Resilient East EU Shows Slumping West That Stimulus Can Work
It was the first time since 2016 that economic growth slowed in all six countries that report simultaneously.
(Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here.
The European Union’s eastern economies downshifted last quarter along with the rest of the bloc, but a job boom and government spending helped them withstand the brunt of global headwinds that sent the U.K. and Germany into contraction.
It was the first time since 2016 that economic growth slowed in all six countries that report simultaneously. Still, Hungary, Romania and Poland so far lead the EU, according to second-quarter gross domestic product data released on Wednesday. They all showed expansions of more than 4% from a year earlier. Hungary, Romania and the Czechs also beat expectations, even though a more pronounced deceleration is probably coming.
“There has to be some slowdown, it’s very unlikely that these rates of growth are maintained,” said Zoltan Arokszallasi, an analyst at Erste Bank Group in Vienna. “But the difference from growth in the west will remain quite positive.”
With the global trade war denting output around the world and Brexit dealing a further blow to the EU, the bloc’s east is outpacing their more affluent western peers. Unlike in Germany, where an economic contraction is ramping up pressure on Chancellor Angela Merkel‘s government to unleash fiscal stimulus, governments from Warsaw to Budapest have been pouring cash into the economy.
To meet his government’s targeting of growth that’s 2 percentage points faster than the EU average, Prime Minister Viktor Orban has pledged two rounds of stimulus measures next year. The central bank, run by a close Orban ally, has eased policy more than its regional peers and announced programs to boost credit to households and companies.
It’s a similar picture in Poland, where the government has boosted spending before October general elections.
Currencies and bonds across eastern Europe looked past the data as swings in global investors sentiment remained the key driver for trading amid a U.S.-China trade spat.
Construction, Loans
The consumption-led expansion has been a shift away from years of export-driven growth. An acute labor shortage across the region has fueled explosive wage growth. Households are taking on new mortgages and buying more cars as rising salaries boost disposable income.
Czech construction companies started building almost 6,000 new flats in the first half of the year, the highest figure since 2008. In Romania, the biggest lender Banca Transilvania, said it had granted more than 100,000 new loans in the first six months of the year.
“It was a dynamic period, with increasing volumes, which allowed us to obtain a good income in the context of reduced fees,” Chief Executive Officer Omer Tetik said after the bank published earnings Wednesday.
For a region that’s deeply integrated into international supply chains, the main question now is whether the domestic support will be enough to counterbalance the slowing global economy. Some countries with less stimulative policies are already feeling the pinch.
Purchasing managers’ surveys have shown growing pessimism and industrial-production figures have fallen in recent months. Despite record-low unemployment and strong wage growth, the pace of expansion in Slovakia, a carmaking powerhouse, was the slowest in almost six years. In the Czech Republic, worsening growth prospects prompted the central bank to keep interest rates steady after leading Europe in raising them.
“Although the region almost fully disconnected from Germany in the first half, the risks have been building,” JPMorgan Chase & Co. economist Jose Cerveira said in a note. “The synchronized nosedive in industrial-production readings raised the first hard data red flag. We have revised our growth forecasts lower for the coming quarters.”
--With assistance from Andra Timu, Dorota Bartyzel and Lenka Ponikelska.
To contact the reporters on this story: Radoslav Tomek in Bratislava at rtomek@bloomberg.net;Marton Eder in Budapest at meder4@bloomberg.net
To contact the editors responsible for this story: Andrea Dudik at adudik@bloomberg.net, Michael Winfrey, Balazs Penz
©2019 Bloomberg L.P.