Intensifying headwinds

by: Peter de Bruin

Intensifying headwinds.pdf ()
  • Over the past months, emerging Europe has increasingly faced headwinds. On the one hand, this is the ongoing effect of the Ukraine/Russia crisis, which has caused the Russian economy to continue to slow. Indeed, capital outflows in conjunction with rising uncertainty have left their mark on investment, while the recent slide in the ruble has fuelled inflation. In turn, this is eroding consumers’ real purchasing power, implying that the outlook for consumption is also weak.
  • On the other hand, the weaker-than-expected performance of the eurozone, emerging Europe’s main trading partner, is also causing the region to slow. This can for instance be seen in Poland, where exports to the EU have slowed noticeably. All in all, according to our emerging Europe GDP tracker, annual growth in the region fell to 1.1% yoy in Q3, down from 1.3% in Q2, keeping it on a downward path.
  • Within the region, despite its structural outperformance over the past years, the Polish economy seems to be slowing the most, while growth in the Czech Republic and in Hungary seems to be a bit more resilient. In contrast, recent data in Turkey are suggesting that growth picked up a bit in the third quarter in response to the monetary easing that followed the sharp tightening in January.
  • Looking further out, though risks remain tilted to the downside, growth should pick up next year. This reflects that we think that somewhere down the road, both Russia and Ukraine should recognise that some form of a diplomatic solution is needed. Alternatively, the conflict could evolve to a ‘frozen conflict’ with fewer economic consequences than currently is the case. This should give room to a slight rebound in Russian GDP growth, though the slide in oil prices poses yet another headwind. Meanwhile, countries such Poland, Hungary and the Czech Republic should benefit from firming domestic demand and somewhat stronger growth in the eurozone.