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The long and winding recovery

  • The economic rebound in CEE was swift in May-July, powered by a rebound in consumer spending and a prompt unwinding of restrictions.
  • However, the rapid removal of restrictions and poor compliance with regulation led to a faster flare-up in COVID-19 cases than in the eurozone, especially in the Balkans.
  • We see three sources of differentiation in the upcoming recovery: 1. the spread of the pandemic; 2. the measures taken to contain it and 3. the efficiency, scope and time horizon of support measures taken by governments and central banks. 
  • We expect EU-CEE economies to contract by 5.5% in 2020, with the economies of Russia, Serbia and Turkey shrinking by 2.5-4%.
  • The recovery in 2021 could be incomplete in all countries but Serbia and Turkey, slowed by fiscal and credit impulses, as well as economic and (geo)political risks
  • The CBR could cut the repo rate to 4% if inflationary and geopolitical risks abate. The NBR could cut the policy rate to 1% if fiscal profligacy is avoided.
  • The CBRT could increase rates by 2pp before year-end, before reversing this year’s hikes in 2H21. The CNB might be the first EU-CEE central bank to increase rates next year.
  • We see little scope for FX and bond rallies in CEE in 4Q20. ROMGBs and ROMANIs are the exception if fiscal spending is reined in. The outlook is better for bonds in 2021. 
  • Risk assessment: There are limited threats to the economic policy mix from political instability in Bulgaria. If pensions increase by 40%, Romania could lose its investment grade and face political instability after the elections. There is a risk of limited sanctions against Russia due to Belarus and the poisoning of Alexei Navalny. There is a low risk that Hungary and Poland may veto the Next Generation EU (NGEU) framework. Geopolitical and sanction risks against Turkey remain due to tensions in the Mediterranean.

Source: UniCredit Research - CEE Quarterly, 29 September 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.