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CEE Sovereign Outlook by Scope Ratings: GDP to fully recover crisis losses by 2022

Central and Eastern Europe’s economic output will return to pre-crisis levels by 2022 but the recovery will be uneven across the region amid renewed export growth, pent-up domestic demand and resumed flows of foreign direct investment, says Scope Ratings in its latest report.

An additional crucial factor is the impact of front-loaded investment from Next Generation EU funds in the region’s EU member countries, particularly the ability of governments to deploy the funds productively.

Scope Ratings forecasts growth in the 11 EU countries in the region (CEE-11) of 4.6% this year and 4.7% growth in 2022.

“The Covid-19 shock has demonstrated the region’s enhanced economic resilience, boding well for a robust recovery assuming health authorities remain on track to vaccinate around 70% of the population by year-end across many countries of the region,” says Giacomo Barisone, head of sovereign and public sector ratings at Scope.

CEE-11 governments are set to maintain fiscal stimulus to help underpin the economic recovery even at the cost of higher near- to medium-run public debt.

Inflationary pressures are another potential headwind, which could result in faster-than-expected tightening of monetary policy, higher interest rates and a rise in cost of servicing public debt.

The crisis has highlighted structural economic weaknesses in the region – particularly in labour markets – which have widened societal inequalities.

“Reforms addressing tight labour markets, shortages of skilled labour, and improving labour force participation rates will prove vital for sustaining recovery,” says Levon Kameryan, analyst at Scope.

The unevenness of the recovery in the CEE-11 region partly reflects the uneven impact of the Covid-19 crisis which led to recessions of varying severity in 2020.

Manufacturing production is near pre-pandemic levels, but services sectors have not bounced back quite as well. Tourism-reliant countries such as Croatia are looking at a more gradual recovery considering some pandemic-related travel restrictions are still in place. Countries like Poland with larger, more diversified economies are better placed.

Scope’s updated growth forecasts for CEE-11 are: Poland: 4.9% (2021), 4.5% (2022); Czech Republic: 3.8%, 4.5%; Hungary: 4.5%, 5.5%; Slovakia: 4.3%, 4.7%; Romania: 4.8%, 4.7%; Bulgaria: 5.4%, 4.7%; Croatia: 5%, 5.8%; Slovenia: 4.5%, 4.6%; Lithuania: 2.7%, 3.8%; Latvia: 3.6%, 5.2%; and Estonia: 3%, 4.5%.

Outside the EU, in Russia, Scope expects 3% growth this year and 2.7% in 2022, before a return to a moderate medium-run potential rate of 1.5-2% a year. Higher oil prices and oil production should facilitate greater public investment and support recovery. Oil market volatility remains a risk. The central bank’s rate tightening stance will support the rouble near term.

Turkey is poised for a sturdy rebound (8% for 2021, and 4% in 2022), helped by strong Q1 2021 growth data, and expectation of future monetary loosening, the latter, however, concurrently making the economy more vulnerable to capital outflow, lira depreciation and higher structural inflation.

In Georgia, Scope projects a growth of 5% this year, followed by 5.5% in 2022 as the tourism sector gradually recovers.

→ Download the June 2021 CEE Outlook, including country-specific views ←


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