Emerging Europe


Near-term recovery to face stronger headwinds

The region has experienced a rapid recovery, but the re-opening boost has now faded and the region is likely to face stronger headwinds in the near term due to surging COVID-19 cases, rising inflation and supply disruptions. Central European economies are vulnerable to shortages of key production inputs in the auto sector and low vaccine coverage countries such as Russia, Romania and Ukraine look most at risk of imposing tighter containment measures. Inflation is likely to remain stubbornly high over the coming months and central banks are likely to continue their front-loaded tightening cycles well into next year.

20 October 2021

CEE: rapid wage growth to fuel above-target inflation

Central and Eastern Europe is one of the regions of the world where we think that the risk of sustained higher inflation in the next few years is greatest. The Phillips curve is alive and we think the combination of a cyclical recovery in demand for labour alongside structural labour shortages will feed into stronger wage growth and keep inflation above central banks’ targets. This is not fully appreciated by most and we think interest rates will ultimately settle at a higher level than most expect in two-to-three years’ time.

13 October 2021

Poland-EU conflict, CEE tightening, auto sector woes

The decision this week by Poland's Constitutional Court to rule that some EU laws are in conflict with the Polish Constitution has sent shockwaves through Europe and raises the possibility that the release of some of Poland's share of the EU Recovery Fund will be delayed. Meanwhile, Poland and Romania joined the monetary tightening club this week and we think that further rate hikes will be delivered to tame inflation. But vague communications from Poland's central bank suggest that its tightening cycle may be slower than we had thought likely. Finally, more news this week about the disruption to auto production in Central Europe means that the recovery will probably struggle in Q4.

8 October 2021
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CEE investment recovery to pick up from 2022

We think a greater reliance on foreign capital and tighter monetary conditions will leave CEE investment activity lagging the euro-zone in H2. Overall, transactions are set to end the year 5% lower than their already weak 2020 levels, before catching up with the euro-zone recovery next year.

NBR hikes interest rates, further tightening to follow

The National Bank of Romania (NBR) raised its policy rate by 25bp to 1.50% at today’s meeting, and the backdrop of rising inflation, large twin deficits and currency weakness means that further rate hikes are likely to be delivered over the next 12 months. We expect the policy rate to reach 2.75% by mid-2022.

Loose fiscal policy in CEE, Russia’s natural gas windfall

Government draft budgets approved for 2022 this week in Czechia and Poland and further details of social support in Hungary suggest that fiscal policy will remain supportive of growth in Central Europe. But with spare capacity increasingly limited, this will continue to fuel strong inflation pressures. Meanwhile, European gas prices surged to new highs this week and Russia will be one of the main beneficiaries - gas exports could be as much as $75bn higher in the second half of the year than would otherwise have been the case. This will also support the budget position and may prompt the government to further relax its grip on the public finances.

Economic Sentiment Indicators (Sep.)

The continued fall in the EC’s Economic Sentiment Indicators for September provides further evidence that the regional recovery in Central and Eastern Europe has slowed in Q3 as supply disruptions have taken their toll on industry and the re-opening boost to services sectors has faded.

Bucharest industrial rental growth to underwhelm

The positive near-term economic picture means that Bucharest industrial activity will maintain its momentum in H2, but ease further out as spending patterns normalise. But given the city’s large supply pipeline, we expect industrial rents to barely grow over 2022-25.

27 September 2021
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