East Europe Growth Nears Pre-Lehman Highs to Lead the Pack in EU

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Downtown Bucharest.

Photographer: Grosescu Alberto Mihai/Getty Images/iStockphoto
  • Romanian economy soars fastest since 2008 on wages, tax cuts
  • Growth in Poland trails forecasts, Hungary seen meeting target

Eastern Europe staked out four of the five fastest growth rates in the European Union last quarter as consumer spending offset a drop in investment and sent some economies to expansions not seen since the 2008 financial crisis.

Romania led the five former communist countries reporting preliminary estimates of economic growth on Friday, with annual expansion jumping to 6 percent from 4.3 percent in the previous three months. Growth in Bulgaria, Hungary, Slovakia and Poland, the region’s biggest economy, also accelerated from the first quarter. The euro area, the destination for most of the region’s exports, expanded an annual 1.6 percent, matching the previous quarter.

The momentum show the nations, only one of which uses the euro, are proving resilient to a lackluster recovery in the currency union and declining inflows of the bloc’s funds. Helped by handouts from governments eager to support growth, consumer spending is countering the slump in investment, which followed a rush last year to spend EU aid money before an end-2015 deadline. Their combined economic output of about $1 trillion will grow 3.5 percent this year, outpacing the projected increase in world output, according to the International Monetary Fund.

“Growth in the region was again driven by domestic demand, which is supported by declining unemployment and rising wages,” Jan Steckerova, an economist at Komercni Banka AS in Prague, said in an e-mailed note. “Investment remains the weak spot in the region as drawing of EU funds from the new budget has a slow start.”

As growth languished earlier this year, Eurobonds from eastern European governments underperformed other developing nations, returning 8.6 percent this year, compared with the 14 percent gain for the Bloomberg Dollar Emerging Market Sovereign Bond Index. The Polish zloty and Romania’s leu were two of the three-worst performing currencies among emerging markets in the second quarter, according to data compiled by Bloomberg.

Second-quarter figures exceeded forecasts by economists for Romania, Slovakia and Hungary. The surprise pickup is reducing concern about this year’s outlook following a deep slowdown in the previous period after financial assistance from the 28-nation EU dwindled.

Romanian growth was the fastest since 2008 as tax cuts and wage increases boosted spending power of consumers in an election year. While the European Commission predicts its GDP will expand at the bloc’s second-quickest pace in 2016, behind Ireland, it has warned that fiscal loosening may endanger next year’s budget targets. 

Slovakia, Hungary

The uptick for Slovakia’s economy to 3.7 percent may push full-year growth to 3.4 percent, the Finance Ministry said. An acceleration of growth in Hungary, which almost tripled to 2.6 percent, shows the economy is able to expand even as the inflow of EU funds dropped, Economy Minister Mihaly Varga told reporters after the release. The government’s target of 2.5 percent for the whole of 2016 will be met, he said. 

With growth approaching expectations of the Hungarian central bank, an interest-rate cut looks less likely, said William Jackson, an analyst at Capital Economics Ltd. in London. On the contrary, Romania’s data raise the likelihood that its central bank will tighten monetary policy this year to prevent the economy from overheating, according to Jackson.

Lagging Behind

Poland was the region’s laggard last quarter. Its gain of 3.1 percent missed estimates for 3.3 growth and barely improved on the worst economic showing in the first three months, when GDP rose 3 percent. Supporting the economy were 4 billion zloty ($1.1 billion) in new child benefits, propping up domestic demand and helping industrial output and retail sales.

Slowing investment remained a key drag on growth after delays in EU funding and increased uncertainty after the U.K.’s vote to leave the EU.

“The prospects for the Polish economy aren’t bad: the growth dynamics should slightly accelerate as money flowing from the government’s child-benefit plan will be effectively supporting the economy,” said Monika Kurtek, chief economist at Bank Pocztowy SA in Warsaw. “Companies, however, will function in an environment featuring strong uncertainty coming from abroad.”

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