CEE in the spotlight

Taking a fresh look at the CEE growth story

by Agnieszka Gajewska

When the eyes of the world turned to the CEE region in February of last year, it was easy to see the threats. The region faced both the immediate danger from Russian aggression and the longer-term weaknesses exposed by the resulting turbulence: surging inflation, looming energy crisis and an economic slowdown.

One year on, it’s time to step back and take a sober look at how companies, governments and societies have addressed those threats. To examine the new trends and drivers of transformation that have appeared on the market, and will shape our future.

Our goal is to demonstrate their impact on CEE and provide a balanced perspective on the region to inform decisions by the international business community. I’m sure that our insights will give useful guidance for investors both old and new.

After our deep-dive analyses and multiple discussions with stakeholders engaged in the region, I believe that despite the challenges, CEE has a bright future. A similar view is shared by the IMF, which predicts that the real GDP growth in CEE in 2027 will be higher than average for G7 countries (1.5%). And as PwC’s 26th Annual Global CEO Survey reveals, 46% of business leaders in the region are “extremely confident” about their own company’s revenue growth prospects over the next 12 months, above the 42% figure for CEOs around the world. The people who know the region and its business environment best are more bullish than their peers elsewhere. 

Today I’ll make a start at examining the most important ingredients in CEE’s recipe for success. Then in a series of articles in the coming months, which we are calling “CEE in the spotlight”, my colleagues and I will take a closer look at specific drivers of growth and transformation.

The CEE region and its growth path

Although “Central and Eastern Europe” is a common enough phrase, there are many ways to draw the region’s boundaries. PwC’s reflects our business operating model, and consists of 27 countries, stretching from the Polish border just 80 km east of Berlin, through the Balkans and the Caucasus, to the steppes and mountains of Central Asia, up to the frontier with China. The region has a total population of over 250 million people and a combined GDP of $2.61 trillion, comparable to France or the Nordic countries and Switzerland combined.

Despite the many differences among the 27 countries, there is one major factor they have in common: growth following the transition away from communism. For the past three decades, CEE countries that have joined the EU have been one of the world’s two most successful growth stories, alongside the Asian Tigers and China. No other region has achieved such high GDP growth rates and social progress, starting from comparable levels, as CEE-EU.

While the growth has been uneven, the overall trend is clear, and understanding the fundamental features that have accelerated the rise of CEE-EU countries can offer lessons for others. The most important one is that growth rates are fastest among the countries that integrated with the European Union and opened for global markets as quickly as possible. This demonstrates the power of structural reforms (political and economic), integration into a European single market and global value chains, openness and learning from others. I’ll return to that in other parts of this article in a moment.

In terms of GDP per capita, CEE includes countries that are among the most developed in the world, such as the Czech Republic, whose GDP was at 92% of the EU average in 2021, as well as some that are only at the beginning of their growth story (e.g. Kyrgyzstan and Uzbekistan).

Drivers of growth

So what are the main ingredients in CEE’s recipe for success? And what are CEE’s drivers of growth that will power the region ahead for the coming decade and beyond?

1. Educated workforce whose ambition is to put the region on the global stage

One of the most important pieces of the CEE growth story puzzle is a well-educated and comparatively price-competitive labour force (hourly labour costs: Hungary - $21.49, Czechia - $26.50, Poland - $26.74 vs. Germany - $47.68, Belgium - $50.75). The World Bank Human Capital Index (HCI), which combines indicators of health and education and measures investment in human capital, shows that many CEE countries are in the same group as Western states. This is a spectacular achievement compared with a decade ago. What’s more, the CEE countries with the lowest HCI noted, on average, the highest rate of improvement, with Albania and Azerbaijan leading the list¹. 

Economic restructuring in CEE during the 1990s also triggered a substantial shift from manual to cognitive work. Today, the percentage of high skilled workers among total employees in CEE-EU countries is as high as in Western European countries. And the percentage of workers who perform cognitive tasks (managers, professionals, technicians) has risen from 20% to 25% over the last 12 years². 

Moreover, CEE has the right talent pool to fuel the growth of technology and digital businesses. Teenagers from the Czech Republic, Estonia, Latvia, Poland and Slovenia are among the OECD leaders in mathematical literacy. There are more than 2 million IT professionals in the region and according to the EBRD digital skills index, CEE has higher digital potential than other emerging markets. The region is also starting to catch up with Western Europe’s start-up ecosystems. For example, Estonia has one of the highest numbers of unicorns (start-up companies that have achieved $1 billion valuation) per million inhabitants in the world. These are clearly early days, but the level of ambition of various local entrepreneurs and their appetite for innovation and expansion are remarkable. We’ve also noted that in our Family Business Survey report – which will be published very soon – family firms in CEE have seen stronger performances than their global peers over the last financial year, and their growth aims are even more ambitious over the next two years.

