Emerging Europe

Emerging Europe Chart Book

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.

27 May 2021

Emerging Europe Chart Book

Third waves subside, outlook brightens

Third virus waves held back recoveries in most countries in Q1, but the good news is that they appear to have peaked as new daily COVID-19 cases have fallen since mid-March. Russia has so far avoided a third wave and easing pressures on health systems prompted some governments in Central and Eastern Europe to start easing restrictions over the past month. Turkey is an exception where containment measures have been tightened. Recoveries will struggle to make much headway in Q2, but vaccination rollouts have gained pace this month. The re-opening of Israel’s economy has driven a rebound in activity and Hungary appears next in line to re-open its economy. In the rest of the region, we think the most harmful restrictions will be lifted in the next few months, paving the way for a sustained recovery in activity from Q3.

28 April 2021

Emerging Europe Chart Book

Region leading the EM central bank policy shift

Emerging Europe has been at the heart of the shift in EM monetary policy over the past month, with central banks in Russia, Turkey and Ukraine raising interest rates in March. The triggers for tightening were largely home grown in nature, including a surge in inflation in Russia and Ukraine and Turkey’s attempt (now undermined) to improve its credibility and tackle inflation, rather than a reaction to the global bond market sell-off. Further interest rate hikes are likely to be front-loaded in Russia and Ukraine to tame inflation. Meanwhile, central banks in Hungary and Romania sounded more cautious about the inflation outlook and we no longer expect interest rate cuts there this year. The exception was Poland’s central bank, which sent a clear message that it is willing to keep policy loose for some time to support the recovery.

25 March 2021
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Emerging Europe Chart Book

Headwinds to the recovery mount

Emerging Europe came through the second virus wave in Q4 in a better state than we had expected, with services sectors holding up and industry booming in Central Europe. But the headwinds have mounted recently. The extension of virus containment measures has weighed on sentiment and indicators of mobility in February have remained depressed. The threat of renewed virus waves is becoming a bigger concern in Central Europe and policymakers look set to keep restrictions in place for longer than we had assumed, or even tighten them further. At the same time, the vaccination rollout is not yet out of first gear, and there is a growing chance that this delays the recovery for longer.

Emerging Europe Chart Book

A bumpy and uneven recovery

Russia and Poland have been regional outperformers in recent months due the relatively light-touch containment measures in the former and the strength of export-orientated sectors in the latter. But Turkey’s recovery has come off the boil and strict lockdown measures have hit activity in Czechia hard. Hopes of a rebound in Q1 are likely to be dashed as most governments keep restrictions tight. But there’s light at the end of the tunnel as vaccines have started to be rolled out and we expect activity to rebound strongly from Q2 onwards.

Emerging Europe Chart Book

Vaccine offers hope, but challenges still lie ahead

Daily new COVID-19 infections have levelled off or fallen in most parts of Central Europe and there are signs that activity has started to rebound. But the fresh rise in new cases this month in Slovakia and the Czech Republic underlines the challenges facing the region and policymakers will probably keep virus restrictions tight until a vaccine is distributed next year. Outbreaks are much worse in Turkey and Russia. In Turkey, policymakers have responded by announcing a full lockdown in January which threatens what has so far been a very strong recovery. Activity in Russia’s economy has held up well so far in Q4 and policymakers seem unwilling to tighten measures further given that vaccine distribution is round the corner.

Emerging Europe Chart Book

Rally in Emerging Europe markets has further to run

The positive news on COVID-19 vaccines has provided a boost to the region’s economic outlook and this has underpinned a rally in local financial markets. The general improvement in risk appetite and the “rotation” back towards energy and financials has seen local equity markets outperform the emerging and advanced economy benchmarks and this trend is likely to continue. At the same time, local currency and dollar bond yields have dropped back while currencies have appreciated. In Turkey, the market rally has been given a further leg up by the shake-up of the economic management team and signs of a shift to orthodox policymaking. Meanwhile, a stronger currency will ease pressure on Hungary’s central bank to tighten policy further and will pave the way for Russia’s central bank to resume its easing cycle next year.

26 November 2020

Emerging Europe Chart Book

Virus restrictions to trigger a renewed downturn

The coronavirus outbreak across the region has gone from bad to worse. The Czech Republic has one of the highest per capita infection rates in the world and the two-week national lockdown until November 3rd has already hit activity in certain sectors. Outbreaks are less severe in Russia, Poland, and Hungary but public health situations are deteriorating. The authorities will hope that the measures imposed so far will start to flatten infection curves over the coming weeks and reduce the need for more stringent national lockdowns. But restrictions will generally remain tight. We expect most economies to contract in Q4, with the Czech Republic hit particularly hard.

28 October 2020
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