My subscription
...
Filters
My Subscription All Publications

Emerging Europe

Bulgaria

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

Recession risks take centre stage

The Russian economy will collapse this year and we expect spillovers from the war in Ukraine to cause a recession in many of the smaller countries in the region, particularly Bulgaria and the Baltic States. Loose fiscal policy and strong labour market dynamics should help Poland and Hungary outperform but, even so, we’re more downbeat on GDP growth in all major economies than the consensus. We think inflation will end the year stronger and interest rates higher than most expect. The economic backdrop of widening macro imbalances, the euro-zone recession risk and aggressive global monetary tightening will cause the region’s currencies to depreciate.

20 April 2022
More Publications

Russia entering recession, slowdowns in CEE

The war in Ukraine has devasted its economy, while Western sanctions are likely to push Russia into a deep contraction, with GDP set to fall by 12% this year. Immediate fears of a Russian sovereign default have not materialised and Russia’s financial markets have rebounded in recent weeks, but it’s unclear for how long this will continue. A more sustained recovery will probably require a peace deal which still looks far away. Meanwhile, spillovers from the war will be felt acutely in Central and Eastern Europe (CEE). Industry will be hit by supply disruptions and higher inflation will weigh on households’ real incomes and dampen consumer spending. We expect the war to shave 1.0-1.5%-pts off growth in CEE this year.

Economic Sentiment Indicators (Mar.)

The EC’s Economic Sentiment Indicators unsurprisingly fell in most countries in March amid the fallout from the war in Ukraine and there were further large increases in price pressures on the back of rising global commodity prices. Sentiment is likely to stay depressed, or even fall further, in Q2 which will add to the headwinds facing the recovery and supports our below-consensus GDP growth forecasts this year.

Emerging Europe: War reinforces weak values outlook

The war in Ukraine will have spillover effects for property in Central and Eastern Europe (CEE), albeit that Russia will be far worst hit. Economic growth is expected to be slower, which will weigh on property demand, while inflation and interest rates will rise faster. We still think that office and retail rents in the CEE region can return to growth this year, but the recovery is likely to be slower than previously expected. With bond yields already higher, we think that there is less scope for further falls in property yields this year and that they will rise more quickly from next year than we previously forecast. Overall, this reinforces what was already a weak outlook for property values.

Mounting headwinds to take the shine off the recovery

We expect regional GDP growth to come in below expectations this year as high inflation erodes households’ real incomes and policy becomes more restrictive. Despite this view on the growth outlook, we think that persistent capacity constraints will mean that inflation ultimately settles at a higher level than is currently appreciated. This feeds into our relatively hawkish interest rate forecasts, particularly in Russia, Poland and Czechia.

Virus outbreaks diverge, but Omicron a renewed risk

COVID-19 outbreaks in Central and Eastern Europe have diverged in the past month and that may continue in December, but the emergence of the potentially highly-transmissible Omicron variant could replace Delta as the dominant strain and result in severe virus waves across the region. The recent experience is that there is a high bar for economically-damaging containment measures. But Omicron could change that if health systems come under increased strain, prompting a renewed downturn in activity. While our baseline view is that this won’t happen, renewed virus outbreaks – coming alongside other headwinds in the form of supply chain disruptions and surging inflation – means that the pace of growth is likely to slow sharply in the coming months.

1 to 6 of 6 publications