Central Europe riding the Eurozone recovery to stronger growth

By bne IntelliNews November 12, 2013

bne -

As has gradually become clear over the last couple of months, the economies of Central Europe are pushing to lead the recovery in CEE. That's thanks to their strong links to the Eurozone, as well relatively conservative fiscal policy that has kept a cap on deficits and debt in most countries. Recovery is set to continue, predicts the European Bank for Reconstruction and Development in its latest outlook issued on November 11.

Just as their heavy reliance on exports into the single currency bloc sank them into recession over the last 18 months or so, the upturn in Germany and other Eurozone hubs has seen Central Europe's vital manufacturing sectors recovering strongly since the summer. That followed a pick-up in growth in the second quarter following a dismal start to the year, to allow the likes of the Czech Republic and Hungary to finally exit recession, and brake the fall of Poland's economy as it dipped dangerously towards stagnation.

Overall, the EBRD sees Central Europe and the Baltics growing at 0.9% in 2013, before recovering to 1.9% next year.

While the Czech Republic is no longer covered by the EBRD, its October PMI reading was at its strongest for two and a half years. That cemented a six-month sequence of improving business conditions. "The PMI survey implies this upward trend will extend," suggests Agata Urbanska-Giner of HSBC, which compiles the PMI reading. "Germany's recovery will be the main driving factor," she adds.

Manufacturing similarly pushed a revival in industrial production for Slovakia over the last quarter. Meanwhile, the government has made progress with its fiscal consolidation drive. However, the EBRD report notes that it has further to go on that front next year. The development bank's projections remain at slightly under 1% for this year, and about 2% in 2014.

While Poland will also benefit from improved Eurozone demand, it is also alone in Central Europe in having domestic demand that can power its growth significantly. In combination, those elements will drive the Polish economy back on track to outperform the Central Europe and Baltics region after a very weak first half in 2013, when year-on-year growth dropped to below one per cent.

The EBRD now says it expects growth to hit 1.2% this year, and, with retail sales and real wages starting to rise, has raised its earlier forecast made in May by 0.3 percentage points to 2.3% in 2014.

To the south, Hungary has seen a welcome cyclical recovery since emerging from recession in first quarter of the year, and backing that up with a second quarter of growth in April - June. "This has brought to an end a "double-dip" recession that had lasted throughout 2012, though the level of economic output is still only back to where it was in early 2009," the EBRD notes. The report looks for growth to be marginally positive this year, before pushing to 1.2% in 2014.

Meanwhile, previously the runaway leaders of growth in the EU - mostly due to the low base they started from due to the devastating recession suffered in 2009 - the three Baltic economies have seen a notable deceleration this year. That said, with growth likely to come in at 3% in Lithuania, and 4.2% in Latvia, "these two countries will remain growth leaders in Europe," the EBRD points out.

"Based on further productivity increases and gains in export market shares, all three economies seem well-poised to take advantage of the incipient European recovery," the report continues, forecasting growth rates of 2.5% - 3.5% across the region next year.

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