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CEE Quarterly

Central banks fighting the downturn

  • Economic growth is likely to slow in CEE after a strong 1Q19 due to weaker eurozone, US and global trade growth.
  • EU-CEEis likely to grow by 3.6% in 2019 and below potential (2.8%) in 2020. Western Balkans are likely to perform slightly worse, with growth around 3% in 2019 and 2.5% in 2020.
  • Turkey’s economy probably contracted again in 2Q19 but could exit recession at the turn of the year if it secures financial support. A deeper recession is in the cards otherwise.
  • In Russia, a likely technical recession in 1H19 may be followed by a muted recovery in 2H19 and 2020.
  • Throughout CEE, domestic demand could slow gradually amid weaker credit and fiscal impulses and the gradual easing of labour market conditions.
  • Inflation could miss the target this year in Hungary, Romania, Turkey and Russia, returning to the target range in 2020 in all countries but Turkey if oil prices fall towards USD 60/bbl and the EUR appreciates.
  • EU-CEE central banks are expected to remain on hold in 2019-20 due to the dovish turn of the ECB and the Fed, weak growth prospects and no time to avoid inflation peaks.
  • We expect cuts from the CBR to 6.5% by mid-2020 and from the CBRT to 16.5% this year and 13% next, provided external support is secured.
  • Market exuberance amid dovish core central banks favours FX bonds. Our top picks are ROMANI EUR, POLAND EUR and RUSSIA USD.
  • EU-CEE local-currency bonds need a strong EUR story. Both short and long-term rates in Russia are attractive amid an expected bull-flattening of the curve.
  • Turkey is a binary trade, depending on how authorities handle political and economic risks. A positive scenario would see a large rally in TURKEY FX bonds and short-term rates.

Source: UniCredit Research - CEE Quarterly, 27 June 2019, Executive summary


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