East EU’s Growth Is Reined In by Ebbing EU Development Funds

  • Economic expansion seen slowing in Romania, Czech Republic
  • Poland, Hungary set to report faster second-quarter growth

Economic growth in the European Union’s biggest eastern economies was tempered in the second quarter by the dwindling inflow of development funds from the bloc, with domestic spending failing to offset a slump in investment.

While Poland and Hungary will probably report that growth accelerated from the pace in the first three months of 2016, the results will be lower than at the end of last year, according to Bloomberg surveys. The expansions in Slovakia and the Czech Republic, which will publish its numbers next week, also slowed over that period. Only Romania, where election-year spending by the government is buoying domestic consumption, showed an increase, one survey showed.

Growth across the region in 2016 won’t “return to the rates seen last year,” said William Jackson, an economist at Capital Economics Ltd in London. “Lower EU fund inflows probably remained a drag.”

The ex-communist region is facing a declining inflow of EU aid funds, which, combined with the euro area’s lackluster recovery, is leaving countries to rely on household consumption. Construction and investment slumped in most of the region following a rush last year to spend EU aid money before a end-2015 deadline.

Governments in some countries have turned to loosening fiscal policy to boost growth. In Poland, household spending was aided by 4 billion zloty ($1 billion) in new child benefits. Similarly, tax cuts and wage increases in Romania will help the Balkan state lead the region in second-quarter growth.

The slowing expansion may have the biggest monetary-policy impact in Hungary, where officials have repeatedly said the pace of growth will return to about 3 percent. Policy makers there may be more inclined to cut interest rates after data show such a return is unlikely, Jackson said. A weaker-than-expected figure in Poland could also open room for a “modest” rate cut in Warsaw, he added.

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