The surge in labour costs across Central and Eastern Europe (CEE) in recent years has led to a sharp loss of competitiveness and raised concern about the impact on the region. We remain relatively optimistic on the medium-term outlook and still think that CEE economies should be able to maintain decent rates of GDP growth of 2.5-3.0% on average over the rest of this decade. The main impact of high labour cost growth is likely to be felt through a prolonged period of high inflation (particularly in Hungary, Romania and Bulgaria) as well as downward pressure on nominal exchange rates this decade.
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