East EU Growth Hits Speed Bump as Region Outpaces Richer West

  • Growth seen slowing in Poland, Romania, Hungary and Bulgaria
  • Capacity constraints start to bite, adding case for rate hikes

Most of the economies in the European Union’s eastern wing probably slowed in the second quarter, with only Slovakia accelerating even as consumer spending and resurgent investment keeps the region on track to outpacing the richer West this year.

Four of the six countries reporting second-quarter gross domestic product data on Wednesday will probably say growth slowed compared, according to separate surveys by Bloomberg News. While Slovakia likely accelerated, the Czech Republic is seen unchanged. Still, even at the bottom of the list, the Czechs’ 3 percent growth from a year earlier is set to outdistance the euro-area’s estimated 2.1 percent.

The developing economies stretching from the Baltic to the Black Sea began 2017 with a boom. EU aid funds resumed flowing into construction and other projects, while improved exports exports helped combine with rising spending power among consumers benefiting from wage growth and government handouts. Although the region will continue catching up with the West, an acute labor shortage and factories running near maximum capacity may hem in growth, making the first-quarter growth tempos hard to match, economists said.

“The lack of spare capacity will put a cap on growth,” said Liam Carson, an economist at Capital Economics Ltd. in London. “With the region’s economies operating either at –- or above –- full employment, we think that policymakers will need to raise interest rates further than most expect over the coming months in order to stem mounting price pressures.”

In Poland, the EU’s largest eastern state, accelerating investment is fueling growth as rising inflation and the waning effect of expanded family subsidies, PKO economists led by Piotr Bujak said in a report. The second-quarter slowdown to 3.8 percent is due to a calendar effect, and data including the fastest wage growth in five years indicate the growth pace is set to return to around 4 percent later this year, the bank said.

Romania is projected to remain the fastest growing member of the group, even as a construction slump cut growth to 5.1 percent from 5.7 percent in the first quarter. The country has posted one of the fastest rates in the EU in recent years as tax cuts and state-wage increases stimulate demand. With inflation at its highest since 2014, the central bank has signaled it’s gearing up to tighten policy.

In Hungary, growth will probably slow to 3.6 percent from 4.2 percent in the first three months. The government forecasts GDP growth more than doubling to 4.1 percent this year on rising wages and higher domestic spending.

“The region is benefiting from the strengthening of domestic demand and solid export performance,” Radomir Jac, Chief Economist at Generali Investments, said by email. “The data are likely to confirm the view that the region is already running above its longer-term potential and that capacities available in the respective economy are basically being fully used.”

— With assistance by Andra Timu, Dorota Bartyzel, and Gabriella Lovas

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