Emerging Europe

Emerging Europe Economics Focus

Emerging Europe Economics Focus

CEE: rapid wage growth to fuel above-target inflation

Central and Eastern Europe is one of the regions of the world where we think that the risk of sustained higher inflation in the next few years is greatest. The Phillips curve is alive and we think the combination of a cyclical recovery in demand for labour alongside structural labour shortages will feed into stronger wage growth and keep inflation above central banks’ targets. This is not fully appreciated by most and we think interest rates will ultimately settle at a higher level than most expect in two-to-three years’ time.

13 October 2021

Emerging Europe Economics Focus

What to expect from the next Czech government

The Czech parliamentary election that kicks off on Friday looks to be one of the most unpredictable for some time. A victory for the incumbent ANO party would continue the recent trend of loose fiscal policy and support GDP growth, but at the cost of higher inflation and interest rates. Meanwhile, victories for Pirates+STAN or SPOLU may pave the way for a fiscally conservative government that focuses on reining in the budget deficit more quickly. No party appears to be offering solutions to boost the economy’s supply potential, which reinforces our downbeat view on Czechia’s medium-term growth prospects.

6 October 2021

Emerging Europe Economics Focus

Israel’s vaccine success to drive strong recovery

Israel has been the world leader in the vaccination race and the early evidence is that the rapid re-opening of the economy has driven a strong rebound in activity, particularly in services sectors. While the recovery is set to be stronger than the consensus expects this year and next, inflation will remain firmly below the central bank’s target. Interest rate hikes are a distant prospect, but this won’t prevent further appreciation of the shekel over the coming years.

22 April 2021
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Emerging Europe Economics Focus

Central Europe, the pandemic and the inflation outlook

The pandemic hasn’t had a major disinflationary effect in Central Europe and the region is in what we think will turn out to be a prolonged period of above-target inflation. But how this affects monetary policy will differ across the region. Interest rates in Poland and Hungary are likely to remain low for longer than investors assume, while the Czech tightening cycle is likely to be more aggressive. We think this will be associated with a marked divergence in the performance of currencies and bonds across the region.

18 February 2021

Emerging Europe Economics Focus

Low interest rates will be the new normal in Russia

The neutral interest rate has become one of the hot topics in Russian monetary policy over the past year and the downward revision to the central bank’s estimate of the neutral rate in July marks the first step in the shift towards a new normal of lower interest rates. Accompanied with structurally lower inflation, this is likely to result in a gradual and sustainable reduction in Russia’s long-term bond yields this decade.

Emerging Europe Economics Focus

Russia’s easing cycle entering new waters

Russia’s central bank has lowered its policy rate to a post-Soviet low during the current crisis and, with the economy likely to recover slowly and inflation set to remain subdued, further monetary easing lies in store. We expect the policy rate to be lowered from 4.50% now to 3.50% by early 2021. This is more easing than most analysts and the financial markets expect and suggests that there is scope for the rally in government bonds to continue.

16 July 2020

Emerging Europe Economics Focus

Lasting blow to supply capacity is not inevitable

It is by no means inevitable that the coronavirus crisis puts a big permanent hole in the supply capacity of economies (i.e. their ability to produce goods and services). With the right government policies, many economies should be able more or less to revert to the path of output they were on before the crisis. Nonetheless, with demand likely to be slow to recover fully, this could still take several years. And there will be several important exceptions to this generally optimistic picture.

Emerging Europe Economics Focus

Turkey and the rising risk of (another) currency crisis

The huge hit to Turkey’s balance of payments position from the coronavirus crisis and the evaporation of investors’ confidence in policymakers makes the risk of a currency crisis like that seen in 2018 increasingly likely. Worryingly, the banking system is in a much weaker state to face a period of extreme stress than it was a couple of years ago.

11 May 2020
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