CEE tops EU growth, but recovery slowly grinding towards a halt

By bne IntelliNews August 14, 2014

Jan Cienski in Warsaw -

 

Central Europe's economies slowed in the second quarter of the year, GDP growth data released on August 14 showed, but the region still easily outperformed the more sluggish economies of Western Europe. However, the issues dragging on the sluggish recovery are only set to rise.

The Eurozone posted no growth whatsoever between April and June, while the EU's 28 member states as a whole notched up expansion of just 0.2%. By way of contrast, Hungary steamed ahead as it posted growth of 0.8% compared with the first quarter, and 3.9% on an annual basis. 

The Polish economy expanded 3.2% year on year - slightly slower than the 3.4% achieved in the first quarter, but still within economists' expectations. Elsewhere in the region, the Czech Republic grew 2.6% annually, Slovakia 2.5% and Romania 1.2%.

Hungary's strong performance - the country's fastest pace of expansion since 2006 - excited the economy ministry to the point that it dramatically increased its forecast growth for the full year - from 2.3% to 3%. The confidence is borne of business and consumer confidence indexes that are up, while industrial production has turned around and unemployment is falling.

"In light of confidence indices, data on the stock of orders and new contracts, housing permits and consumer expectations, momentum is expected to remain steady," the ministry noted in its statement.

In Poland, the forecast is for growth of about 3.3% for 2014, although that could drop due to the impact of Russia's blockade of many EU agricultural exports, which is particularly harmful to Poland. Malgorzata Starczewska-Krzysztoszek, chief economist for Lewiatan - the Polish employers confederation - says the second quarter growth data came in slightly better than she had expected, and notes that Poland was the EU's third-fastest growing economy in April-June.

However, that may not remain the case through the rest of the year. "The next two quarters of 2014 will be weaker because in addition to the existing weaknesses in consumption and investment, a fall in export growth will unfortunately be added," she writes. "With rising imports that will reduce external demand as a factor in GDP growth."

There is also worry across the Central European region due to Germany's poor showing. The major driver for exports out of the Visegrad countries due to supply chain integration, the German economy growth could manage no more than 0.8% growth on an annual basis, while it contracted 0.2% quarter on quarter. 

The strengthened EU sanctions against Moscow, and retaliatory Russian food import embargo, is only likely to aggravate the slowdown in the Eurozone and Germany in the third quarter. On top of the direct effects on the Central European economies, those struggles in the single currency area also set to be reflected in the next quarter's growth data out of CEE, particularly in the smaller and more open economies such as Hungary and the Czech Republic.

"We don't expect the recovery in Central and Eastern Europe to go into reverse over the coming months and quarters," writes William Jackson at Capital Economics, "but growth is likely to remain slower than the rates seen at the start of this year."

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