Photographer: Akos Stiller/Bloomberg

Eastern EU Economic Growth Speeds Up on Consumer Spending

Updated on
  • Romanian growth, at 8.8% from year ago, is EU’s fastest
  • Tighter monetary policy will probably cause slowdown in 2018

Economic growth in the European Union’s eastern members picked up in the third quarter as rising wages propelled consumer spending.

While the expansion of gross domestic product accelerated across the region from the previous quarter, Romania delivered the biggest surprise, with an 8.8 percent advance, significantly exceeding a median estimate of 6.2 percent in a Bloomberg survey. Czech and Polish growth also topped analysts’ predictions. On the other hand, Hungary slightly missed a 3.6 percent estimate, probably putting the government’s goal of 4.1 percent this year out of reach.

The recovery in the euro area fueled demand for exports from the EU’s former communist states, while loose fiscal policy and record-low unemployment buoyed consumer spending. The resulting increase in wages helped the countries grow faster than their richer counterparts, but some, like Romania, risk a surge in inflation that may constrain growth in the future. The quicker-than-forecast expansion may prompt interest rate tightening.

"We still think growth will slow in 2018, but today’s data mean the risks to our forecasts lie to the upside," Liam Carson, an analyst at Capital Economics in London, said in a note on Tuesday. "In the meantime, these strong GDP data support our view that interest rates will be hiked sooner and by more than most expect across the region."

The Czech economy grew 5 percent from 12 months earlier, a two-year high, and Poland’s expanded by 4.7 percent, the fastest since 2011. Slovak output disappointed, rising 3.3 percent, a touch below the median estimate in a Bloomberg survey.

Romania eclipsed other EU members as tax cuts and wage hikes boosted consumption. Still, risks are piling up, with rising imports widening the current-account deficit. Central bank Governor Mugur Isarescu warned last week that, to ensure growth is sustainable, the Balkan state must address a labor shortage, increase its use of EU development funds and refrain from stimulating consumption further.

The leu gained 0.1 percent against the euro, after losing almost 1 percent this month because of fiscal uncertainties and rising imbalances in the economy. The Hungarian forint and Polish zloty were both less than 0.1 percent stronger before the GDP data. The Czech koruna, the world’s best-performing currency since the central bank removed a limit on currency gains in April, was unchanged at 25.563 per euro.

Slowdown Ahead

Economists predict growth will moderate in the coming quarters as wage growth drives inflation higher and prompts central banks to tighten monetary policy. The European Commission forecast a slowdown in all eastern EU members last week. It said Romania would be hit hardest, decelerating to 4.4 percent growth in 2018.

Economists expect the Czech central bank to raise the benchmark rate by an additional 50 basis points throughout 2018, according to a Bloomberg survey.

GDP data “are fully in line with the central bank’s expectations and shouldn’t cause any change in the bank board’s thinking,” said Radomir Jac, chief economist Generali Investments CEE, who sees policy makers in Prague raising the benchmark interest rate in February after being the first in Europe to conduct two hikes this year.

The economic expansion in the EU’s east comes as Germany, the bloc’s largest economy, is heading toward its best year since 2011, after third quarter growth of 0.8 percent from the previous three months.

— With assistance by Zoltan Simon, Adrian Krajewski, Slav Okov, and Krystof Chamonikolas

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