East Europe Growth Quickens as Spending, Exports Increase

Eastern Europe’s economic expansion quickened last quarter because of higher consumer spending and exports to the recovering euro area, showing the region’s resilience to the Ukrainian crisis.

Polish gross domestic product rose a preliminary 3.3 percent from a year earlier, the fastest pace in two years and more than the 3.1 percent median forecast in a Bloomberg survey, the statistics office in Warsaw said today. Hungary’s economy expanded 3.5 percent, while Czech GDP jumped 2 percent.

Eastern Europe is benefiting from increased domestic consumption as nations phase out austerity and boost investment. Demand for the region’s exports has also improved as the euro area, its biggest customer, heals from a record-long recession. Economies such as Poland’s have so far withstood the effect of the Ukrainian crisis on their border, which prompted U.S. and European Union sanctions against Russia.

“We expect the region to recover further in the rest of 2014 thanks to sustained exports and a recovery in domestic demand, especially investment,” Magdalena Polan, a London-based economist with Goldman Sachs Group Inc., said by e-mail. “However, lower exports to Russia and Ukraine will continue to pose downside risks.”

Currencies Strengthen

Evidence of the firmer recovery boosted currencies in the region. The zloty strengthened 0.2 percent to 4.1832 per euro, while the forint advanced 0.1 percent to 303.6 against the common currency after touching a more than three-month high of 302.50. The koruna rose 0.1 percent to 27.456 per euro.

While the euro area grew 0.2 percent from the previous three months to continue its recovery from six straight quarters of contraction, its pace of expansion was unchanged and half as much as economists had forecast. France unexpectedly stalled and economies from Italy to the Netherlands shrank.

To the east of the region, Russian growth slowed to the weakest in a year on falling investment amid the Ukraine standoff, with GDP rising 0.9 percent from last year compared with the 0.7 percent median estimate in a Bloomberg survey.

In Poland, first-quarter GDP expansion lends credibility to the central bank’s 2014 forecast of 3.6 percent, Narodowy Bank Polski Governor Marek Belka told reporters today in Warsaw.

‘Rather Robust’

“The economic recovery is rather robust,” he said. “We have ultra-low inflation and the economy is pushing ahead rather strongly.” Along with slower-than-expected inflation in April, the data “don’t bring rate increases any closer,” Belka said.

The EU’s largest eastern economy should “stand ready to reduce rates if the recovery falters or projections indicate that inflation would remain well below target for a protracted period,” the International Monetary Fund said today in a statement after a mission visit in Warsaw.

Hungary’s economic expansion accelerated to the fastest pace since 2006 as manufacturing and construction output improved, providing a boost for the freshly re-elected government of Prime Minister Viktor Orban.

“It’s unclear how long the economy can sustain this sort of growth pace without endangering internal and external balances,” Andras Balatoni, a Budapest-based economist at ING Groep NV (INGA), wrote in an e-mailed report. “Budget policy has become looser after the tightening of 2012, as can be seen in the deteriorating budget deficit.”

Fastest Pace

Romania’s economy went against the regional trend as the fading effect of a bumper crop tempered rising industrial output and consumption. GDP grew 3.8 percent from a year earlier, slowing from the previous quarter’s 5.4 percent surge and less than the 3.9 percent median forecast in a Bloomberg survey.

Even so, that’s eastern Europe’s fastest growth, with Romania “supported by external demand coming especially from Germany, accompanied by improving domestic demand and despite disappointing construction data,” Anca Maria Aron, an economist at UniCredit Tiriac Bank SA in Bucharest, said in a note.

Bulgaria’s expansion slowed to 1.1 percent from 1.2 percent in the fourth quarter. The country faces trade with Ukraine shrinking by almost half as well as lower demand for visas from Ukrainian tourists, Daniela Bobeva, deputy premier for economic development, said today in an interview in Warsaw.

The European Bank for Reconstruction and Development yesterday cut this year’s economic-growth forecast for eastern Europe and central Asia by more than half to an average 1.3 percent and warned the Ukraine conflict may choke expansion.

No Spillover

The central and eastern Europe economic expectations index fell 6.1 points this month, ZEW-Erste Group said by e-mail.

The IMF said April 30 that Russia is already in recession as U.S. and EU leaders warn they’re ready to take further measures if Ukraine’s May 25 presidential election is disrupted.

There are no signs spillover from Ukraine has affected the recovery in central and southeastern Europe, according to William Jackson, emerging-markets economist at London-based Capital Economics Ltd.

“While much of the acceleration in growth in the region may now be behind us, barring a slowdown in Germany, we think most countries should be able to sustain growth rates of 3-3.5 percent year on year over the coming quarters,” he said today by e-mail.

To contact the reporters on this story: Ott Ummelas in Tallinn at oummelas@bloomberg.net; Dorota Bartyzel in Warsaw at dbartyzel@bloomberg.net; Andra Timu in Bucharest at atimu@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Andrew Langley, Paul Abelsky

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