Consumer Renaissance Helps EU's Eastern Economies Beat Euro Area

  • Growth seen steady in Poland, Slovakia, quicker in Romania
  • Expansion slowing in Czech Republic, Hungary, surveys show

A revival of consumer demand is helping keep the European Union’s biggest eastern economies growing faster than the euro area, making up for exports losing momentum.

Countries across the region will report third-quarter economic growth figures ranging from 2.5 percent to 4.2 percent compared with a year earlier, according to economists surveyed by Bloomberg before Friday’s releases. Even at the bottom of the list, Hungary is set to outpace the euro area, where expansion will accelerate to 1.7 percent from 1.6 percent, a separate poll showed.

Governments on the EU’s eastern fringes are looking for ways to offset more sluggish growth in the euro area, their biggest trading partner. With oil prices down more than 40 percent from a year ago pushing inflation and borrowing costs to record lows, consumers in the trading bloc’s former communist members are helping revive domestic demand that had been depressed by austerity and a post-crisis spike in unemployment. Public investment also supports expansion this year, driven by governments seeking to spend as much as they can from EU grants before a deadline.

"The strong growth rates have been supported in large part by low commodity prices, which have pushed down inflation and supported real incomes and consumer spending," said William Jackson, an economist at Capital Economics Ltd. in London. "Monetary policy is supportive, fiscal austerity has eased and unemployment rates are coming down. I remain fairly upbeat about the near-term prospects."

Currency Performance

The region’s economic performance has been reflected in the currencies. The Czech koruna has gained 2.6 percent against the euro this year, the Polish zloty is up 1.7 percent, the Hungarian forint by 1.5 percent and the Romanian leu by 1 percent, according to data compiled by Bloomberg.

Growth in Poland and Slovakia stayed at 3.3 percent and 3.2 percent in the third quarter, according to the surveys of economists. Expansion is seen slowing to 4.2 percent from 4.6 percent in April-June in the Czech Republic and to 2.5 percent from 2.7 percent in Hungary, with Romania’s output accelerating to 3.5 percent from 3.4 percent, separate polls showed.

Government Measures

Governments in the region are also passing measures to stimulate the economy. Hungary channeled 1 trillion forint ($3.5 billion) to consumers by forcing banks to to reimburse borrowers for charges on foreign-currency loans deemed unfair. Facing higher-than-projected tax receipts, Slovakian Prime Minister Robert Fico pledged increased spending of about 200 million euros ($215 million), including a cut in taxes on basic food.

Poland’s Law & Justice party, which won elections last month, has vowed to increase welfare benefits. In Romania, the government also cut taxes before mass protests over a nightclub fire and corruption forced it out.

The European Central Bank on Sept. 3 cut its outlook for inflation and growth in the euro area, forecasting consumer prices to barely increase this year, while the economy will expand 1.4 percent in 2015, accelerating to 1.8 percent two years later.

As EU funding dries up, growth will slow by almost half in the Czech Republic to 2.2 percent next year, while the expansion in Hungary will decelerate by 0.7 percentage point to 2.2 percent, the European Commission, the EU’s executive, said in its latest forecast last week. In Romania, fiscal stimulus including a cut in the value-added tax rate, will push growth to 4.1 percent.

‘Good Momentum’

"There is still a good growth momentum" in eastern Europe "as domestic demand has continued to be supported by low inflation and governments’ effort to draw the remaining amount of EU funds left from the previous programming period," said Juraj Kotian, an economist at Erste Bank Group in Vienna. "However, Hungary and Czech Republic are unlikely to repeat the record-high inflows of the EU funds from the first half of this year and that should bring the growth rates lower, especially next year."

Inflation at records lows -- or negative such as in Poland, Romania and Slovakia -- allows looser monetary policy. The Czech central bank on Nov. 5 kept its benchmark rate at what it calls ‘technical zero’ -- 0.05 percent -- and signaled it may delay the exit from the policy of capping koruna gains. Hungary’s monetary authority is ready to use "non-conventional" tools to relax policy further amid concern growth is set to slow next year, Vice President Marton Nagy said Nov. 4.

‘Still Vulnerable’

Favorable domestic demand will help countries in the region experience stabilized, albeit a bit slower, growth in the next two years, economists said. Still, they remain vulnerable to shocks such as a spike in oil prices or a hard landing in China, according to Capital Economics’ Jackson.

"While the near-term prospects for domestic demand are strong, the region is still vulnerable to external shocks," he said. "Exports still constitute an extremely large share of GDP -- as much as 80 percent in the Czech Republic, Hungary and Slovakia -- so if the German economy slows substantially, growth in the region will too."

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