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Emerging Europe

Czechia

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

Gas supplies at risk, CNB shake-up, Turkey FX restrictions

Russia’s sanctions on European energy companies and the closure of the Sokhranivka transit point in Ukraine this week are a sign that the risk of energy supply disruptions in Central and Eastern Europe is increasing. Meanwhile, changes to the board of the Czech central bank over the coming months, starting with this week’s appointment of Aleš Michl as the next governor, could pave the way for a more dovish MPC that cuts interest rates quickly once inflation drops back. Finally, reports of Turkey’s increased oversight over FX transactions could be the first step towards restrictions that threaten to disrupt activity. 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.

13 May 2022

CEE industry showing no signs of weakness…yet

Industrial production in Central Europe performed much better than expected in March given the sharp fall in German production. We still think industry will weaken in Q2 as supply chain disruptions bite, but we’re hopeful that the major economies in Central Europe will not follow Germany into recession. China Drop-In (12th May, 09:00 BST/16:00 SGT): Join our China and Markets economists for a 20-minute discussion about near to long-term economic challenges, from zero-COVID disruptions to US-China decoupling. Register now.

10 May 2022
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CNB steps up tightening, but NBP opts for a smaller hike

Central banks in Czechia and Poland caught investors by surprise today as the Czech central bank (CNB) unexpectedly re-accelerated the pace of its tightening cycle with a 75bp hike while Poland’s central bank (NBP) slowed the pace of tightening with a smaller-than-expected hike (also of 75bp). With inflation still the main concern we expect interest rates to rise to at least 7.00% in both countries this year. China Drop-In (12th May, 09:00 BST/16:00 SGT): Join our China and Markets economists for a 20-minute discussion about near to long-term economic challenges, from zero-COVID disruptions to US-China decoupling. Register now.

Czech GDP (Q1 2022)

The 0.7% q/q expansion of Czech GDP in Q1 was slightly stronger than expected, although it still marked a slowdown in growth and, in particular, there were signs of weakness at the end of the quarter. We think that spillovers from the war in Ukraine will weigh heavily on industry and cause the economy to contract in Q2.

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.

New policy support, CA deficits, Turkey FX conversion

Governments in Central and Eastern Europe stepped up support this week for firms and households against surging inflation, but we don't think they will prevent some economies from contracting in Q2. Meanwhile, current account deficits have blown out this year and will only deteriorate further due to high commodity prices and supply-chain disruptions. One country where the current account is looking concerning is Turkey and the central bank took steps this week to shore up its FX reserves. At the same time, policymakers are pushing their lira-isation strategy but this is likely to raise risks in the banking sector further down the line. We are sending this Weekly one day earlier than usual because our offices are closed for Good Friday on Friday, 15th April

Inverted yield curves a poor signal for EM downturns

While yield curves have inverted in a number of emerging markets (and look likely to do so in several others in the coming months), they don’t have a good track record in predicting recessions in the emerging world. In most EMs, we think that growth will be softer this year than last, but outright contractions in GDP are unlikely. Emerging Markets Drop-In (7th April, 10:00 EDT/15:00 BST): Join us on Thursday for our next monthly Emerging Markets briefing where our economists will discuss how the Ukraine war’s spillovers are helping and hurting EMs, and the impact of global central bank tightening. Register here

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