Emerging Europe

Latvia

Five points on the latest virus developments in EMs

The COVID-19 situation in many EMs has improved markedly over the past month or so as new infections have fallen sharply and vaccine rollouts have gathered pace. That said, the recent surge in virus cases in Emerging Europe serves as reminder that the risk of renewed outbreaks lingers, particularly where vaccine coverage is low. Countries in Sub-Saharan Africa still look particularly vulnerable on this front.

5 November 2021

Virus outbreaks shine spotlight on vaccine hesitancy

The surge in COVID-19 cases and deaths in Eastern Europe has prompted the re-imposition of restrictions and it looks like measures will be stepped up, weighing on recoveries in Q4. Tight restrictions may not remain in place for long across Central Europe, but vaccine hesitancy has held back rollouts in the east and the risk in low-vaccine coverage countries such as Russia, Romania, Bulgaria and Ukraine is that containment measures need to stay tight for a prolonged period to suppress outbreaks.

28 October 2021

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
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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.

Inflation pressures mount as activity rebounds

Recoveries across Emerging Europe accelerated in Q2 as the easing of virus restrictions pushed GDP to, or above, pre-pandemic levels in most countries and we think this momentum will continue in Q3. However, the recovery has been accompanied by a marked increase in price pressures. Consumer and producer price inflation reached multi-year highs in July and shows no sign of letting up. We think inflation will fall only slightly in Russia and Turkey by year-end and will rise further above central banks’ targets in most of Central Europe. Interest rates are likely to be raised further in Russia, Ukraine, Czechia and Hungary and the risks are skewed to tightening cycles starting earlier than we currently expect in Poland and Romania.

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.

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).

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.

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