Emerging Europe

Hungary

Manufacturing PMIs (Nov.)

The manufacturing PMIs in November were surprisingly strong across the board, but with supply chains stretched and the emergence of the Omicron variant clouding the outlook, there are reasons to be sceptical that this strength will be sustained in the coming months.

1 December 2021

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.

30 November 2021

Lira crisis, MNB hikes, Ukraine-IMF, Romanian politics

This week has been dominated by the collapse in the Turkish lira and all our research on the crisis can be found here. While Turkey’s problems have been driven by a ‘head-in-the-sand’ approach to inflation and falls in the lira, Hungary’s central bank tightened policy further this week amid signs that officials across Central Europe are taking the inflation fight more seriously and becoming less tolerant of currency weakness. Elsewhere, the early signs are that a new grand coalition in Romania does not have the appetite for much-needed austerity. Finally, the latest tranche of IMF funds provide a welcome boost for Ukraine’s economy.
Drop-In: Why is Asia sitting out the global inflation surge? 09:00 GMT/17:00 HKT, Thursday 2nd December https://event.on24.com/wcc/r/3546145/A9D34EF592141BEFCAC819ADB40359D5?partnerref=report

26 November 2021
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Cyclical pressures set to keep CEE inflation elevated

Inflation across Central and Eastern Europe (CEE) has continued to surge and now sits at its highest level in around 20 years. This can be partly attributed to global factors, such as rising energy prices and supply chain disruptions, which are eventually likely to ease. However, underlying cyclical price pressures are building and we think that these will keep headline inflation elevated over the course of 2022-23.

Turmoil in Turkey, MNB delivers, COVID divergence

It's been a turbulent week for Turkey, with the lira falling by around 11% against the dollar and we've looked extensively at the key implications for the economy and financial system. We'll be hosting a drop-in session on Tuesday to answer any key questions. (Sign up here.) Meanwhile, Hungary's central bank stepped up to the plate with a 70bp hike to its one-week deposit rate this week and further large increases are likely to push interest rates to 4% next year. Finally, there are some encouraging signs that new COVID-19 cases are starting to fall in parts of Eastern Europe, but cases have surged in Central Europe and tightening virus restrictions will sap recoveries of momentum.

MNB drops a bombshell as it pledges faster tightening

Investors were initially disappointed following the decision by Hungary’s central bank (MNB) to raise its base rate by only 30bp (to 2.10%) today, but the hawkish post-meeting communications and a pledge to step up the pace of tightening by using other policy tools have supported a marked appreciation of the forint. We now expect short-term interest rates will rise towards 4.0% next year.

Rate hikes to take some heat out of growth and inflation

The sharp tightening of monetary policy in the region will strengthen the preference for savings, dampen lending growth and raise debt servicing costs next year. It is plausible to think that higher interest rates could trim 0.5-0.8%-pts off GDP growth and 0.8-1.0%-pts off inflation in Central Europe in 2022-23.

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.

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