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Emerging Europe


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

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

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.

5 May 2022
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Poland well prepared for life without Russian gas

Poland’s government has shown no signs of meeting President Putin’s demand to get gas flows restored, but we think the economy is relatively well placed to deal with a loss of Russian supplies. As things stand, we do not expect any energy rationing and we think Poland will avoid a recession this year. The main impact is likely to come through inflation due to higher energy bills for households and firms. EM Drop-In (5th May, 10:00 EDT/15:00 BST): Join Shilan Shah for our latest monthly session on the big macro and markets stories in EMs. This month, Shilan and the team will be talking Russian gas, FX weakness and surging food prices. Register now

Inflation risks mount as commodity prices surge

Surging commodity prices have pushed up inflation across the region and we expect inflation to hit fresh multi-year highs in the coming months. A loss of Russian gas supplies should not lead to rationing in Poland, but it will have a big impact in Bulgaria and energy bills are likely to be higher across the region this year. With activity holding up well for now, central banks continue to focus on inflation risks and we expect large interest rate hikes next week in Poland (100bp) and Czechia (50bp). In contrast, Russia’s central bank looks set to lower interest rates further now that inflation pressures have eased sharply. It may be shifting to a dovish stance too quickly, but looser monetary conditions will only go so far to supporting activity.

Russia’s crisis easing, Poland’s energy supply boom

Comments from Russian central bank governor Elvira Nabiullina this week underline the view that the most acute phase of Russia's crisis may have passed and that interest rates are likely to fall sharply in the coming months, but that a long-term re-structuring and a new growth model will now be needed. Meanwhile, Poland's industrial production figures for March beat expectations again and a lot of this strength reflects a questionable surge in power supply that may be overstating the strength of industry. But even so, there were encouraging details in the manufacturing figures that suggest industry should be able to hold up well this year despite the war in Ukraine.

Poland Activity Data (Mar.)

Industrial production and retail sales figures in Poland remained incredibly strong in March and point to a solid expansion in Q1. A lot of this strength is unlikely to last as the effects of the war in Ukraine bite, but Poland is likely to avoid a contraction and continue outperforming its regional peers this year.

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.

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