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Stronger recovery requires pandemic control

  • We expect EU-CEE economies to grow by 3.9% in 2021 and 4.5% in 2022. Last year’s economic losses could be recovered this year in Hungary, Poland and Romania and the next year elsewhere. The western Balkans could outpace EU-CEE.
  • Russia could grow by 2.5-3% in 2021-22 and the Turkish economy is likely to grow at 4.7% in 2021 and 2.3% in 2022 after avoiding a contraction in 2020. 
  • Failure to control the pandemic could slow the recovery by affecting services and construction. Vaccination is not enough to avoid future lockdowns, with governments having to test, track and trace more than they do at the moment. 
  • Households and companies are both in a good position to start spending once restrictions are eased. 
  • Government may have to increase economic support if the pandemic is not controlled. With few exceptions, fiscal impulses are likely to be negative in 2021-22.
  • CEE benefits from larger stable capital flows than other EM. EU transfers in EU-CEE and the western Balkans will ensure positive extended basic balances in all countries but Romania. Revenue from commodity exports will boost reserves in Russia. 
  • A move to looser monetary policy could widen macroeconomic imbalances in Turkey, forcing an adjustment of the C/A and affecting the exchange rate, inflation and growth. 
  • The main economic risks are a slow recovery amid a raging pandemic and, in Turkey, a forced adjustment of the economy.
  • Elections in Bulgaria and Czechia are highly uncertain due to the incumbent administrations’ handling of the pandemic. 
  • Russia faces limited sanctions related to Nord Stream 2, but more consequential sanctions related to potential interference in US elections. In an extreme scenario, the OFZ market could be affected.
  • We see limited risk of crippling sanctions against Turkey from the EU and the US.

Source: UniCredit Research - CEE Quarterly, 30 March 2021, Executive summary

 

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