Central Europe cannot expect big boost from German fiscal expansion, S&P says

BUDAPEST (Reuters) - Central Europe cannot expect a big boost from Germany's fiscal expansion despite strong links to Europe's largest economy, where part of the stimulus benefits will be offset by U.S. tariff effects and uncertainty, S&P Global told Reuters.

Germany gave the green light last month to a massive surge in borrowing that is expected to stimulate its anaemic economy and ailing corporate sector, though the reforms are not expected to provide a quick fix for the economy this year.

Central Europe has deep trade ties to the German economy and especially its auto sector, sending 20% to 30% of its exports there. However, a German slowdown in growth has weighed heavily on Central European economies in the past several years.

"We see the German fiscal expansion as predominantly supporting broader German domestic investments and demand, rather than directly assisting pockets of CEE industry," S&P Global said in response to emailed questions.

S&P sees the fiscal package adding 0.1 percentage point to Germany's economic growth this year, rising gradually to 0.9 percentage point by 2028 if the reforms are implemented without too many delays.

"These growth-boosting effects will be counterbalanced (among a series of factors), by the various dimensions of the U.S. tariff effects, with the uncertainty component particularly prominent over 2025," it said.

Poland, central Europe's largest economy, which is less exposed to risk due to its big domestic market and lower dependence on car exports, said U.S. tariffs could curb economic growth by 0.4 percentage point.

Authorities in neighbouring Czech Republic and Hungary, whose economies are more heavily geared toward exports, have estimated the hit to growth from U.S. tariffs at 0.5 to 0.6 percentage point, possibly worsening next year.

On Friday, S&P cut Hungary's credit rating outlook to negative from stable amid growing risks to fiscal stability from trade wars, lower European Union fund inflows and high debt servicing costs amid budget loosening ahead of a 2026 election. 

The ratings agency said its revised economic forecast for Hungary incorporated possible upside and downside risks from German fiscal expansion and U.S. tariffs.

"All things considered, compared with our ratings report in October, we have lowered our real economic growth forecast for 2025 more substantially, to 1.5% (from 3.0%) with 2026 going to 2.5% (from 2.9%)," it said.

(Reporting by Gergely Szakacs; Additional reporting by Jason Hovet; Editing by Bernadette Baum)