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Full dose, half measures - CEEMEA Economics Quarterly

Simon Williams, Chief Economist, CEEMEA

Article

  • Article
  • Falling commodity prices, sticky inflation, weak risk appetite and sluggish domestic demand...
  • ...are testing commitment to rebalancing and reform...
  • ...and intensifying pressure where policy has fallen short

Full dose, half measures

A difficult quarter has complicated the outlook for much of Central and Eastern Europe, the Middle East and Africa (CEEMEA). In some cases, dramatically so as a combination of external shifts and domestic pressures have exacerbated pre-existing fragilities, setting back recovery and stiffening the policy challenges that lie ahead.

There are outperformers among the 20 economies we cover, reflecting either structural strengths that mitigate strain, or bold policy choices that left them well placed to manage the cyclical adjustment. But for the region as a whole, prospects have dimmed and downside risks have gained.
The external pressures in part stem from the still subdued outlook for global growth. Our global economists continue to expect a marked slowdown and further weakness in 2024, leaving scant grounds to hope export gains might offset weakening domestic demand.

3.6%
CEEMEA average GDP growth in 2022
1.7%
HSBC forecast for CEEMEA GDP growth in 2023

Perhaps most significantly, our colleagues in Asia now expect growth in China to be softer for longer, with policy stimulus likely to be moderate. This has already fed through to commodity prices for CEEMEA’s exporters, with oil testing the floor of the USD70-90/b trading range. This is the end of the comfort zone even for wealthy states, and uncomfortably low for smaller producers. Slower and less infrastructure-intensive growth in China will also weigh on demand for metals, turning the terms of trade against South Africa and others.

The commodity price decline has brought relief to the region’s importers and strengthened our conviction that headline inflation is set to fall. Core price pressures, however, have proved even stickier than we feared, and this has prompted us not just to push back and scale down the monetary easing we had previously anticipated, but in a number of cases to add more hikes to what has already been a steep tightening cycle.

Compounding the challenge, a more hawkish global backdrop has weighed heavily on risk appetite and access to market funding, turning chronic external funding problems acute.

Updating our forecasts

Our new growth forecasts give some sense of the shift in regional fortunes. All told, we have cut our forecast for 2023 growth on a weighted average basis by 0.2ppt since last quarter, to just 1.7%. This is a marked deceleration on growth of some 3.6% in 2022. And while we look for a rebound in 2024, we expect CEEMEA average growth to be slower than that of emerging markets as a whole.

While softer growth has left us increasingly confident that the disinflation cycle is under way, we are also conscious that price growth is set to remain uncomfortably high. Indeed, even by the end of this year we fear that South Africa will be the only economy in the region to have inflation back to target.

Our top picks in the region are focused on the Middle East, particularly large oil-producing economies where cyclical momentum is coupled with structural reform.

So which economies are best placed? Our top picks in the region are focused on the Middle East, particularly large oil-producing economies like Saudi Arabia and the UAE where cyclical momentum is coupled with the lift from structural reform. For commodity exporters outside the Middle East, the outlook is more challenging, but we are encouraged by evidence of progress on reform in Nigeria and on debt talks in Zambia and elsewhere. We look for sharp disinflation in across Central Europe, but policy easing looks likely to come more slowly than we previously expected, and at the cost of a sharper slowdown in domestic demand.

The markets we see facing the most uncertain outlook continue to be those where policy half-measures have left imbalances unaddressed and vulnerabilities pronounced, creating material downside risks.

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