union.

“It has been a 50-year process of convergence which drives nominal growth prospects in the CE3,” said Mark Robinson, economist and investment consultant, Investment Consultancy. “That’s the reason to consider investing in this region.”

These countries are still below the EU in terms of GDP but they are catching up fast: the Czech Republic is expected to be the first to reach the EU average in 2036, with Slovakia following in 2047 and Poland getting there in 2052.

“Another positive factor is that these are export-oriented economies, that sell goods to Western countries and to Germany in particular,” said Robinson. “These are export powerhouses with low labour costs and economies which in some sectors are competitive at a global level.”

Major sectors like electric machinery, appliances and vehicles dominate, accounting for 61% of exports from Slovakia, 55% from the Czech Republic and 35% from Poland.

The big bad wolf in the last year has been inflation, which is still at double digits in Poland (10.1%) and not much lower in Slovakia (9.7%) and Czech Republic (8.5%). Central banks had to react, increasing interest rates, while 10-year government bond yields and mortgage rates have had to rise to reflect the higher inflation risk.

“Wage growth is a significant issue, running at 10% in Poland and 8% in Czechia, as are energy and commodity prices,” said Robinson. “Inflation risk will still be evident in 2024 because of local and global pressures. High and volatile inflation affects the returns you can get from different asset classes.”

In all three countries GDP growth has been badly dented by macroeconomic factors sparked by the invasion of Ukraine. Poland has gone from +5.1% in H1 2022 to +0.3% in the same period this year.

However, “2023 will be the low point and we expect a recovery in 2024, which might be slow if inflationary pressures persist,” said Robinson. “Inflation is drowning real GDP growth.”

As interest rates are cut and the inflation rate falls, growth is expected to pick up again in 2024 and accelerate in 2025, returning to a more traditional pattern.

Transaction volumes have been low in the last year, as the effect of higher interest rates has been absorbed, but the rental picture is much healthier.

The other positive is that “inflationary rental growth in the residential and industrial & logistics sectors will preserve capital values even if yields have to rise further”, Robinson said. “That will provide some protection.”