East Europe's Economies Say Goodbye to Peak Growth as Boom Fades

(Bloomberg) -- Eastern Europe’s economic boom, which produced some of the world’s fastest growth rates, passed its peak as inflation returns and interest rates begin to rise.

Expansion fueled by higher investment, rising wages and consumer spending slowed on an annual basis in the first quarter in the Czech Republic and Romania, while holding steady in Hungary and Bulgaria, data released Tuesday showed. Poland overtook Romania as the star performer, accelerating to 5.1 percent, more than double the advance in the euro area.

East Europe's Economies Say Goodbye to Peak Growth as Boom Fades

Economies from the Baltics to the Black Sea have enjoyed a bumper period of growth as inflation and borrowing costs remained low, while the euro zone -- the region’s biggest trading partner -- recovered from years of crisis. But labor shortages are starting to weigh, while the boom has rekindled price pressure in nations such as the Czech Republic and Romania, prompting rate hikes. The European Union forecasts a slowdown this year for all the its ex-communist members except Bulgaria and Slovakia.

“It isn’t a bad reading at all but all of these rates are well above potential,” Raffaella Tenconi, chief economist at ADA Economics Ltd. in London, said by phone. “We’ve passed the best of the business cycle -- the question now is how fast will it go down.”

Currencies in the region weakened against the euro as investors continued to turn away from riskier emerging markets. The forint tumbled as much as 0.6 percent, reaching the weakest level in almost two years, while Poland’s zloty, the Czech koruna and Romania’s leu all fell at least 0.1 percent.

  • Romania reported the region’s biggest GDP slowdown as annual growth slowed to 4 percent from 6.7 percent in the fourth quarter, undershooting economists’ 5.5 percent median estimate. Household spending, driven by tax cuts and wage increases, is gradually fading as the central bank raises interest rates. Governor Mugur Isarescu said last week the bank won’t increase the benchmark “too much” to avoid choking growth
  • The Czech expansion eased to 4.5 percent from 5.5 percent amid a slowdown in industry and higher borrowing costs, though consumer spending remains strong thanks to the EU’s lowest unemployment
  • Hungarian growth was unchanged at 4.4 percent, beating the Bloomberg survey, with services contributing most, the statistics office said. The government is working on stimulus measures to reach a target of 4.3 percent this year and meet Prime Minister Viktor Orban’s demand for expansion above 4 percent through 2022
  • Despite growth beating expectations, Poland economists including Wiktor Wojciechowski at Plus Bank in Warsaw predict consumer spending will decline moderately in the coming quarters, while a dip in Germany’s economic will impact exports
  • Growth in Slovakia accelerated slightly to 3.6 percent. The government says it will exceed 4 percent this year and next as production begins at a new Jaguar Land Rover factory

A wider deceleration in euro-region growth would add to the headwinds for eastern Europe, which is already weighing the possibility of reduced development funds from the EU in the coming years. For now, expansion should remain robust even as it retreats.

“Despite the slowdown in the euro area, central and eastern European economies retained sound growth,” Viktor Zeisel, an economist at Komercni Banka AS in Prague, said by email. “But the economies are probably at the peak of the cycle and are set to slow in the coming periods as they’ll hit capacity constraints.”

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