Faster growth faces external headwinds

  • We expect the economies in EU-CEE1 and the Western Balkans to grow by around 1.6% in 2023 and 3.1% in 2024, with Romania outperforming, and Czechia and Hungary lagging.
  • Foreign demand is expected to drag on economic growth, potentially postponing the rebound in capex, exports and consumer demand to late 2023 or 2024. We forecast real wage growth from 2H23 onwards and financial conditions to ease in 2024.
  • In Turkey, we expect economic growth of 3.2% in 2023 and 2.8% in 2024, with a temporary adjustment in macroeconomic imbalances driven by limited rate hikes and capital inflows. In Russia, we expect the economy to grow by 1% in 2023 and 0.8% in 2024 due to frontloaded fiscal spending and a gradual rebound in consumer demand.
  • CEE governments are reluctant to withdraw fiscal support for households, which will trigger the excessive deficit procedure (EDP) in 2024. Together with weak inflows of EU grants, this could crowd out public investment. We expect most RRF funds allotted for 2023 to be lost.
  • We expect inflation in CEE to end 2023 in a narrow 6-9% range, except in Turkey. We forecast slower disinflation next year, when inflation targets are likely to be missed because of higher energy tariffs and demand pressure on prices due to the 2023 fiscal stimulus and real wage growth. Russia and Serbia could be the exceptions.
  • In 2023, we expect policy rates to be cut to 12% in Hungary and 6.50% in Poland, and to be raised to 8% in Russia and 25% in Turkey. In 2024, we expect rates to be cut to 5% in Romania, 5.25% in Czechia, 5.50% in Poland and Serbia, 7% in Russia and 20% in Turkey.
  • We expect C/A deficits to be partly covered by external borrowing in 2023. On average, CEE governments have completed more than half of their market funding needs for this year. We expect more FX bond issuance from Hungary, Romania and Turkey. In 2024, FDI and EU funds could fully cover C/A deficits in most EU-CEE countries.
  • In our view, the main risks are: 1. loose fiscal and monetary policies and faster wage growth keeping inflation above targets in the medium term; 2. potential rating downgrades if fiscal policy does not tighten enough, with higher short-term risks in Hungary and medium-term risks in Slovakia, Poland and Czechia; 3. a recession in the eurozone and the US, and weaker growth in China weighing on economic growth in CEE; 4. the impact of the Russia-Ukraine war on tourism on the Black Sea coast and a potential accident at the Zaporizhzhia nuclear power plant; 5. nationalism and Euroskepticism permeating economic policies; and 6. a sharp reversal in Turkey’s economic policies.

Source: UniCredit Research - CEE Quarterly, 29 June 2023, Executive summary

1  EU-CEE refers to CEE countries that are members of the EU: Bulgaria, Croatia, Czechia, Hungary, Poland, Romania, Slovakia and Slovenia.