CEE entering a renewed downturn - Capital Economics
Emerging Markets Economics

CEE entering a renewed downturn

Emerging Markets Activity Monitor
Written by Edward Glossop
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The rapid spread of COVID-19 in Central & Eastern Europe (CEE) will cause a renewed slump in the region in Q4. That contrasts with India and parts of Latin America and Africa, where falling new cases and easing containment measures should support activity. Even so, as long as recent outbreaks start to come under control, CEE should still outperform most EM regions (bar Asia) over the next year.

  • The rapid spread of COVID-19 in Central & Eastern Europe (CEE) will cause a renewed slump in the region in Q4. That contrasts with India and parts of Latin America and Africa, where falling new cases and easing containment measures should support activity. Even so, as long as recent outbreaks start to come under control, CEE should still outperform most EM regions (bar Asia) over the next year.
  • The trickle of Q3 GDP figures that have been released in recent weeks have shown a strong pick-up in activity, but the key point is that recoveries in many EMs were slowing throughout the quarter. Both industrial production and retail sales growth eased further in m/m terms in August. This is despite sales and production in many countries still being 5-15% below pre-crisis levels. (See our latest Chart Book.)
  • The recent surge in COVID-19 cases in CEE will cause recoveries there to go into reverse. We’ve little hard data to go on so far, but our Mobility Trackers suggest that a renewed tightening of containment measures is taking its toll on activity in the region. (See Chart 1.) Unsurprisingly, the biggest drop has come in the Czech Republic, where the virus spread is most rampant and new cases are among the highest in the world on a per capita basis. Mobility has also declined in other CEE economies and Russia. (See Chart 2.)
  • The European Commission’s ESI surveys for October, suggest that the region’s recovery stalled this month, and they don’t fully account for the surge in cases and tightening of restrictions this month. It’s clear that the region will suffer a renewed downturn in Q4. As things stand, we’ve pencilled in contractions of 1.5-3.0% q/q across most CEE countries but the risks are skewed towards larger falls, particularly given the deteriorating outlook for key trading partners in Western Europe, which are also being hit by second waves.
  • In contrast, mobility indicators have edged up in much of Latin America, India and, to a lesser extent, the Middle East and Africa. This probably reflects the fact that new cases have started to fall in many of these countries, reducing precautionary behaviour and allowing policymakers to ease restrictions.
  • While the severity of virus outbreaks is key to the near-term outlook, one important point is that the outlook over a longer horizon will also be shaped by other factors. A key one is fiscal policy. Governments in CEE have implemented generous fiscal packages and have scope to do more. Public debt ratios are not very high and borrowing costs are low, improving their debt trajectories. Large fiscal support will help to limit the hit to labour markets and support a quicker rebound if and when virus cases start to come down.
  • In contrast, fiscal support measures have generally been much smaller in much of Latin America, the Middle East, Africa and India. As a result, there is likely to be more prolonged scarring in labour markets, constraining recoveries in domestic demand. Accordingly, we still think there’s a decent chance that CEE outperforms most EM regions next year. (See our latest Emerging Markets Outlook.)
  • The outlook remains brightest, though, in parts of Asia. Our China Activity Proxy (CAP) suggests that the economy is now growing at its fastest pace since mid-2018. And policy stimulus will continue to support its recovery, which is now broadening out to consumers. Elsewhere, control of the virus and a shift in global consumption patterns towards goods will continue to benefit exports from Vietnam, Taiwan, and Korea.

Chart 1: Selected CE EM Mobility Trackers
(% diff. from Jan.-6th Feb. median level, 7d MA)

Chart 2: Selected CE EM Mobility Trackers
(% diff. from Jan.-6th Feb. median level, 7d MA)

Sources: Refinitiv, Google, Capital Economics

Sources: Refinitiv, Google, Capital Economics


Edward Glossop, Senior Emerging Markets Economist, edward.glossop@capitaleconomics.com