Macro Keys:EU fund inflows to push growth in CE-3higher

A rebound in EU fund inflows bodes well for investment in CE3 in 2017In July last year we wrote that the drop in absorption of EU structural and investmentfunds and the resulting drop in investment in CE3 in early 2016 was likely to betemporary (see "EU funds into CE3 - should we worry?"). The data for the past fewmonths points to a re-acceleration of inflows, supporting our forecast for a rebound ininvestment in CE3 in 2017. With consumption growth already very strong across theregion – and on track to get a further boost this year from supportive fiscal policies – areturn of robust investment expansion should make growth across the CE3 morebalanced, enhancing the region's solid macro position.

    2016 data showed the importance of EU funding for CE3 investmentTo remind the reader about the scale of sums at stake for the CE3, Poland is set toreceive EUR 109bn or 3.8% of GDP annually over 2014-2020. Excluding payments tothe agricultural sector from the Rural Development Fund and direct payments underCommon Agricultural Policy, the amount of EU funds comes to around EUR 77bn.

    Hungary is budgeted to get EUR 33.8bn (21.5bn excl agriculture) over the seven yearframework or 4.6% GDP annually. Czech Republic is allocated EUR 30bn (21.6bn exclagriculture), equivalent to 2.7% of GDP per year (see charts overleaf). For the purposeof this note we mainly focus on the structural and cohesion funds, leaving CAP aside.

    The absorption of EU fund flows dropped sharply in 2016, as the funding for projectsbacked by the 2007-2013 EU budget framework expired and the pipeline of the newprojects was still thin. In Hungary, in January 2016 applications worth only 3.7% of thetotal available EU funds we approved; 4.4% in Poland and 1.3% in the Czech Republic.

    Unsurprisingly, fixed investment tanked, especially in Hungary and Poland.