The economies of Central and Eastern Europe (CEE), which experienced a period of stagnation last year, are poised for a modest revival in 2024, but both the Russian and Turkish economies are already overheating, Capital Economics said in a note on March 26.

“Inflation has fallen sharply in recent months but in some parts of the region (notably Poland and Hungary) we expect it to rise back above central bank target ranges later this year, which will prevent interest rates from being cut as far as most analysts anticipate,” emerging market economists Liam Peach and Nicholas Farr said.

“In Russia and Turkey, overheating pressures will keep growth strong and inflation high for most of this year, although fast rates of growth are unlikely to be sustained for long as policy tightening and structural capacity constraints take their toll,” the authors added.

The economies of Russia and Turkey are running hot, characterised by robust growth that is also fuelling persistent inflation.

"Russia's economy is caught in a precarious balancing act, needing to support the war effort without compromising macroeconomic stability," the analysts noted, highlighting the potential need for fiscal adjustments to avert a severe downturn.

The Central Bank of Russia (CBR) has just kept interest rates at a growth-crushingly high 16% at its March monetary policy meeting and Turkey unexpectedly hiked rates by 500bp at its last meeting this month. Analysts expect no rate cuts in Russia until the last quarter of this year, if then, and more rate hikes in Turkey as it battles to contain runaway inflation.

Capital Economics also predicts that the Turkish lira will weaken more than initially forecasted by the end of 2024, signalling a protracted correction of the country's significant macroeconomic imbalances. Turkey’s macroeconomic situation is made more difficult as Turkish President Recep Tayyip Erdogan is pumping up the economy with loose credit conditions ahead of elections, as he always does, to produce a “feel good factor” ahead of the vote. Robin Brooks, former chief economist with Institute of International Finance (IIF), predicts that the lira will have to be devalued yet again after the election is over.

CEE in recovery mode
The situation in Central Europe is much better, where inflation is in retreat across the region after hitting 20-year highs in 2023.

Poland's recovery trajectory appears to be the best amongst its CEE counterparts, though anticipated inflationary trends may delay interest rate cuts until well into 2025, say the analysts.

Czechia, on the other hand, is expected to lag, with GDP growth likely falling short of expectations and inflation dropping more than anticipated in February, allowing for continued monetary easing. Czechia has been the laggard amongst the Central European countries and has yet to make back the ground lost during the global pandemic that started in 2020.

Hungary is being roiled by a political crisis, where the government of Hungarian Prime Minister Viktor Orban has been accused of entrenched corruption. However, the economy is on track for a robust economic recovery. Inflation in Hungary has also been falling fast to an 18-month low in February and the Hungarian central bank cut rates by 75bp to 8.25% on March 26. Nevertheless, inflationary pressure could prompt a more gradual approach to rate reductions by policymakers this year, say the Capital Economics analysts.

Romania faces vulnerabilities due to substantial budget and current account deficits, exacerbated by the upcoming elections. On the upside, the core inflation edged down by 0.5 percentage points in February to 7.7% year on year from 8.2% y/y in January and a peak of 16.8% y/y in November. Inflationary pressures remain and the central bank kept rates on hold at 7% at its last meeting in February.

At the latest monetary policy meeting in mid-February, central bank governor Mugur Isarescu mentioned the option of rate cuts later this year, but only after the core inflation rate enters a firm downward path. The February figures increase the uncertainty associated with the expected rate cuts calendar. Partly based on Isarescu's comments, the analysts are expecting the first rate cut in May.

“Romania’s large twin budget and current account deficits leave the economy vulnerable to a deterioration in investor risk appetite as elections approach later this year. Any fiscal loosening ahead of the vote could add to pressure on the public finances, push up bond yields and weigh more heavily on the currency," the analysts warned.

 

CEE real GDP and inflation
	Share of World (1)	GDP (2)				Inflation (2)
		2023	2024	2025	2026	2023	2024	2025	2026
Russia	2.9	3.6	3.5	2	1.5	5.9	7.2	4.8	4.5
Turkey	2.1	4.5	3	2.3	3.5	53.9	56.5	27.5	20
Poland	1	0.2	3	3.3	3.3	11.4	4	4.3	3
Romania	0.4	2.1	2.5	3.3	3	10.4	5.8	4	3.3
Israel	0.3	2	1	5	3.8	4.2	2.6	2.3	1.8
Czechia	0.3	-0.5	0.8	2.5	2.8	10.7	2	1.8	2
Hungary	0.2	-0.9	2	3	3.3	17.1	4	3.8	3.5
Ukraine	0.3	3	5	6.5	6.5	12.9	6.5	7.3	5.8
Slovakia	0.1	1.1	1.8	2.3	2.5	10.5	3	2.8	2.5
Bulgaria	0.1	1.8	2	2.8	3	9.5	3.5	3.3	2.8
Croatia	0.1	2.8	2.8	3	3.3	7.9	3.3	2.5	2.3
Lithuania	0.1	-0.3	1.8	3.5	3.3	9.1	2.3	2.5	2.3
Latvia	0.04	0	1.5	3.8	3	9	1.5	2.5	2
Estonia	0.04	-3	-0.3	4.3	3.5	9.2	3.5	2.5	2.3
Emerging Europe (3)	8	2.8	3	2.7	2.8	8.4	5.5	4.3	3.7
World (4)	100	3.8	3	3	2.9	5.1	3.4	2.8	2.8
US	15.5	2.5	2.4	2	3	4.1	2.9	2.3	2.3
China (4)	18.4	9	4.5	3.5	2.9	0.2	0.5	1	1
Euro-zone	11.9	0.5	0.2	1.2	1	5.4	2.2	2	1.8
Sources: Refinitiv, Capital Economics, (1) %, 2023, in PPP terms. (2) All % y/y annual average. (3) Inflation measure excluding Turkey. 4) CE China Activity Proxy (CAP) measure of GDP growth.