Tensions in financial markets have eased in recent months, but the outlook for Emerging Europe remains challenging. We expect the region to grow by just 1.3% this year and 3.0% in 2013. This is well below consensus expectations. At a country level, Poland will continue to outperform. At the other end of the scale, however, Hungary, Romania and Bulgaria (where banking sector vulnerabilities are greatest) together with the Czech Republic (which is highly export dependent) are at risk of slipping back into recession. We expect a renewed escalation in the euro-zone crisis to trigger fresh falls in the region’s equities and currencies over the course of this year, although a decent rebound is likely in 2013.
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