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Emerging Europe

Slovakia

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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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.

Russia-Ukraine and the impact on the rest of the region

The rest of Emerging Europe is particularly exposed if a further escalation of Russia-Ukraine tensions lead to higher global energy prices and disruptions to commodity exports, with Bulgaria and the Baltic States most at risk from possible interruptions to gas supplies from Russia. A potential flood of Ukrainian refugees would clearly pose some challenges and costs, but may help to plug labour shortages and deal with long-term demographic headwinds.

Industry shifts into gear amid signs of easing shortages

Industry across Emerging Europe turned a corner in Q4 as auto production rebounded strongly. This comes amid signs that supply shortages are starting to ease; our proprietary shortages dashboard suggests that product shortages may have peaked. We think industry will continue to recover in the coming months as shortages ease gradually. But consumer-facing sectors struggled in Q4 due to rising virus cases, tighter restrictions, greater consumer caution and surging inflation. This is likely to remain the case early this year too, dampening activity in Q1. Many countries have made good progress rolling out third vaccine doses which should lessen the hit from the current Omicron wave and support the economic recovery in general, but the risk is that those countries with much lower vaccine coverage face continued headwinds to growth.

Mounting headwinds to take the shine off the recovery

We expect regional GDP growth to come in below expectations this year as high inflation erodes households’ real incomes and policy becomes more restrictive. Despite this view on the growth outlook, we think that persistent capacity constraints will mean that inflation ultimately settles at a higher level than is currently appreciated. This feeds into our relatively hawkish interest rate forecasts, particularly in Russia, Poland and Czechia.

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