Central Europe set to shine while Russia continues to struggle

We expect the economies of Central Europe (Poland, Hungary, Slovakia and the Czech Republic) to perform well over 2016-17. Consumer spending looks set to stay strong, while export sectors will register reasonable rates of growth. Deflation pressures will ease over the course of this year, but monetary policy in the region is likely to remain extremely loose. All told, we expect most economies to record annual growth of 3-4% in the next few years. In contrast, the region’s largest economy, Russia, will continue to struggle. Fiscal policy will tighten in response to lower oil prices. Meanwhile, high inflation and exchange rate vulnerabilities mean the central bank will tread carefully before cutting interest rates. The result is that the economy looks set to contract by 1.3% this year, with only modest growth of 0.5% likely next year. Problems in Russia will constrain regional GDP growth to 1.3% in 2016 and 2.0% in 2017.