CEE boom passes peak

CEE boom passes peak
The four year boom in Central and Eastern Europe has peaked
By Ben Aris in Berlin August 15, 2018

The boom Central and Eastern Europe (CEE) has been enjoying for the last four years has reached its peak as countries in the region start to run up against their structural limits.

While all the countries are still enjoying robust growth, the rate of expansion is starting to slow and in some cases has begun to fall. The main break on development is a growing labour shortage in the region, but more insidious is the lack of investment into new technologies and a reengining of businesses to go up the value added chain that will take longer to make itself felt.

Six economies in Central and Eastern Europe released second quarter GDP data this month: Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia. The data showed that regional growth slowed for a third straight quarter, weakening from 4.6% y/y in Q1 to 4.3% y/y in the second quarter – down from a peak of 5.6% y/y in the third quarter of 2017, reports Capital Economics.

“Detailed breakdowns of the data have yet to be released. But monthly activity data show that weaker growth in Q2 was widespread across sectors. After a sharp rebound in 2017 on the back of a recovery in EU structural fund inflows, growth in construction output slowed markedly in Q2. Meanwhile, continued softness in euro-zone manufacturing weighed on CEE industry. And retail spending weakened a touch — higher oil prices may have tempered consumer demand,” Capital Economics said in a note.

Its been a fun ride as bne IntelliNews pointed out in a cover story “CEE booms” last year but now the countries in the region will return to more levels of growth.

The Romanian economy already started to slow sharply at the end of last year, while the Czech economy slowed the most this quarter. Poland put in a small growth, however, economists are warning that the peak has passed and expect all the economies of the region to slow as the rest of the year plays out. Acute labour shortages that are causing wage inflation and the slow progress manufacturers are making in moving up the value chain is limiting the further growth of countries in the region.

“We think that the gradual slowdown in CEE GDP growth will continue over the course of 2018 and into 2019. Higher inflation and interest rates, as well as less supportive fiscal policy in parts of the region, will probably take the steam out of domestic demand. And weaker demand from the euro-zone and mounting capacity constraints will weigh on net trade. We expect CEE growth to average around 3% in 2019,” said Capital Economics.

GDP growth slowing but still strong

The Czech Republic was worst affected this quarter. Czechia’s economic growth decelerated to 2.3% year-on-year in the second quarter of 2018 from 4.2% growth in the first quarter as the economy runs up against its structural limits, the Czech Statistics Office (CSU) said on August 14. The main reason is a strong base effect from the previous year, but the slowdown was also due to the depleted capacities of the Czech economy, analysts say. Slovakia’s economy grew 4.1%, compared with 3.6% in the first quarter.

By contrast Hungarian GDP growth unexpectedly quickened to 4.6%, the fastest pace since 2014, driven by agriculture, services and manufacturing. But economic research institute GKI said at the end of July economic growth probably reached the peak in this business cycle of 4.4% in the 4Q17 and 1Q18.

Poland’s economy is the biggest in the region and is also holding up well, but growth is also expected to peter out later this year. GDP growth slipped from 5.2% in the first quarter to 5.1% in the second and is expected to slow further as the year wears on, due to weak investment growth as the construction sector reaches capacity limits, among other problems.

Romania’s economy has already passed its peak. After turning in an astonishing 8.8% growth in the third quarter of 2017. Romania’s state forecasting body the CNP cut its projection for this year’s GDP growth from to 5.5% in July from 6.1% in the previous outlook released in April. Romania’s GDP increased by 4% y/y in the first quarter of the year, the statistics office said earlier in July, confirming an earlier flash estimate, pushed up by private consumption.

Labour woes

The main problem is everyone now has a job and these workers can’t be made to work more or better. Poland in its desperation to find more labour has opened a bureau to fast-track work permits for Ukrainian jobseekers and bne IntelliNews’s correspondent in Tbilisi reports the capital of Georgia is plastered with posters advertising jobs in Poland.

The labour issue is becoming a major drag on further growth and driving up wages. Six countries in Central and Eastern Europe have acute labour shortages, bne IntelliNews reported this week, according to a report of Colliers International. Bulgaria, Romania, Hungary, Slovakia, the Czech Republic and Poland have very low levels of unemployment, combined with dynamic growth, emigration and the fast development of the service sector. “If the labour force riddle is not solved, then we foresee limitations to GDP growth, perhaps a recession and a likely shadow over private investment in the region in the medium to long run,” the report noted.

Slovenia is now facing its highest job vacancy rates in a decade. Slovenia’s job vacancy rate in the second quarter of the year stood at 2.6%, the highest since 2008. It went up 0.1pp up compared to the previous quarter as well as 0.4pp up against the same quarter of 2017, the statistical office announced on August 9.

The Polish unemployment rate came in at 5.9% in July, a drop of 1.1pp y/y, the labour ministry said in a preliminary estimate released on August 6. And the July unemployment rate is the lowest since November 1990, shortly before it ballooned to double-digit levels after the implementation of market reforms.

Polish wages grew 7.1% y/y in the second quarter, resulting in an average gross monthly pay packet of PLN4,521.1 (€1,058), according to data released by statistics office GUS on August 9. Growth in wages continues in Poland, as an effect of the shortage of labour that persists despite companies resorting to employing cheaper labourers from Ukraine on a massive scale.

