The surge in oil prices is unlikely to have a major impact on inflation in Emerging Europe but the impact on growth could be significant, says a Capital Economics report.
Going by the report, the effect of higher oil prices will influence different areas in each economy differently in emerging Europe. With the exception of Russia, every country in the region is a large net importer of oil.
Net oil imports are largest relative to the GDP in Ukraine and the Baltic States, followed by central European economies of Poland, Hungary, Slovakia and the Czech Republic. For these countries, higher oil prices lead to deterioration in the terms of trade, thus weighing on domestic demand.
Neil Shearing, Chief Emerging Markets Economist of Capital Economics, has stated that most countries in the region have phased out energy subsidies, meaning that higher oil prices will mainly affect the private sector. But utility prices in Turkey and Ukraine are still subsidized, meaning that higher oil prices are likely to lead to deterioration in the fiscal accounts.
The Capital Economics report has pointed out that the headwinds posed by higher oil prices are compounded by two further factors. First, most countries in emerging Europe have a high oil intensity of output. Put differently, they require a relatively large amount of oil to produce a given level of GDP. Accordingly, if the spike in prices leads to a reduction in oil consumption, the hit to output will be correspondingly greater. The second cause for concern is that the most vulnerable countries to the oil spike have among the most fragile economies in the region.
On a positive note, Capital Economics said that higher oil prices are not yet a threat to inflation. It has noted that oil prices are now only back to where they were this time last year. At the same time, local currencies have appreciated against the U.S. dollar over the same period.
So Capital Economics has forecast that inflation across the region will fall over the next 6-12 months.