Emerging Europe


Renewed virus waves cast clouds over the recovery

COVID-19 outbreaks have surged across the region in the past month. Record high daily cases have been reported in Russia, Romania, Bulgaria and Latvia and infections are rising sharply elsewhere. Governments have tightened containment measures, including a four-week lockdown in Latvia and closures of hospitality services in Russia. 40-60% of people in most countries have received two vaccine doses, but rollouts have slowed and the spread of a new, highly transmissible subvariant (so-called “Delta plus”) highlights that much higher vaccine coverage is needed to supress outbreaks on a sustainable basis. Most countries are unlikely to follow Israel’s lead in rolling out booster jabs quickly and it is likely that governments will tighten restrictions further in the coming weeks. This will add to the headwinds from surging inflation and supply disruptions in industry and provides another reason to think that GDP growth will slow in Q4.

26 October 2021

Strong recovery, but inflation a lasting concern

Rapid recoveries are underway across the region and GDP should return close to its pre-pandemic path sooner than in most other EM regions. While the spread of highly transmissible virus strains poses the greatest threat to the near-term outlook, high vaccine coverage means that we do not think it will derail the recovery. The economic rebound is likely to use up spare capacity quickly and keep inflation pressures stronger than in other parts of the EM world. Further interest rate hikes lie in store in Russia, Czechia and Hungary in the coming months, with Poland set to join next year.

21 July 2021

Recovery takes hold and inflation pressures build

Economic activity across Emerging Europe is rebounding strongly now that virus waves have passed and restrictions have been lifted. The recovery in Q2 looks to have been strongest in Russia, Israel and Central Europe, but we think Turkey will also join in the regional recovery in Q3. Inflation has picked up across the region and price pressures are likely to remain strong in the coming months, keeping central banks in Russia, Hungary, and Czechia in tightening mode. But we don’t think there will be appetite for rate hikes in Poland until next year and we expect Turkey’s central bank to start an easing cycle in the coming months (lira permitting).

24 June 2021
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Consumer recovery strengthens

The latest economic data suggest that growth in Emerging Europe as a whole picked up further in Q3 and one of the main drivers behind this appears to have been stronger consumer spending. Retail sales in Russia rose at their fastest pace since 2014 last month and in Central and Eastern Europe (CEE) they increased more quickly in August than at any point since the global financial crisis. We think the recent consumer recovery in Russia probably has a little further to run. Inflation is likely to remain low for the next six-to-nine months at least, supporting real incomes. And there still seems to be a little room for households to continue drawing down the precautionary savings they made in the wake of the 2014/15 crisis. In contrast, tightening monetary policy and less accommodative fiscal policy is likely to take some of the steam out of consumer spending in CEE in 2018 and 2019.

Early signs of a Q3 pick-up

The latest data suggest that, following a strong Q2, growth in Emerging Europe as a whole picked up further in Q3. Activity figures from Poland improved in July and August and the early signs are that Turkey’s economy will record very robust growth in Q3, boosted by the comparison with a period last year when activity was disrupted by the coup attempt. Meanwhile, various economic surveys for the region now stand at or around multi-year highs. However, it’s not all good news. In particular, it looks like growth in Russia has softened a little in the last few months. Perhaps the more important point, though, is that Q3 is likely to mark the peak for regional growth. Growth in Turkey is being flattered by temporary factors, while economic cycles in Central Europe are starting to look mature. We expect regional GDP growth to slow in the final quarter of this year and into 2018.

Economic Sentiment Indicators (Aug.)

This month’s Economic Sentiment Indicators for Central and Eastern Europe suggest that regional growth has remained robust in Q3, at around 4.5% y/y, but also that growth is now peaking.

A strong Q2, but regional growth nearing a peak

The raft of second quarter GDP data released over the past few weeks showed that growth in Emerging Europe as a whole accelerated to around 3.7% y/y, its fastest pace since 2011. The pickup in growth was widespread across the region. It’s tempting to pin the improvement in the Central European economies on the strength of key euro-zone trading partners. However, monthly activity data suggest that domestic factors – including a rebound in construction and strong retail spending – played a bigger role there. Meanwhile, the upturn in Russia’s economy, which grew by 2.5% y/y in Q2, appears to have been broad-based. As things stand, it looks like the third quarter will mark the peak in the region’s economic cycle, and we expect that growth in most economies – Russia being a notable exception – will slow towards the end of this year and into 2018.

Central Europe: inflation eases, but not for long

The scale of the decline in inflation in Central Europe over the past month has taken many by surprise and reinforced expectations in the financial markets that monetary policy will remain very loose. However, this fall in inflation was due almost entirely to a drop in petrol price inflation which is now close to a trough, and it masked a further rise in core inflation. We think tightening labour markets will push core inflation up further in the coming months, leading to a fresh rise in headline rates. Against that backdrop, we expect the Czech central bank to begin raising interest rates as soon as next month, while other central banks in the region will follow suit by next year.

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