¹ Source: PWC calculations based on World Bank’s World Development Indicators.
² Source: PWC calculations based on Eurostat.

2. Openness, adaptiveness and a globally-oriented culture

Openness and international cooperation has been a hallmark of growth in CEE. Of course, not every country has exhibited these characteristics to the same level, and even among the region’s leaders, openness has waxed and waned. But it’s certainly fair to say that the pace of growth correlates strongly with the degree of openness to the global economy. Exhibit A for this argument is – as I mentioned above – the role of the European Union in boosting trade and driving reforms. Access to the EU single market created opportunities for CEE products and services and resulted in growing international trade and FDIs inward stocks – which for CEE-EU countries increased from around 40% of GDP in 2004 to around 60% in 2021. 

Trade openness, along with relative political and macroeconomic stability, labour costs and connectivity, is an important factor of nearshoring and reshoring of global supply chain decisions. This trend has accelerated when the pandemic’s disruptions to global supply chains forced manufacturers to rethink their logistics models, shifting from just-in-time to just-in-case. The CEE region is well-positioned to capitalise on this trend. According to the Savills nearshoring index, Czechia is the top ranked country for nearshoring – not just in the CEE region but in the world, with Poland ranked 9th and Hungary - 15th. And according to this year’s PwC CEO Survey report, business executives in CEE are increasingly looking at the markets in the region in order to generate growth for their companies. Business leaders indicated an increased focus on Ukraine (8%), Serbia (6%), Hungary (5%), the Czech Republic (5%), Albania (5%) and Bosnia and Herzegovina (4%).

Also, a recently published by fDi Intelligence European Cities and Regions of the Future ranking, which aims to identify the most promising investment destinations in the continent, confirms that cities in CEE have a bright future. Warsaw ranked 6th overall, 2nd in business friendliness and 8th in economic potential. Bucharest was 6th and Prague 7th in the human capital and lifestyle category. Moreover, CEE cities dominated the cost effectiveness category, with Tbilisi ranked 1st, Sofia - 3rd, Kyiv - 4th, and Bucharest - 5th. 

Taking into account CEE’s openness and its economic and human potential, it is not surprising that the EU part of the region is already a nearshoring hub for business services. According to PwC’s estimates based on the WTO data, the total growth of exports of business services from this part of the region has been triple-digit since 2005, and in the case of Poland and Romania it surpassed 500%. What’s more, CEE is attracting investments in higher value-added services, which brings new opportunities for the region. 

EU member states in the region, particularly those such as Poland that have emphasised building strong ties with the EU as well as the US, also stand to benefit from “friendshoring” –
a similar trend that also takes into account geopolitical alliances and rivalries.

3. Macroeconomic resilience built over the years

An interesting historical fact: the worst case of hyperinflation ever recorded occurred in Hungary in the first half of 1946. The CATO Institute study estimated that during its peak month, July 1946, the equivalent daily inflation rate was roughly 207%, with prices doubling approximately every 15 hours! 

Almost 80 years later, the world is grappling again with high inflation. Hyperinflation is, fortunately, a remote prospect. Russia’s war in Ukraine has caused significant macroeconomic turbulence in the world, and in the region. The disruption to energy and food markets, coming on the heels of the pandemic-era stimulus, has pushed inflation in the region to levels not seen in decades: in Hungary - 26%, in Latvia - 20%, in Poland - 17%. Yet the CEE economies are strong and the countries have built robust economic ecosystems. The region’s central banks are in general independent, with a mandate to maintain price stability. Six countries are in the eurozone, and others, such as Bulgaria and Bosnia & Herzegovina, have pegs to the single currency. 

CEE countries’ macroeconomic resilience is also reflected in the fact that the average public debt ratio in CEE is less than half the levels of advanced economies. We can see an overall improvement in current account balances over the last three decades, which proves that the region has increased its resilience to external shocks. As a reminder, during the previous downturn in 2007-2009, CEE-EU countries proved more resilient than Western Europe. Poland was the only member state that avoided recession. 

Access to the EU single market has also significantly contributed to economic growth of CEE over the years. Just to give you one example: according to Polish Economic Institute estimates, if Poland were not a member of the EU, its GDP would be 31% lower today.

