The economies of Emerging Europe will diverge over the coming year as Russia’s war economy continues to run out of steam, while growth in Central and Eastern Europe (CEE) picks up – albeit to varying degrees. Falling inflation and slower wage growth will pave the way for further monetary easing in most countries, but labour market tightness will mean that interest rates generally remain higher than most expect. With budget deficits wide and pressures for higher spending likely to remain (particularly on defence), we think that investors are underappreciating fiscal risks that are building in some countries.
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