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Russia entering recession, slowdowns in CEE

The war in Ukraine has devasted its economy, while Western sanctions are likely to push Russia into a deep contraction, with GDP set to fall by 12% this year. Immediate fears of a Russian sovereign default have not materialised and Russia’s financial markets have rebounded in recent weeks, but it’s unclear for how long this will continue. A more sustained recovery will probably require a peace deal which still looks far away. Meanwhile, spillovers from the war will be felt acutely in Central and Eastern Europe (CEE). Industry will be hit by supply disruptions and higher inflation will weigh on households’ real incomes and dampen consumer spending. We expect the war to shave 1.0-1.5%-pts off growth in CEE this year.
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Emerging Europe Data Response

Russia Activity Data (May)

The latest Russian data for May suggest that activity, having declined sharply after Western sanctions were imposed in March, has started to stabilise. Some sectors of manufacturing have benefited from a shift towards domestic production. On balance, the fall in Russian GDP this quarter looks like it will be in the order of 10% q/q, not the 15% q/q we had previously expected. EM Drop-In (Thurs, 7th July): Join our economists for their regular monthly briefing on the hot stories in EMs – and those that aren’t getting the attention they deserve. In this 20-minute session, topics will include the outlook for EM FX markets after the recent sell-offs. Register now.

29 June 2022

Emerging Europe Chart Book

Tightening cycles still have some way to go

Inflation has continued to beat expectations across Emerging Europe over the past month, reaching rates not seen in decades in most countries. It is now weighing more heavily on consumer confidence, and the surprise inflation releases for May prompted central banks to accelerate tightening cycles in a number of economies, including Czechia (125bp hike) and Hungary (185bp). Such large hikes are unlikely to be repeated but, with inflation not set to peak for at least a few more months, tightening cycles still have some way to go. The exceptions are Russia and Turkey. Falling inflation will give Russia’s central bank scope to cut its policy rate further and President Erdogan’s grip on Turkey’s central bank means that rate hikes to combat inflation of more than 70% y/y remain off the cards.

29 June 2022

Emerging Europe Data Response

Economic Sentiment Indicators (Jun.)

The EC’s Economic Sentiment Indicators for Central and Eastern Europe showed broad-based declines in sentiment across the region and across sectors in June to levels not seen in a year. Economic activity has generally held up well since the war in Ukraine started a few months ago, but the second half of this year is likely to be more challenging and we think economic recoveries will slow sharply.

29 June 2022

More from Emerging Europe Economics Team

Emerging Europe Chart Book

War in Europe

Russia’s military invasion of Ukraine has caused turmoil in financial markets across the region. Western nations have imposed sanctions on Russia, including targeting some of its largest banks and their access to the international financial system. Sanctions so far fall short of the ‘nuclear’ option of hitting Russia’s energy sector but the imposition of these will likely depend on the scale of the conflict. Russia’s economy is in a strong position to weather the effect of sanctions but growth is likely to weaken from here, exacerbated by the significant tightening in financial conditions this week. And the rest of the region is likely to be hit via trade ties and higher energy prices, which will keep inflation high for a prolonged period of time.

25 February 2022

Emerging Europe Chart Book

Industry shifts into gear amid signs of easing shortages

Industry across Emerging Europe turned a corner in Q4 as auto production rebounded strongly. This comes amid signs that supply shortages are starting to ease; our proprietary shortages dashboard suggests that product shortages may have peaked. We think industry will continue to recover in the coming months as shortages ease gradually. But consumer-facing sectors struggled in Q4 due to rising virus cases, tighter restrictions, greater consumer caution and surging inflation. This is likely to remain the case early this year too, dampening activity in Q1. Many countries have made good progress rolling out third vaccine doses which should lessen the hit from the current Omicron wave and support the economic recovery in general, but the risk is that those countries with much lower vaccine coverage face continued headwinds to growth.

27 January 2022

Emerging Europe Economic Outlook

Mounting headwinds to take the shine off the recovery

We expect regional GDP growth to come in below expectations this year as high inflation erodes households’ real incomes and policy becomes more restrictive. Despite this view on the growth outlook, we think that persistent capacity constraints will mean that inflation ultimately settles at a higher level than is currently appreciated. This feeds into our relatively hawkish interest rate forecasts, particularly in Russia, Poland and Czechia.

20 January 2022
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