Europe’s Emerging Markets: An Economic Overview

While Europe is home to some of the world’s largest economies, many countries within the European Economic Area are actually emerging markets. In this article, we will examine the present economic state of Emerging Europe and its risk outlook.

Q3 Saw Significant Rebounds
Overall, Emerging Europe witnessed significant economic rebounds. Slovakia and Hungary showed the strongest gains with 11.7% and 11.3%, after witnessing contractions of 8.3% and 14.6% in Q2, respectively. Easing of lockdowns had a lot to do with this, but looming secondary lockdowns could send the region back into negative territory.

Economic Toll of Secondary Lockdowns
Estimates put the cost of secondary lockdowns at approximately 30% to 50% of the impact that the original lockdown had. This is because new lockdowns are more targeted and will affect certain services more than others (tourism, leisure, transport and entertainment especially), while supply chain constrictions have now eased.

Overall EU GDP Expected to Shrink
The EU’s overall GDP is expected to shrink further in Q4 by about 4.4%, leaving the region with a 5% contraction over 2020. Furthermore, the expected 2021 recovery may not be as promising as originally thought due to these secondary lockdowns, poor monetary policy decisions and overall global capital flows.

Diverging Fiscal Stimulus Perspectives & Policy Risks
While Russia, Bulgaria, Slovakia and the Baltic States have room for expansionary policies, Russia in particular is likely to continue with its moderate stimulus stance as it will be looking to protect its fiscal reserves in an environment of economic sanctions. On the other hand, Hungary, Croatia, Poland and Turkey have little room left for fiscal manoeuvring.

There is also significant downside risk as a result of poor policy decisions. Turkey is a great example here, having kept loose monetary policy in place for too long, weakening its economic potential and sending the TRY into a downward spiral against world currencies.

Overall Risk is Skewed to the Downside
Risks within Emerging Europe are overall skewed to the downside and are largely dependent on how long and how draconian any future lockdowns will be. Services requiring physical gathering and movement will likely remain depressed in the near term. However, effective vaccines, therapeutics and or other positive pandemic related developments could alter this outlook significantly as and when, and if, they emerge.

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