Eastern Europe’s economic growth advantage over its western neighbors is narrowing as the continent’s sovereign debt crisis torpedoes credit and puts a strain on trade ties.
The CHART OF THE DAY shows the gap between eastern and western European growth rates has plunged from 5.1 percentage points when nations including Poland joined the European Union in 2004 and will stabilize at about 2 percentage points next year, according to International Monetary Fund estimates.
Eastern European countries such as the Czech Republic and Hungary rely on markets in the west to buy more than half of their exports, while the credit dearth plaguing western lenders spills into the east, where they own about three-quarters of the region’s banking assets. The euro area will contract this year and next before posting growth of 1.2 percent in 2014, the European Central Bank predicted on Dec. 6.
“It’s particularly noticeable how the regional growth forecast is much lower across the region as compared to the halcyon days” before the 2008 global financial crisis, Tim Ash, the chief emerging-markets strategist at Standard Bank in London, said by e-mail. “Emerging Europe is clearly facing a new normal of much lower growth, a reflection of slow growth in key western European markets, weak banks, lower levels of foreign investment, fiscal consolidation and efforts at much-needed structural reform.”
Austerity measures pursued by European governments are adding to growth concern in the east as tax increases and spending cuts hurt purchasing power in the west. The economies of the Czech Republic, Hungary and Slovenia probably shrank last year, the European Commission estimates.
Growth in Poland, the largest eastern EU economy, is set to slow to 1.8 percent this year from 5.1 percent five years ago, while the three Baltic nations of Latvia, Lithuania and Estonia, will be the fastest growing in Europe in 2013.