CEE Quarterly

Weathering geopolitical and economic shocks

• We forecast a technical recession throughout CEE over the winter due to falling purchasing power and foreign demand, tighter financial conditions and lower fiscal spending. A rebound is likely from 2H23 onwards if the eurozone economy recovers as well.
• We expect the economies in EU-CEE to grow by around 0.5% in 2023 and 3.3% in 2024, slowing from 4.4% in 2022. The Western Balkans might trail the EU-CEE recovery.
• In Turkey, we expect economic growth of 2.9% in 2023 and 3.6% in 2024, with growth improving in 2024 only if financial risks are addressed after the 2023 elections. In Russia, the recession could accelerate to -5% in 2023, followed by a small rebound to around 2.5% in 2024 if import substitution improves, underpinning a gradual recovery in aggregate supply.
• We forecast inflation to peak in 1Q23 in both EU-CEE and the Western Balkans. Thereafter, fiscal transfers, tight labor-market conditions and higher energy and food prices could keep inflation outside target ranges in 2023-24.
• As a result, we see the scope for rate cuts in EU-CEE as being limited to 4.5-7% by 2024, while in Turkey we expect rates to be hiked to 45% this year if the opposition wins the elections. In Russia, cuts to 6.5% are possible if inflation returns to target in 2024.
• All CEE central banks will continue to intervene in FX markets, with those in Romania and Serbia being more successful. The CBR could allow the RUB to depreciate gradually.
• We assume that the Russia-Ukraine war will continue into 2024, without escalating to the use of non-conventional weapons and/or spilling over to the rest of Europe.
• Besides a more damaging conflict, the main risks for CEE in 2023 are the lack of a common European energy policy, a standoff between the European Commission and Hungary and Poland due to weak adherence to the rule of law, low reform appetite ahead of elections in Bulgaria, Poland, Slovakia and Turkey, a financial crisis in Turkey if monetary and fiscal policies are not tightened after the elections, nationalist tensions in the Western Balkans, and Russia’s deepening economic isolation.

Source: UniCredit Research - CEE Quarterly, 9 January 2023, Executive summary