Near-term recovery to face stronger headwinds

The region has experienced a rapid recovery, but the re-opening boost has now faded and the region is likely to face stronger headwinds in the near term due to surging COVID-19 cases, rising inflation and supply disruptions. Central European economies are vulnerable to shortages of key production inputs in the auto sector and low vaccine coverage countries such as Russia, Romania and Ukraine look most at risk of imposing tighter containment measures. Inflation is likely to remain stubbornly high over the coming months and central banks are likely to continue their front-loaded tightening cycles well into next year.
Continue reading

More from Emerging Europe

Emerging Europe Economics Weekly

Omicron & tightening cycles, Turkey into the unknown

While a lot is still unknown about the Omicron variant, we don’t think it will prevent central banks from delivering further large interest rate hikes - Poland will be a case in point next week, where we expect a 75bp rate hike. The key exception is Turkey, where the departure of Finance Minister Elvan this week adds to signs that policymakers are not prepared to respond to the recent falls in the lira with an orthodox approach. The currency will remain under pressure and this week’s interventions in the FX market suggest policymakers’ tolerance of a weak lira is being tested. These interventions cannot be sustained and soft capital control may be the next port of call.

3 December 2021

Emerging Europe Economics Update

Turkey & the macro fallout from past “sudden stops”

The history books show that currency crises in other parts of the emerging world in recent decades have resulted in peak-to-trough falls in GDP of around 8% on average and pushed headline inflation up by 25%-pts from its latest trough. The latest crisis in Turkey is likely to result in a downturn that sits towards the milder end of the spectrum and, so long as the lira stabilises, the peak in inflation is likely to be in the region of 25-30% y/y in the next few months.

3 December 2021

Emerging Europe Data Response

Turkey Consumer Prices (Nov.)

The rise in Turkey’s headline inflation rate to 21.3% y/y in November will almost certainly be followed by further chunky increases over the coming months that take it to 25-30% as the effects of the recent currency crises continue to filter through. With no sign that President Erdogan will permit an orthodox policy response in the form of large interest rate hikes, the lira will struggle to recoup its losses and inflation will remain at these very high levels throughout much of the next six-to-nine months.

3 December 2021

More from Emerging Europe Economics Team

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 Economic Outlook

Near the front of the EM pack

Third virus waves and the slow vaccine rollout will weigh on near-term growth in the region, but we expect a strong recovery in activity to take place later this year and in 2022. Our forecasts for growth are generally above the consensus and we think the lasting impact of the pandemic will be smaller than in other EM regions. Inflation will remain above central bank’s targets in most countries. We expect interest rate hikes in Russia and Czechia this year, but the prospect of monetary tightening remains some way off in Poland and Israel. Turkey is an exception, where the central bank looks set to embark on an easing cycle, but this will continue to feed into further sharp falls in the lira and high inflation.

26 April 2021
↑ Back to top