Executive summary
This week, we analyzed three important issues:
- First, COP28 – the decisive decade. Here we go again. COP28 will kick off on 30 November in Dubai, with a packed agenda: the energy transition, climate finance, climate adaptation, and resilience and inclusivity. In the tradition of previous COPs, we can expect new protocols and agreements, but no new commitments to phase out fossil fuels. Yet, the window of opportunity to achieve the 1.5°C target through mitigation alone has already closed. If current trends persist, the planet is on track to exceed the 1.5°C warming threshold within the next decade. To stay within the target, carbon emissions need to fall by nearly -13% every year from 2025 to 2033. The only way forward is to invest, invest, and invest. Global climate investments need to increase to USD3.6trn by 2026, and USD4.4trn by 2046.
- Second, it is opportunity time in Central and Eastern Europe. Regional growth appears to have bottomed out in Q3 although the recovery in 2024 is likely to be mild. We forecast annual regional growth of around +0.5% in 2023 (after +4.0% in 2022) and +2.1% in 2024. The unwinding of current account imbalances will reduce vulnerability to systemic shocks that may impact financing flows. However, Romania is one to watch: its coverage of the external deficit by net FDI inflows has recently fallen to just one third, posing a risk of a balance-of-payments crisis in the event of a reversal of portfolio investment inflows in case of a systemic shock. Meanwhile, lower inflation and falling interest rates should support a recovery in domestic demand in CEE over the coming quarters. But strong wage growth is a moderate upside risk to inflation, in particular in Hungary, Slovakia and Bulgaria.
- Third, first Emerging markets winners from decoupling efforts with China are now visible. Indeed, pivoting emerging markets are reaping the benefits of the West’s ambiguous relations with China, both in terms of financial flows and trade flows. The US trade balance shows a clear shift away from China towards other economies, especially in Asia, Mexico, Canada and Europe. Dependencies however remain through secondary suppliers. Foreign direct investments are also falling to unprecedented lows, and divergence in growth, inflation and the conduct of monetary policy are exacerbating the pressure on the renminbi.
