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Time for policy normalization

  • We expect economies in EU-CEE1 and in the Western Balkans, to grow by around 6% in 2021 and 4.6% in 2022. Turkey’s economy could grow by 9.7% in 2021 and 5.5% in 2022. In Russia, GDP growth could slow from 4% in 2021 to 2.4% in 2022.
  • Before the end of 2022, output gaps could turn positive in Hungary, Poland, Romania, Russia, Serbia, Slovenia and Turkey.
  • Pent-up demand is driving the recovery in 2021, helped by savings accumulated in 2020, and rising wages and employment. Exports are contributing to growth owing to strong demand for cars, a bumper harvest, returning foreign tourists and, in Turkey, to competitive gains amid currency depreciation.
  • In 2022, investment could contribute more to growth, helped in EU-CEE by disbursements from the EU’s Recovery and Resilience Facility (RRF), in Russia by spending from National Wealth Fund and in Turkey by looser financial conditions.
  • Public policies are a risk to medium-term growth due to populist spending triggering a limited fiscal adjustment, a backlash against green energy, poor implementation of structural reforms and nationalist agendas affecting economic goals.
  • Supply-chain bottlenecks, rising energy prices and buoyant consumer demand could keep inflation outside target ranges for longer than central banks currently expect. Further monetary tightening is needed to ensure price stability.2
  • Due to structurally tight labor-market conditions, we expect inflation in EU-CEE to diverge from that in the eurozone in the coming years, forcing EU-CEE central banks to tighten further. The CBR might need to keep the real interest rate positive due to structural rigidities. The CBRT gave up its inflation mandate, with potential consequences on financial stability.

Source: UniCredit Research - CEE Quarterly, 28 September 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.
2 Our current inflation and monetary-policy outlook is laid out in the EEMEA Special Topics – CEE: High time for rate hikes, published on 16 September.