Demand resilience sapped by economic and geopolitical shocks

  • The Russia-Ukraine conflict is likely to be protracted, with long-term economic and political consequences in CEE.
  • Supply shocks spurred on inflation in 2Q22 and are likely to continue to do so by increasing food and energy prices in 2022 and 2023.
  • In our baseline scenario, the EU will reduce its dependence on Russian gas by two thirds compared to 2021 and to Russian oil by 90% before year-end, in line with plans. In this scenario, we expect the EU-CEE[1] economies to grow on average by 3.6% in 2022 and 2.6% in 2023, with the Western Balkans lagging. Turkey could grow by 4.4% in 2022 and 3.3% in 2023. In Russia, the economy could shrink by around 10% this year and stall next year.
  • In a negative scenario, in which deliveries of Russian oil and gas stop suddenly, before the EU finds alternative energy sources, CEE could undergo a very negative growth shock in the first few quarters due to impaired production and falling exports, with its magnitude estimated at between -9pp in Turkey and Romania and -13pp in Slovakia and Slovenia.
  • The biggest direct impact from a lack of Russian energy imports would be in Hungary and Slovakia, followed by Bulgaria, Czechia and Serbia.
  • If the EU fails to reduce oil and gas purchases from Russia in line with plans, economic growth would be higher than in our baseline scenario, especially in Central Europe.
  • Inflation is likely to peak between August and December in most CEE countries, with the exception of Hungary and Poland, where the peak could be postponed to 2023. Inflation is expected to remain well above targets in 2023. There is a risk that fiscal profligacy might fuel inflation in most CEE countries.
  • We expect central banks to end rate hikes in the autumn at around 9.5% in Hungary, 7% in Poland and Czechia, 6% in Romania and 4% in Serbia. The scope for rate cuts in 2023 is very limited, with the CNB and the NBH most likely to cut. The CBR could cut the policy rate to 8% in 2022 and 7% in 2023. The CBRT might hike in 2023 if there is a change in government.
  • We expect FX interventions to be a suboptimal offset for insufficient rate hikes.
  • The protracted Russia-Ukraine conflict is testing hawkishness in the EU and the rule of law in CEE. In our view, the main political risks are: 1. political instability and more populist policies in Poland; 2. the lack of an overhaul of the energy strategy in Hungary; 3. stalling reforms in Czechia, Romania and Slovakia; 4. political volatility and wider economic imbalances in Turkey and 5. lower long-term growth and deindustrialization in Russia.
  • The EU should act more proactively to foster reforms in the Balkans and around the Black Sea, offering the prospect of a customs union and a common energy policy to candidate countries.

Source: UniCredit Research - CEE Quarterly, 29 June 2022, Executive summary


1  EU-CEE includes Bulgaria, Croatia, Czechia, Hungary, Poland, Romania, Slovakia and Slovenia, all CEE countries that are members of the EU.
2 Our current inflation and monetary-policy outlook is laid out in the EEMEA Special Topics – CEE: High time for rate hikes, published on 16 September.