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An outperformer in testing times

  • 2020 could prove a difficult year for EM due to weak global trade, a likely slowdown in the US, tighter financial conditions in EM and the impact these factors might have on policies and macroeconomic imbalances. A recovery is on the cards in 2021.
  • CEE could be again an outperformer among EM owing to lower reliance on foreign capital and US demand, as well as better economic policies and the EU anchor.
  • In EU-CEE1, we expect economic growth to slow to 2.5% in 2020 from 3.6% in 2019, affected by weaker global trade and a cyclical downturn in the US. Economic growth could recover to 2.8% in 2021 if global trade rebounds.
  • Growth in the western Balkans will follow the same trajectory as in EU-CEE. We expect rate cuts in Czechia and Serbia, and rates on hold in all other EU-CEE countries.
  • Growth in Turkey is likely to pick up gradually to around 2% in 2020 and 3% in 2021 but remain below potential in both years. The CBRT may cut its policy rate to 10% or lower, keeping the real interest rate close to zero.
  • In Russia, economic growth could remain below 1.5% in 2019-20 if investment under the national projects program fails to start. We expect the CBR to cut the policy rate to 5.75% or below in 2020 as inflation remains below the 4% target.
  • The main political risks will be a smaller EU fund allotment to central Europe, thwarted European integration in the western Balkans and US sanctions on Turkey and, to a lesser extent, on Russia.
  • We highlight four convergence trades: inflation in EU-CEE and Turkish rates and inflation (1Q20), Czech and eurozone rates (from 2Q20 onwards), EU-CEE EUR bond yields and Bunds (throughout 2020), Russian rates and inflation (in the medium term).

Source: UniCredit Research - CEE Quarterly, 13 January 2020, Executive summary


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