Boom Times for Longer in EU's East as GDP Growth Quickens

(Bloomberg) -- The European Union’s eastern economies began 2017 with a growth flurry as resumed flows of development funds from the bloc and improving demand in the euro area gave them the edge over the rest of the region.

Romania led the way, with first-quarter growth unexpectedly quickening to 5.7 percent from a year earlier, more than the 4.5 percent median estimate in a Bloomberg survey. Expansion in Poland, the east’s biggest economy, accelerated to 4 percent. Even at the bottom of the pack, the Czech Republic’s 2.9 percent increase in gross domestic product outpaced the euro area, the region’s main trading partner.

“Risks to our above-consensus 2017 growth forecasts now lie to the upside,” Liam Carson, an analyst at Capital Economics Ltd. in London, said in a note. “Monthly activity figures suggest the pick-up was largely driven by a recovery in construction output following last year’s slump. Moreover, industrial sectors appear to have strengthened on the back of an improvement in conditions in the eurozone.”

The former communist nations, with combined economic output of about $1 trillion, are benefiting from healthier demand in their western neighbors and resumed flows of EU assistance that’s used to revamp roads and bridges. Expansionary fiscal policies are also boosting household spending, while unemployment is hovering near record lows.

Eastern European currencies accounted for five of the top six best emerging-market performers against the euro during the past month, led by Hungary’s forint with a jump of 1.4 percent. The Czech koruna had strengthened 0.2 percent to 26.415 against the common currency by 11:56 a.m. in Prague, the strongest since November 2013.

Hungary’s pace of growth more than doubled in the first quarter to 4.1 percent, exceeding estimates, while Bulgaria’s 3.4 percent expansion also beat expectations. Slovakia grew 3.1 percent, matching a Bloomberg survey.
A drop in EU structural funds was the main drag on growth last year, leading to drastic cutbacks in public investment in many countries and prompting governments to further loosen fiscal policy to sustain expansion. The International Monetary Fund sees growth in developing Europe picking up to 3.3 percent in 2017, double the pace in the euro area. First-quarter expansion in the currency union remained at 1.7 percent, figures released Tuesday showed.

Romania will probably remain the EU’s fastest-growing eastern economy, with the government predicting looser fiscal policy including tax cuts and pay rises for state employees will bring about expansion of 5.2 percent in 2017. Hungary forecasts growth of 4.1 percent, more than double the pace of 2016, while Poland sees GDP gaining 3.6 percent.

While Capital Economics’s Carson said growth will stay strong this year, the IMF warned last week that expansion is likely to slow as it runs up against capacity constraints.

“Such a strong pace of annual growth can hardly be sustained,” said Radomir Jac, chief economist at Generali Investments CEE in Prague. “I’d expect some corrections in the coming quarters.”

--With assistance from Zoltan Simon Adrian Krajewski Peter Laca Zoya Shilova and Barbara Sladkowska

To contact the reporters on this story: Radoslav Tomek in Bratislava, Slovakia at rtomek@bloomberg.net, Andra Timu in Bucharest at atimu@bloomberg.net.

To contact the editors responsible for this story: James M. Gomez at jagomez@bloomberg.net, Andrew Langley, Paul Abelsky