Emerging Europe

Emerging Europe Chart Book

Emerging Europe Chart Book

Omicron? Central banks focusing firmly on inflation

Inflation pressures have shown no signs of letting up across Emerging Europe, with headline inflation rates surging to multi-year highs in November. Producer price inflation has hit rates not seen in decades, food inflation continues to surge and strong wage growth is pushing up cyclical price pressures in Central Europe. Central banks, with the important exception of Turkey, are clearly focused on tackling inflation, continuing to hike interest rates despite the emergence of the Omicron variant. We think that inflation will stabilise in most countries in the coming months but it will take some time for headline rates to fall back to central banks’ targets, in some countries not until 2023. Against this backdrop, and amid growing signs of inflation expectations becoming unanchored, we expect interest rates to continue rising well into the new year.

20 December 2021

Emerging Europe Chart Book

Virus outbreaks diverge, but Omicron a renewed risk

COVID-19 outbreaks in Central and Eastern Europe have diverged in the past month and that may continue in December, but the emergence of the potentially highly-transmissible Omicron variant could replace Delta as the dominant strain and result in severe virus waves across the region. The recent experience is that there is a high bar for economically-damaging containment measures. But Omicron could change that if health systems come under increased strain, prompting a renewed downturn in activity. While our baseline view is that this won’t happen, renewed virus outbreaks – coming alongside other headwinds in the form of supply chain disruptions and surging inflation – means that the pace of growth is likely to slow sharply in the coming months.

30 November 2021

Emerging Europe Chart Book

Renewed virus waves cast clouds over the recovery

COVID-19 outbreaks have surged across the region in the past month. Record high daily cases have been reported in Russia, Romania, Bulgaria and Latvia and infections are rising sharply elsewhere. Governments have tightened containment measures, including a four-week lockdown in Latvia and closures of hospitality services in Russia. 40-60% of people in most countries have received two vaccine doses, but rollouts have slowed and the spread of a new, highly transmissible subvariant (so-called “Delta plus”) highlights that much higher vaccine coverage is needed to supress outbreaks on a sustainable basis. Most countries are unlikely to follow Israel’s lead in rolling out booster jabs quickly and it is likely that governments will tighten restrictions further in the coming weeks. This will add to the headwinds from surging inflation and supply disruptions in industry and provides another reason to think that GDP growth will slow in Q4.

26 October 2021
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Emerging Europe Chart Book

Re-opening boost fades as supply disruptions mount

Economies across Emerging Europe enjoyed a rapid rebound in Q2, but all the signs suggest that the recovery has come off the boil in Q3. Surveys of sentiment in services sectors have started to flatline and, in some cases, fall. What’s more, hard activity data show that supply chain disruptions and raw materials shortages have taken a greater toll on industry. Manufacturing in Poland’s electronics sector has fallen sharply and auto sectors in Czechia and Hungary have been hit hard. We think economies will still post robust rises in GDP in Q3, but the risks lie to the downside and suggest that the regional recovery may return to a steadier pace of growth earlier than we had expected.

Emerging Europe Chart Book

Inflation pressures mount as activity rebounds

Recoveries across Emerging Europe accelerated in Q2 as the easing of virus restrictions pushed GDP to, or above, pre-pandemic levels in most countries and we think this momentum will continue in Q3. However, the recovery has been accompanied by a marked increase in price pressures. Consumer and producer price inflation reached multi-year highs in July and shows no sign of letting up. We think inflation will fall only slightly in Russia and Turkey by year-end and will rise further above central banks’ targets in most of Central Europe. Interest rates are likely to be raised further in Russia, Ukraine, Czechia and Hungary and the risks are skewed to tightening cycles starting earlier than we currently expect in Poland and Romania.

Emerging Europe Chart Book

Activity rebounding as economies re-open

The region’s economies have continued to rebound strongly over the past month as virus outbreaks have largely been contained and restrictions have been lifted. Surveys of sentiment in the services sector have surged and high-frequency mobility data have risen far above pre-pandemic levels. Turkey’s recovery seems to have been particularly rapid since the end of its lockdown in May. Admittedly, there are reasons to be cautious. Israel’s re-opening boost seems to be fading, the Czech auto sector has been hampered by shortages of inputs and the highly transmissible Delta variant has now become the dominant strain in most places. But vaccine coverage is generally high and we think recoveries will make further headway in Q3.

Emerging Europe Chart Book

Recovery takes hold and inflation pressures build

Economic activity across Emerging Europe is rebounding strongly now that virus waves have passed and restrictions have been lifted. The recovery in Q2 looks to have been strongest in Russia, Israel and Central Europe, but we think Turkey will also join in the regional recovery in Q3. Inflation has picked up across the region and price pressures are likely to remain strong in the coming months, keeping central banks in Russia, Hungary, and Czechia in tightening mode. But we don’t think there will be appetite for rate hikes in Poland until next year and we expect Turkey’s central bank to start an easing cycle in the coming months (lira permitting).

Emerging Europe Chart Book

Inflation risks build, central banks start to react

The strength of inflation and expectations for a strong economic recovery have prompted a clear hawkish shift among Central European central banks. We think it will take time for a majority in favour of rate hikes to form in Poland, but Hungary and Czechia now look as though they will join Russia and Turkey in being among the first EM central banks to raise rates as they come out of the pandemic.

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