EU's East Loses Economic Momentum as Funds Ebb, Surveys Show

  • Romanian fiscal easing boosted growth in first quarter
  • Czech, Hungarian, Polanish, Slovak growth seen slower

Growth in the European Union’s biggest eastern economies probably slowed last quarter, as household spending failed to offset ebbing aid funds and weakening export demand, surveys show.

Romania will probably be alone in reporting faster annual growth in January-March among five countries in the region preparing to release fresh statistics, according to Bloomberg surveys of economists for each. Even with the lost momentum, set to be the deepest in the Czech Republic, the former communist economies are set to outpace the 1.6 percent expansion predicted for the euro area.

The eastern EU nations need to grow faster than the bloc’s average to bring living standards closer to the levels of their richer Western neighbors. The fragile recovery in the euro zone, their largest trading partner, is forcing them to rely on domestic demand, rather than exports. While public spending boosted growth last year as governments rushed to spend EU aid funds before an end-2015 deadline, diminished inflows this year have hurt investment and sales abroad have weakened.

“Strong consumer spending supports growth rates that, while slower than in 2015, will remain good, going by recent standards,” William Jackson, emerging markets economist at Capital Economics in London, said by e-mail. “I am a bit more concerned about the medium-term outlook. Once the spare capacity is used up, the rate at which these economies can grow will be determined by how quickly the supply side of their economy can expand.”

Hungary, Slovakia, Poland and Bulgaria will release preliminary first quarter gross domestic product data on Friday, followed by the Czech Republic on May 17.

Construction slumped across the region as less EU money arrived, leaving it up to consumers who are benefiting from record-low price growth to support their economies.

Helped by fiscal easing before autumn general elections, Romania probably led the pack, with an estimated 3.9 percent expansion in the first quarter from a year earlier. That compares with 3.8 percent growth in the previous three months. Economic activity was also helped by a consumer boom spurred by public-sector wage increases and value-added tax cuts.

“Romanian growth was heavily supported by unprecedented fiscal easing, estimated at 2.2 percent of GDP in structural terms,” Juraj Kotian, an economist at Erste Group Bank AG in Vienna, said by e-mail. “Romania will consume the full fiscal buffer that it built over past years to shore up growth well above 4 percent in this election year.”

Hungary Slowest

Hungary probably posted the slowest growth, with GDP advancing 2.4 percent, down from 3.2 percent in the fourth quarter when the country benefited from a heavy inflow of EU funds. The slowdown has prompted Prime Minister Viktor Orban’s government to work with the central bank on growth-spurring measures including tax cuts and lending incentives.

In Poland, construction has declined every month since January, with March showing the biggest fall in almost three years. The slump caused growth to slow 3.5 percent, according to a Bloomberg survey, from a four-year high of 4.3 percent in the fourth quarter. Still, after approving a child benefit program aimed at boosting consumption by an extra 17 billion zloty ($3.8 billion), the government is keeping its target for full-year growth of 3.8 percent, up from 3.6 percent in 2015.

“For the year as a whole, growth in central and eastern Europe will probably remain strong,” Jackson said. “We’ll probably see weaker growth in Hungary and the Czech Republic compared with 2015 as last year’s bumper EU structural fund inflows ease. But growth in Romania and Poland should be as strong as in 2015, perhaps a little stronger even, due to looser fiscal policy.”

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