Entries for 'Czech Republic'

Elevated levels of inflation remain the biggest challenge for CEE-4. Meanwhile, concerns over a recession will likely weigh on demand. This leaves central bankers in a tricky position to strike a balance. The market anticipates interest rate cuts will begin sooner in 2023.

Elevated commodity prices deteriorated CA balances across CEE-4. Fiscal deficits will likely improve in 2022 from a year earlier for most CEE-4, while a higher imported energy bill is expected to widen CA deficits markedly. The region will likely end 2022 with sizable fiscal and CA deficits.

Energy supply shortages will weigh on near-term growth prospects for the CEE-4 region. Covid-driven supply chain stress is off its peak, but a return to pre-Covid norms will take time. The CEE-4 region could help make global supply chains more resilient if the region can attract more FDI.

The CEE-4 outperformed Euro area GDP growth in 2022Q1. Uncertainty and fallout from Russia’s invasion of Ukraine, as well as tighter policies are to blame. Central banks may need to tighten policies further should depreciation pressures rise. Energy supply shortages could trigger a severe recession.

Russia stopped natural gas exports to Poland and Bulgaria on April 27. Disruptions should be limited for Poland due to high storage levels, with more diversified sources, including LNG imports, also factoring in. We do not expect spillover effects to other European countries’ supplies. However, Russia’s energy policy is prompting them to seek other sources.

Sanctions on Russia following the invasion of Ukraine will lead to a deep output contraction. Soaring energy prices and supply chain disruptions are beginning to affect Europe’s economy. The resulting weaker foreign demand, including from the Euro area, will weigh on EM Europe. In addition, tighter liquidity conditions are likely to be a drag on domestic demand through ‘22. Over the medium term, EM Europe could benefit as investors are withdrawing FDI from Russia. The outlook is clouded by extraordinary uncertainty as the military conflict is likely to drag on.

Upside inflation surprises have prompted rate hikes by CEEMEA central banks. We project demand pressures to remain benign despite the ongoing recovery. Even so, markets are pricing further aggressive rate hikes in the coming months. Rising inflation has pushed up long-term bond yields across the region in ‘21H2. Wider term premiums reflect higher credit risk spreads in Turkey and Romania. South African bonds offer the most attractive real returns among CEEMEA bonds.

We project non-resident flows of $128 bn to CEEMEA countries in 2021. Higher FDI and the IMF’s SDR allocation are the most important drivers. Excluding one-offs, however, flows will remain below pre-pandemic levels. G3 tightening will likely reduce investors’ appetite for EM assets in 21Q4. But further rate hikes in CEEMEA should improve portfolio flows in 2022. Non-resident flows to the region are estimated to reach $98 bn next year.

Upside inflation surprises prompted rate hike in most CEEMEA countries. We expect inflation to ease across the region, but high uncertainty remains. In Russia, we now see a higher terminal rate and easing to start later in ’22. The SARB can likely afford to stay on hold longer with only one hike in ‘22. We expect gradual cuts in Turkey through 2022 in line with market pricing. Despite above-target inflation, the Ukrainian NBU will likely stay on hold.

Upside inflation surprises prompted rate hikes in the Czech Republic and Hungary. If sustained, stable energy prices should help headline inflation to ease into 2022. FX stability should also limit imported inflation and pressure on consumer prices. However, tighter global liquidity conditions will likely prompt rate hikes in the CEE-4. We expect earlier action by the CNB and MNB, with the NBP and BNR waiting longer. Our forecast sees smaller and more gradual hikes than implied by market pricing.

We apply a Taylor Rule-based approach to policy making in the CEE-4 and find that rising inflationary pressures point to a need for rate hikes in three of the four countries: the Czech Republic, Hungary, and Poland. Closing output gaps also contribute, while lower real rates provide room.

CEEMEA countries recovered faster from the initial COVID-19 shock than expected. This is mainly due to virus containment allowing for a faster reopening of businesses. As a result, we are revising our estimate of the contraction in 2020 from 5.2% to 3.2%. However, a second wave of infections weighed on economic activity in recent months. We expect modest growth of 3.8% in 2021, but much depends on vaccinations efforts.

We expect a slow and uneven recovery in non-resident capital flows globally. CEEMEA should fare somewhat better with a broad pickup in ‘20H2 and ‘21. The recovery will likely be driven by stronger FDI and portfolio capital flows. A possible COVID-19 resurgence and geopolitical risks weigh on the outlook. If sentiment worsens, Turkey, South Africa, and Ukraine will be most exposed.

CEE-4 economies have outperformed growth in the Euro area in recent years. Growth has been driven largely by private consumption and capital formation. But the Euro area’s weakness could be a drag on the medium-term outlook. Structural changes in sectors such as car manufacturing represent a challenge.

The CEE-4 will likely experience relatively moderate GDP contractions. Fiscal and monetary stimulus measures support private consumption. Despite rising COVID-19 cases, major lockdowns are unlikely to occur. Medium-term growth prospects remain promising across the region.

The COVID-19 response will improve medium-term growth prospects for the CEE-4. Stronger government finances provided countries with room for stimulus measures. The ECB’s response has also allowed authorities to cut rates and start bond purchases. Finally, the EU’s proposed recovery fund would improve growth prospects markedly.

We now expect an even deeper output contraction of 5.7% in the CEEMEA region. Effects of the COVID-19 shock are increasingly visible in the data for March-April. We downgrade growth in South Africa, the Czech Republic, Ukraine, and Russia. The fall in activity prompted authorities to implement fiscal stimulus measures. Together with cyclical revenue weakness, additional spending will widen deficits. CEEMEA central banks cut rates and some began government bond purchases.

COVID-19 is projected to bring about a 4.7% output contraction in 2020. This is partly the result of the looming deep recession in the Euro area. Virus containment measures will also lead to weaker domestic demand. Markedly wider fiscal deficits could intensify debt sustainability concerns.

Labor shortages and fragile investor confidence will constrain output growth. Policies will likely become more accommodative, thanks to a dovish ECB and Fed. The external financing and inflation outlook will remain challenging for some. Slow progress in addressing structural problems will intensify vulnerabilities.

Supply-side constraints will reduce the growth rate to 3.7% this year. Monetary policy normalization has begun, but fiscal policy turned pro-cyclical.