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CEE economies close to their economic performance peak

10 January 2018 Coface

GDP forecast 2017: 4.3%, 2018: 3.6%.

Recently released data confirms a solid pace of economic activity in the Central and Eastern European (CEE) region* with the average GDP growth in the third quarter of 2017 exceeding 5% year on year, nearly doubled the level of the Eurozone’s growth.

Countries such as the Czech Republic, Poland or Romania grew 4.7%, 5.1%, 8.8% respectively. The region seems to be outperforming other emerging economies worldwide and risks have been reduced.

Central and Eastern European economies mostly include the European Union countries which joined the Community from 2004 onwards. Competition between Western and Eastern Europe is intense and therefore demand from the West is crucial for CEE’s exports. CEE countries are still able to use EU funds which aim to bring a further convergence and higher cohesion with wealthier Western economies.

CEE countries have been beneficiaries of EU budgets which have been used to improve living standards, including investments in infrastructure. However, this component lagged last year due to a period of switching to the new EU budget and a need to adopt to local regulations. It was mostly seen in a reduction in fixed asset investments in those countries in 2016 with a slump of 10.6% in Hungary, 15% in Latvia and 7.9% in Poland. Consequently, the CEE average GDP growth rate decreased to 2.9% in 2016 from 3.6% in 2015. The rebound in investment has been gradual and brought a more evident contribution to growth in the second half of 2017.

Household consumption remains the main engine for growth in CEE economies. There has been a sizeable reduction in unemployment in recent years. Compared to 2012-2013 levels, jobless rates have been halved in a number of countries, breaking previous lows. By a way of example, unemployment in Poland is the lowest in 27 years. As a result, households are enjoy increased wages.

This has been the trend in recent years and double-digit growth of average compensation has been recorded in Hungary and Romania and solid increases in other CEE countries. An impressive growth rate in Romania (Coface forecast: 6.0% for 2017) is attributable not only to improvements on the labour market but also in a wide spectrum of fiscal measures that included, inter alia, a substantial decrease in VAT rates.

Last but not least, CEE economies have benefited from improving external factors. According to the latest World Trade Organisation’s (WTO) forecast, the volume of world merchandise trade is estimated to reach 3.6% this year after weak dynamics of 1.3% in 2016. Higher exports are confirmed in the CEE’s foreign trade statistics which benefit directly as well as through CEE’s inclusion in global (mostly Western European ones) supply chains.

Nevertheless, higher CEE domestic demand means also stronger imports. As a reminder, net exports (the difference between exports and imports) are taken into account when calculating the GDP growth rate. Therefore, net exports are likely to have a neutral if not a negative contribution to CEE growth.

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