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Emerging Europe

Hungary tightening, ruble strength, Bulgaria support

Officials in Hungary sought this week to reassure investors that they will tackle inflation and mounting macro imbalances. Tighter policy is needed, which underpins our below-consensus growth forecasts. Elsewhere, the Russian ruble strengthened beyond 60/$ this week – its strongest level since 2018 – which, combined with the stabilising inflationary backdrop, will give the CBR the confidence to ease capital controls and cut interest rates further. Finally, Bulgaria announced measures to shield the economy from high inflation this week, but we doubt that it will be enough to prevent a recession.

20 May 2022

War in Ukraine to exacerbate macro imbalances in CEE

The war in Ukraine will exacerbate two key macro risks in Central and Eastern Europe this year: wage-price spirals (particularly in Poland) and widening current account deficits (particularly in Hungary and Romania). Monetary policy will do most of the heavy lifting to cool demand and we think that interest rates will stay higher for longer than most expect. This is one factor behind our below-consensus GDP growth forecasts for the region. In the meantime, currencies will weaken further against the euro.

19 May 2022

Emerging Europe: Rental growth steps up

CEE economies and property markets started the year on a solid footing. Strong quarterly increases in office and industrial rents supported CEE all-property values in Q1, though yield compression slowed. However, rental growth is likely to drop back further ahead as economic growth decelerates, supply rises and structural changes take their toll. And we expect all-property yield compression to come to a halt, given increases in bond yields and signs of a shift in investor sentiment towards some CEE markets. As such, capital value growth is likely to slow sharply by year end. Property Drop-In (19th May): What will rising interest rates mean for commercial property returns in the US, UK and Europe? Join our 20-minute briefing on the outlook for returns on Thursday. Register now.

19 May 2022
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Turkey: how will officials respond to falls in the lira?

The Turkish lira has come under renewed pressure in recent weeks but interest rate hikes to shore up the currency are off the cards. Instead, further sharp and disorderly falls would most likely be met by formal capital controls and more strident lira-isation efforts.

Russia GDP (Q1 2022)

The 3.5% expansion in Russia’s GDP in Q1 is consistent with a small contraction in q/q terms, and this will almost certainly be followed by a steep fall in output in Q2 as the effects of Western sanctions bite hard. For 2022 as a whole, we’ve pencilled in a 12% contraction in Russia’s economy, which would be the steepest downturn since the 1990s.

Emerging Markets Capital Flows Monitor

Net capital outflows from EMs appear to have picked up over the past few weeks amid the general risk-off mood in global financial markets. This is a worrying development for countries with fragile external positions, notably Turkey and some smaller frontier economies. But most major EMs are much better placed to cope with a period of capital outflows.

Central & Eastern Europe GDP (Q1 2022)

Q1 GDP figures for Central and Eastern Europe smashed expectations in Poland, Romania and Hungary and suggest that their economies were running hot at the start of the year. The war in Ukraine will dampen activity in Q2, but demand is likely to remain strong which will keep wage and inflation pressures elevated and require central banks to raise interest rates further than most expect this year. EM Drop-In (17th May): Do current EM debt strains point to a repeat of the kinds of crises seen in the 1980s and 1990s? Join our special briefing on EM sovereign debt risk on Tuesday. Register now.

Inflation surge not just a food and energy story

Higher food and energy prices go some way to explaining the rise in headline inflation rates across the emerging world, but this is only part of the story. Core inflation has also jumped in many EMs, especially in Emerging Europe and Latin America. This will keep central banks in both regions in tightening mode. With inflation in Asia and South Africa more subdued, tightening cycles there will be more gradual. EM Drop-In (17th May): Do current EM debt strains point to a repeat of the kinds of crises seen in the 1980s and 1990s? Join our special briefing on EM sovereign debt risk on Tuesday. Register now.

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