Emerging Europe: Riding on the wind

5 min
Manfred Stamer
Manfred Stamer Senior Economist for Emerging Europe and the Middle East

Robust growth to continue in the region in 2018. Inflationary pressures in check - mostly

The Emerging Europe region as a whole is forecast to grow by +3% in 2018, following a strong +3.7% in 2017.

Central Europe: Strong, balanced growth

Notably the 11 EU member states in the region will continue to perform well. These economies have been on a path of strong recovery since 2014, somewhat earlier than Western Europe, thanks to strengthening domestic demand which has put growth on a more balanced footing. Private consumption is forecast to remain a key growth driver in 2018, supported by strong wage growth, low interest rates and still moderate inflation.

Fixed investment growth rebounded in 2017, thanks to better absorption of EU funds, and should remain robust in 2018 though the rate of increase will be somewhat lower due to base effects. In Romania and Poland, substantial pro-cyclical fiscal stimulus boosted growth in 2017, raising some concern of potential overheating and rising inflationary pressures.

Indeed, inflation rose to 3.3% at end-2017 in Romania, prompting a timid 25bp policy rate hike to 2.0% by the Central Bank.

GDP growth forecasts and short-term country risk as of Q4 2017

Sources: National statistics, Euler Hermes

Elsewhere in Central Europe, inflation also rose markedly in 2017 but leveled off within the respective central banks’ inflation target ranges by year-end.We expect average inflation rates between 2% and 3% in 2018 in these economies and a rate above 3% in Romania. The Czech Republic started the monetary tightening cycle in the region with two hikes in H2 2017 and we expect the other countries to follow with 1-2 hikes this year.External trade activity will remain robust in 2018, with export growth benefiting from the ongoing Eurozone recovery and import growth from the sound domestic demand.

Turkey:  Normalization in 2018

Following the extraordinarily rapid growth in 2017, thanks to strong fiscal stimulus channeled to households and investment as well as rebounding exports, we expect a slowdown of GDP growth to +4% in 2018.This could be due in part to the waning impact of both the one-off fiscal measures and the exports rebound. Inflation is forecast to ease from the 14-year high of 13% in November 2017 to a still elevated average 9% in 2018.

Russia: Low growth, low inflation

We project a gradual acceleration of GDP growth to +1.9% in 2018, on the back of recovering consumption and investment, and political continuity beyond the presidential election in March.The pick-up will be supported by low inflation (forecast at an average 3.6% in 2018) and declining interest rates as well as one-off factors such as pre-election spending and the 2018 FIFA World Cup.