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A weak Q1, but vaccines to drive strong recovery

Prolonged containment measures mean that activity in Emerging Europe will remain depressed for longer than we had previously expected. But the region is well-placed to access and distribute vaccines, which should allow activity to recover more quickly than in most other EM regions. The outlook is brightest in Central Europe, while Russia’s recovery will be held back by a tighter fiscal stance. Turkey’s central bank will keep monetary conditions tight, which will help it to claw back its battered credibility, although it will take the steam out of the economy. Inflation should ease sharply this year in Russia and Central Europe, and we think that interest rates will be kept low for longer than investors and most analysts currently expect.
William Jackson Chief Emerging Markets Economist
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The further rise in Russian inflation to a stronger-than-expected 6.5% y/y in June means the central bank (CBR) is likely to up the pace of tightening when it meets in a couple of weeks. A 75bp hike (to 6.25%) seems most likely, but the probability of an even larger 100bp hike has risen.

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