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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

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.

28 April 2022

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.

20 April 2022
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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

Russia entering recession, slowdowns in CEE

The war in Ukraine has devasted its economy, while Western sanctions are likely to push Russia into a deep contraction, with GDP set to fall by 12% this year. Immediate fears of a Russian sovereign default have not materialised and Russia’s financial markets have rebounded in recent weeks, but it’s unclear for how long this will continue. A more sustained recovery will probably require a peace deal which still looks far away. Meanwhile, spillovers from the war will be felt acutely in Central and Eastern Europe (CEE). Industry will be hit by supply disruptions and higher inflation will weigh on households’ real incomes and dampen consumer spending. We expect the war to shave 1.0-1.5%-pts off growth in CEE this year.

Emerging Europe: War reinforces weak values outlook

The war in Ukraine will have spillover effects for property in Central and Eastern Europe (CEE), albeit that Russia will be far worst hit. Economic growth is expected to be slower, which will weigh on property demand, while inflation and interest rates will rise faster. We still think that office and retail rents in the CEE region can return to growth this year, but the recovery is likely to be slower than previously expected. With bond yields already higher, we think that there is less scope for further falls in property yields this year and that they will rise more quickly from next year than we previously forecast. Overall, this reinforces what was already a weak outlook for property values.

The economic impact of Ukrainian refugees on CEE

The potential for around 3 million refugees to settle in Central and Eastern Europe (CEE) by the middle of this year will present a large fiscal cost, but will also boost the size of the labour force and GDP in the near term. We estimate that the increase in fiscal spending could amount to 1-3% of GDP over the next year and if refugees settle in CEE that could raise the size of the labour force by 2% or so. The combination of these may contribute to a more sustained boost to GDP growth in the order of 1-2%-pts. Commodities Drop-In (24 March, 11:00 EDT/15:00 GMT): Our Commodities team will be exploring how the war in Ukraine is shaking up commodity markets, from oil to wheat, while tackling some of the big market questions – not least whether we’re in for 1970s-style oil supply shocks. Register here.

NBR steps up the pace of tightening

The National Bank of Romania (NBR) accelerated its tightening cycle today with a 50bp hike to its key policy rate (to 2.50%) and, with inflation firmly above the central bank’s target, we think this cycle has plenty more room to run. We now expect the policy rate to rise towards 4.00% by mid-2022.

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