The labour shortages in CEE has been a boon to Ukraine, which has the lowest wages in Europe – the average wage in Poland is currently four-times more than the official average in Ukraine. Over the last three years there has been an exodus by able bodied Ukrainians looking for work. Some 400,000 Ukrainians have left the country in the last year to find employment in their neighbours and are sending some $10bn of remittances home a year.

The Czech labour market is overheated, which is causing inflationary pressures due to robust wage growth, the central bank board concluded during a June 27 meeting at which it raised the key interest rate by a quarter point to 1%. The Czech unemployment rate has fallen to 3.1% in July – one of the lowest ni the region -- and has been contracting every month for the last five months. Analysts expect unemployment to decrease again in the coming months to fall below the 3% mark – less than the structural minimum unemployment associated with a booming economy that enjoys full employment. This will put further pressure on wage growth, which expanded by 8.6% y/y in 1Q – the fastest rise in the past 10 years.

Romania is facing similar problems. Romania’s seasonally-adjusted ILO unemployment rate dropped by 0.4pp y/y to 4.5% in June, the INS statistics office reported on July 31. The Romanian unemployment rate has been on a downward trend in recent years helped by the booming economic growth last year. Three quarters of Romanian companies reported this month they were prepared to hike wages by 15% in several key sectors as they struggle to find enough labour.

Demand fading

Retail sales are also slowing in the region. Polish retail sales have started to slow, expanding by 4% y/y in constant prices in April, the statistics office GUS announced on May 23. The reading sees sales drop 4.8pp compared to the pace of annual growth recorded in March, likely owing to buying activity slowing down in April after heightened consumption linked to Easter took place in March. The ban on Sunday retailing also played a role, as last month only one Sunday was open for retail.

Czech retail sales disappointed in June, falling from record highs a month earlier, the government statistics agency reported on August 6.  Seasonally adjusted sales stagnated month-on-month in June due to rising inflation, hot weather, increasing prices of housing and fewer working days. “Slower growth can be also attributed to a weakening taste of consumers to spend money. Consumer confidence has decreased over the last two months in a row after a record-breaking high in May,” said Raiffeisenbank analyst Jakub Cervenka.

Romania’s retail sales increased by 6.6% y/y in Q2, a marginal improvement from the 6.4% y/y in Q1, but the result was still only half the 13% y/y growth in retail sales seen in the same quarter a year earlier, according to the national statistics office.

Industrial production down

Falling demand and labour problems are threatening industrial production growth, which has already started to fade in some countries of the region, but the boom years have created momentum, and individual industries are holding up industrial expansion in several countries in the region for the meantime.

Poland has bucked the trend, delivering a positive surprise in July after posting an unadjusted 6.8% y/y growth in industrial production for June. The headline figure beat consensus, which expected growth to come in at only slightly above the 6% mark. The acceleration of growth in June – after expansion of 5.4% y/y in May – once again owes to calendar effects, but also to the unexpectedly good performance in the energy sector, analysts say.

Czech industrial production also posted a 3.4% expansion at constant prices in June, following 1.4% growth in May. The main drivers were the energy and engineering sectors, the CSU said on August 6. But some analysts are warning that Czech industrial production growth is capped by insufficient capacity and labour to expand further.

Romania’s industrial production index increased by only 1.2% y/y in May and the average growth rate calculated for the rolling three months eased to 2.1% y/y — the weakest performance since September 2016. Romania’s industry shows signs of fatigue after it expanded by 7.8% y/y in 2017, which was the best performance in the post-crisis decade.

Time to step up the value added ladder

A lack of investments in key industries is the limiting factor in most of the economies in the region. A lot of investment has gone into all the countries of the region, but most of it was targeting basic infrastructure that the previous socialist governments failed to build, and then building light manufacturing facilities that provided work for the first post-socialist generation.

Now the game has changed an entirely different wave of investment needs to start to take the economies of the region up to the next step on the value added ladder to build more sophisticated industries and develop new technologies.

In a country like Romania, which is further behind than its Central European peers, the challenge is easier as it still has a lot of growth available in areas like the food processing industry.

At the same time poor structural reforms will limit growth, and here backtracking on liberal reforms in countries like Poland and Hungary will turn into problems in the future.


Central & Eastern Europe GDP (seasonally-adjusted)




Czech Rep.





%y/y (% q/q)

%y/y (% q/q)

%y/y (% q/q)

%y/y (% q/q)

%y/y (% q/q)

%y/y (% q/q)


+3.9 (+0.9)

+4.3 (+1.1)

+5.2 (+0.7)

+5.4 (+1.4)

+8.4 (+2.2)

+3.5 (+0.9)


+3.5 (+0.7)

+4.9 (+1.3)

+5.5 (+0.8)

+4.4 (+1.0)

+6.6 (+0.3)

+3.6 (+0.9)


+3.6 (+0.9)

+4.7 (+1.2)

+4.5 (+0.5)

 +5.0 (+1.6)

+4.3 (+0.1)

+3.7 (+1.0)


+3.4 (+0.8)

+4.4 (+0.9)

+2.3 (+0.5)

 +5.0 (+0.9)

+4.2 (+1.4)

+3.9 (+1.0)

Sources: National Statistics Offices, Capital Economics