BCR ERSTE BANK

  |  2016-03-24

CEE’ing Past the BRICs: Central and Eastern Europe’s economies have decoupled from global emerging markets

CEE growth of 3.1% in 2016 nearly double that of euro area (1.6%) despite slowing EU fund inflows.

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The growth dynamic in the economies of Central and Eastern Europe (CEE1 ) has largely decoupled from that in global emerging markets such as Brazil, Russia, India, China (widely known as the BRICs), or Indonesia, Mexico and Turkey 2, according to the newly published “CEE’ing Past the BRICs” report issued by Erste Group’s CEE Research team.

 

“CEE economies are at different stages of the economic cycle than the global emerging markets, which is the main reason why the impact of the global slowdown is not weighing equally on both groups,” said Juraj Kotian, Head of CEE Macro/FI Research and one of the report’s co-authors.

 

For the period 2010-2015, the global emerging markets enjoyed very strong growth on the back of high commodity prices and credit growth, while the growth in CEE was comparatively subdued as countries in the region were fixing their imbalances. With CEE economies likely to continue performing below their potential until either this year or 2017, the region’s economies are still far removed from the peak of their economic cycles.

 

For this reason, they are less prone to being hit hard by a cyclical downturn along the lines of the 2009 recession. In contrast, emerging markets economies like the BRICs have performed above their potential in recent years, coupled with a notably high investment share (currently close to 35% of GDP vs. 21% of GDP in CEE).
 

 

 

In addition to the influence of the economic cycle, described by output gaps and investment shares above, Erste Group analysts have pointed out five additional factors that have contributed to the decoupling:


Stage of financial cycle: CEE countries are at a different stage not only of the economic cycle, but also of the financial cycle, as their economies have experienced a credit-less recovery. Benign credit growth and a cleanup of balance sheets in CEE indicate that NPLs should remain well anchored or even decline in the region. In contrast, global emerging markets may face some deterioration of credit quality in the aftermath of the strong credit growth they experienced over the past five years.


Low commodity prices: The CEE economies, which are strong net oil importers, are benefiting from the sharp dip in commodity prices. A positive supply shock is still supporting household consumption in CEE, while keeping the region’s current accounts in good shape, thus limiting the CEE economies’ external vulnerability. In global emerging markets, the impact of that supply shock has been a mixed bag.

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