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The reopening

  • We expect economies in EU-CEE and in the Western Balkans, to grow by around 5% in 2021 and 4.5% in 2022 after slumping by close to 4% in 2020. We see Hungary, Poland, Romania and Serbia returning to pre-pandemic levels of activity already in 2021, with the other countries following in 2022.
  • Pent-up demand could drive the recovery, as consumers and companies increased their savings in 2020. Government transfers will further support household finances. Pre-funding from the EU’s Recovery and Resilience Facility (RRF) might start arriving in 3Q21, further boosting investment.
  • Turkey’s economy could grow by 7.5% in 2021, the fastest in CEE, after avoiding a recession in 2020. In 2022, growth might slow to 3.5% if financial conditions remain tight.
  • The Russian economy is expected to grow by around 3.4% this year and 2.6% next year, recouping all pandemic losses. Domestic demand could increase as households reduce their savings and companies start investing again. 
  • In 2021, the summer rebound will be driven by services, which suffered the most during lockdowns. The subsequent recovery could be bumpy, as all sectors face labor shortages. Manufacturing, which led the economic rebound since last summer, and construction also face supply-chain bottlenecks that will slow their growth. 
  • Throughout CEE, the main risk to growth is another spike in COVID-19 cases and deaths later in 2021 as the speed of vaccination has slowed since May. Bulgaria, Russia and Romania face bigger threats in this respect than Czechia, Turkey, Poland, Hungary, Slovenia and Slovakia. 
  • Supply shocks and stronger demand are expected to push inflation higher. The momentum in cyclical inflation continues to rise, while commodity prices may contribute less to inflation from here on. Czechia and Serbia are the only countries likely to hit inflation targets this year. Next year, stronger domestic demand will keep inflation outside or close to the top of target ranges.
  • We expect additional rate hikes this year, to 1.35% in Hungary, 1.00% in Czechia and 6.5% in Russia. The NBP could start raising rates in 4Q21 or 1Q22, taking the policy rate to 1.5%. The NBR could take the key rate to 1.75-2% in 2022. The CBRT could cut the policy rate by 2.5pp this year and 3pp next year, to 13.5%, with the CBR cutting as well, to 5.5%. 
  • The main risks are domestic and mostly related to politics. Elections in Bulgaria and Czechia could result in fragile majorities. Infighting among Slovakia’s governing parties could delay reforms. A leadership contest in the Liberal party could reshape the Romanian government. Political interference remains the biggest risk for monetary policy in Turkey. In 3Q21, the geopolitical risk premium on Russian financial assets could diminish.

Source: UniCredit Research - CEE Quarterly, 30 June 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.