Emerging Europe


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

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.

21 July 2021

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).

24 June 2021
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Missing the global tightening cycle

The euro-zone should regain some momentum in the coming months, at least compared to its dire performance at the end of last year. But we think the economy will expand by just 1% in 2019 as a whole. Demand in key export partners is set to slow further, particularly if we are right in expecting the US economy to lose steam later this year. Business investment has come off the boil and will be held back by the weak global backdrop. And household consumption looks set to increase at only a moderate pace, despite the drop in energy prices, because consumer confidence has fallen and households are likely to increase their savings. All of this means that core inflation will stay close to 1%, rather than converging towards the ECB’s target, and that policymakers will leave interest rates on hold this year and next – missing the global tightening cycle completely.

Slovakia: Fiscal policy needs to tighten

The ECB’s loose monetary stance isn’t compatible with Slovakia’s advanced stage of the business cycle and it looks like the government will respond by tightening fiscal policy to prevent the economy from overheating. This, coupled with household deleveraging, is likely to take the steam out of the economy by late-2019 and into 2020.

Central & Eastern Europe GDP (Q2)

GDP data for Central and Eastern Europe showed that regional growth slowed for a third consecutive quarter in Q2. We expect that this slowdown will continue over the rest of 2018 and 2019.

CEE slowdown continues

GDP data out next week will probably show that GDP growth in Central and Eastern Europe slowed for a third straight quarter in Q2. We think that the slowdown will continue over the rest of 2018 and 2019.

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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