Emerging Europe

Estonia

Baltic States brush off pandemic’s economic hit

GDP in the Baltic States has already surpassed pre-pandemic levels and we expect this strength to be sustained, with growth outpacing Central Europe and the euro-zone as a whole over the coming years. This strong recovery will use up spare capacity fairly quickly and fuel higher inflation. The main risk is that these economies overheat, causing macro imbalances to build.

18 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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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.

Frontier recovery still on track

The recovery in frontier economies continued over the first half of this year. GDP growth averaged around 2.0% y/y in Q1, twice the rates seen in mid-2016. It would have been stronger still were it not for weakness in the largest frontier market, Saudi Arabia. Cuts to oil production there as part of an OPEC agreement caused the economy to contract by 0.5% y/y. More timely figures suggest that most economies fared well in the second quarter.

As good as it gets

The recovery in GDP growth in Emerging Europe is close to peaking and, while we expect the region’s largest economy, Russia, to strengthen over the next 12 months or so, that will be more than offset by weakness elsewhere. The cycle in Central and Eastern Europe is now looking mature and growth will soften by 2018, while we expect a sharper slowdown in Turkey. In aggregate, GDP growth in Emerging Europe is set to slow from 3.0% this year to 2.5% in 2018 and 2.3% in 2019. Our growth forecasts for 2018-19 are – with the important exception of Russia – below consensus.

Regional recovery takes hold

First quarter GDP estimates for Emerging Europe published this month beat expectations across the board and suggest that growth in the region as a whole picked up to a three-year high of 2.3% y/y. Romania was the region’s star performer, growing by close to 6% y/y, the Central European economies expanded by a robust 3-4% y/y, and Russia’s gradual recovery from recession continued. Early signs are that conditions improved further in Q2. Admittedly, April’s activity data for Poland were a bit disappointing, but those from Russia point to faster growth. More generally, survey measures across the region have stayed extremely strong. For now, there are no signs that these data will prompt a shift in monetary policy. Policymakers in Central Europe have continued to toe a dovish line, and rate hikes still seem to be some way off. Elsewhere, Russia’s central bank is paying more attention to the fall in inflation and its easing cycle still has a lot further to run.

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