Outlook improves, but downside risks remain

Growth in Emerging Europe sank to a post-crisis low in the final quarter of 2012 but the latest surveys suggest that the outlook has brightened a little since the turn of the year. We expect growth to accelerate over the first half of the year, but the recovery is likely to be sluggish and patchy, with risks skewed to the downside. The most obvious threat is a renewed escalation in the euro-zone crisis. But there are local concerns too. Turkey’s recovery is likely to come alongside a widening of its current account deficit, while trend growth in Russia is slowing. All told, we expect regional GDP to grow by 1.8% this year and 2.5% in 2014. This will ensure that interest rates remain low in most countries, although fresh shocks from the euro-zone could force defensive rate hikes in countries with large external vulnerabilities (notably Hungary and Turkey).