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Governments collapse, Russia set to default

Governments in Israel and Bulgaria collapsed this week which may delay support to households over the cost of living. The threat to Bulgaria’s economy is probably greater, as political instability also puts EU fund inflows and the ability to secure gas supplies at risk. Elsewhere, a 30-day grace period for Russia’s government to make interest payments on Eurobonds ends on Sunday. While Russia has signalled that it is willing to make the payments in rubles, this would be a breach of the contract and could mark Russia’s first default on foreign currency debt since the Bolshevik revolution.
Joseph Marlow Assistant Economist
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Emerging Europe Data Response

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The stronger-than-expected 6.8% q/q annualised expansion in Israel GDP in Q2 confirms that the Q1 contraction was just a blip. Economic activity remains strong and alongside the red-hot inflation figures for July, the risks are skewed to a 75bp rate hike at next week’s central bank meeting. We think a 50bp hike (to 1.75%) is just about more likely but we maintain our view that rates will reach 3.0% next year. Europe Drop-In (18th Aug.): Winter is coming to the European economy – but how harsh will it get? Join this special briefing on the economic impact of Russia’s gas supply threat. Register now.

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Emerging Europe Data Response

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Russian GDP contracted by 4% y/y in Q2, consistent with a fall of 6% in seasonally-adjusted q/q terms – a much better performance than analysts had expected and than had seemed likely a few months ago. There have been signs of stabilisation in many sectors over the past month or two but we don’t expect the downturn to bottom out until Q2 2023 and think the economy will stagnate at best thereafter.

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Emerging Europe Economics Weekly

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Hungary's government has reined in the budget deficit much more quickly than had looked likely since April's election, helping to alleviate the large twin deficits. But this presents a major headwind to the economy and supports our view that GDP growth will grind to a halt in the coming quarters. Elsewhere, CEE currencies have received some much-needed respite this month as global risk sentiment has improved. We think this will be short lived but it will at least take some pressure off central banks that are dealing with red hot inflation.

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Manufacturing PMIs (May)

Manufacturing PMIs for May showed that weaker external demand weighed on export orders in Emerging Europe, and that spillovers from the war in Ukraine hit output. There were some signs of improvement in suppliers’ delivery times and price pressures, but we still think that industrial production is likely to contract in the coming months.

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Emerging Europe Data Response

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Exports from Central and Eastern Europe (CEE) face growing headwinds, and this feeds into our below consensus view on economic growth in the region. The larger economies in CEE such as Poland and Hungary are particularly exposed to slower growth in the euro-zone, while the Baltic states are more vulnerable to the direct spillovers from the war in Ukraine.

25 May 2022
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