East EU Growth Surge Wrong-Foots Economists But Peak Nearing

Updated on
  • Polish, Czech, Romanian and Bulgarian GDP exceeds estimates
  • Capital Economics sees inflation, rate hikes weighing after 3Q

Tires are inspected during production at the Continental plant in Timisoara, Romania.

Photographer: Akos Stiller/Bloomberg

Economies in most of the European Union’s eastern wing exceeded expectations as consumer spending and resurgent investment kept growth ahead of the richer west.

Expansion in Poland, the Czech Republic, Romania and Bulgaria surpassed economists’ estimates, preliminary second-quarter data showed Wednesday. Romania led the pack, with gross domestic product surging 5.9 percent from a year earlier. While Hungary was slowest at 3.2 percent, that still outpaced the euro area’s 2.2 percent.

The developing economies stretching from the Baltic to the Black Sea have enjoyed a boom in the first half of 2017 as EU aid funds resumed, exports rose and consumer spending strengthened thanks to higher wages and government handouts. While living standards in the region will continue catching up with the west, an acute labor shortage and factories running near full capacity may mean rapid expansion can’t last.

“This golden period of strong economic growth in central and southeastern Europe will soon come to an end,” Liam Carson, an economist at Capital Economics in London, said in an emailed note after the release. “Growth is likely to peak in the third quarter as higher inflation and interest rates -- coupled with tighter fiscal policy -- start to weigh on domestic demand.”

The Czech Republic posted the biggest surprise, with GDP jumping an annual 4.5 percent, way ahead of the 3 percent median estimate in a Bloomberg survey. In Poland, the EU’s largest eastern economy, growth slowed to 3.9 percent from 4 percent in the previous three months, offering respite to central bankers who’re in no hurry to raise interest rates. 

“Strong second quarter GDP figures confirm that Polish monetary authorities are in a very comfortable position,” analysts at mBank said. “Contrary to some CEE economies, like the Czech Republic and especially Romania, Poland is showing no signs of overheating at the moment.”

Romania remained the fastest-growing member of the group as tax cuts and state-wage increases propelled the country toward the top of the EU’s growth charts in recent years. But with inflation at the most since 2014, the central bank has is gearing up to tighten monetary policy.

Hungary’s economy slowed from 4.2 percent in the first quarter, dragged down by industrial production and agriculture, according to the Statistics Office in Budapest.

The Czech koruna gained 0.4 percent against the euro as the data boosts case for more rate increases. The Polish zloty advanced 0.6 percent, the most since December, while the Hungarian forint was little changed.

— With assistance by Dorota Bartyzel, Gabriella Lovas, and Adrian Krajewski

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