4. Investments in infrastructure, innovations and digital capabilities

Investments in innovation and infrastructure have also played a significant role in CEE’s development. The quality of infrastructure and trade connections have been improving fast, especially in CEE-EU countries which have received hefty financial support from the EU for roads, rail, and energy infrastructure. The CEE member states got more than 45 billion euros through European Structural and Investment Funds (ESIF) during the funding period 2014-2020, with Poland receiving 23.6 billion euros, Czechia and Romania more than 5 billion euros each.

Like their peers around the globe, firms in CEE are also reimagining the way they do business in light of emerging technologies. Spending on R&D is growing across the region, with many CEE countries outspending their peers (countries at a similar level of GDP per capita). For example, Czechia has a higher rate of R&D spending than Spain, and the wealthier Italy or the UK³. What’s more, CEE-OECD is the fastest-growing VC market in Europe. In recent years, financing by venture capital funds has grown almost sevenfold⁴.  

Although in the past companies in CEE have generally lagged behind those in Western Europe in implementing different digital technologies, for example cloud, they are quickly catching up. And the delay actually works to the advantage of companies in the region because they can implement cloud solutions with a more mature mode and thus “leapfrog” their counterparts. We will delve deeper into this topic in May in an upcoming PwC CEE Cloud Business Survey. 

CEE countries that are EU members have also access to different funds that help them advance their digitalisation efforts. For example, the European Commission dedicated 127 billion euros to digital related reforms and investments in the national Recovery and Resilience Plans. According to a recent EU Digital Economy and Society Index report, countries dedicated on average 26% of their Recovery and Resilience Facilities allocation to  digital transformation, above the compulsory 20% threshold. Lithuania is the CEE leader – it invested more than 30% in digital.

³ Source: PWC calculations based on World Bank’s World Development Indicators.
⁴ Source: PWC estimates based on OECD.

5. Ambitious green agenda

This might come as a surprise, but energy transition and the green agenda is another growth driver in CEE – the emerging positive side of earlier concerns about energy security given prior dependence on Russian fossil fuels (outside the Caucasus and Central Asia). Taking into account data for November 2022 compared to a year earlier, the share of Russia in the basket of main suppliers of gas to CEE-EU countries decreased from 51% to 19%⁵. Countries in the region like Croatia, Lithuania and Poland have also expanded their terminals’ capacities (and are building new ones) to import liquefied natural gas from the United States and Qatar, among others (which also benefit their neighbours). Energy consumers’ shift away from Russia is also good news for producers in the region such as Azerbaijan.

⁵ Source: PwC calculations based on Eurostat data (for 27111100 and 27112100 CN codes).

What is more important, the energy shock has already boosted the shift to renewables. Faith Birol, the head of the International Energy Agency, said in the World Economic Forum that the energy crisis could be a turning point for forming a sustainable and secure energy system – this is certainly relevant for CEE.

The EU has made green investments a priority in its current multi-year budget – about 30% is planned to be spent on climate-related initiatives and projects. Yet the leaders in our region may surprise you: Latvia already gets 42.1% of its energy from renewable sources, the highest of any CEE country located in Europe, followed by Albania (41%), Montenegro (40%) and Estonia (38%). 

Countries in Eastern Europe, the Caucasus region and Central Asia – many of them still heavily dependent on fossil fuels – have also adopted the UN 2030 Agenda for Sustainable Development and the Paris Agreement on climate change. And many of them have set and updated national targets to guide their transition towards a green economy, including on environmental protection, climate change and natural resource management. They are also supporting green investments. For example, the Kazakhstan government has signed a $50 billion deal with European renewables group Svevind to build one of the world’s largest green hydrogen production facilities in Mangystau Region; Saudi Arabia wants to invest $14 billion in Uzbekistan and build, among other things, the world's largest wind farm. And Ukraine has already stated that the country’s reconstruction will be green and sustainable.

In addition to the EU and national governments, business leaders in the region are also setting ambitious goals, this year’s CEO Survey shows that 48% of CEOs in CEE believe that the transition to new energy sources will impact their business in the next 10 years, substantially more than the 37% of global leaders who foresee this effect. And 46% of business leaders in CEE (globally: 34%) plan to invest in alternative new energy sources in the next 12 months. 

All those growth drivers that I listed above make the region an interesting and attractive place for investors, in comparison both with Western Europe or with emerging economies in less stable and developed regions.

Of course, challenges both short and long-term also remain, such as expected global economic slowdown, the effects of Russia's war in Ukraine or a more difficult regulatory and legal environment. Yet many CEE countries are members of NATO and the EU, which guarantee military, political and economic security, respecting laws and sustainable development. 

I’m looking forward to sharing the voices of the members of our PwC community, both colleagues and clients, who will share their experiences and insights as we re-examine this fascinating region. And I look forward to hearing from readers. Join the conversation!