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Euro-Zone Malaise Exposes Eastern EU’s Economic Weak Spot

Bloomberg logoBloomberg 3 days ago Peter Laca

(Bloomberg) -- Economies in eastern Europe revealed on Friday the pain being transmitted by the weakness afflicting their richer neighbors.

Data showed a further slowdown in the fourth quarter in Poland, the Czech Republic, Hungary and Bulgaria, though Romania and Slovakia quickened.

Three decades after the collapse of communism, the nations that went on to join the European Union can nowadays boast of booming domestic demand driven by lavish government spending and an army of keen consumers.

But, while not as central as they once were, exports westward remain a powerful force. And the euro area’s current malaise weighed on the continent’s east, whose factories are wired into its supply chains.

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“The downturn in Germany took a bigger toll on growth across the region,” Capital Economics said. “Solid rates of growth in Hungary and Romania reflected strong domestic demand, which provided some offsetting support to weakness in industry.”

Czech steelmaker Trinecke Zelezarny encapsulates the mood: While output will tick up this year, the company is slashing investment by about 40% to 1.4 billion koruna ($60 million).

“It’s significantly less than we originally included in our business plan,” Chairman Jan Czudek said. “The overall situation doesn’t allow us to invest a bigger amount.”

GDP Results:
Poland: 4Q GDP +3.1%, 3Q +3.9%Czech Republic: 4Q GDP +1.7%, 3Q +2.5%Hungary: 4Q GDP +4.5%, 3Q +5%Bulgaria: 4Q GDP +3.5%, 3Q +3.7%Romania: 4Q GDP +4.3%, 3Q +3%Slovakia: 4Q GDP +2.1%, 3Q +1.3%

Eastern Europe’s economies will nevertheless continue to expand far faster than those in the west as rising wages drive spending.

“We expect consumption growth to continue, albeit at a more moderate pace,” Francois Bloch, chief executive officer of BRD-Groupe Societe Generale, Romania’s third-largest bank, said by email.

But there are other headwinds.

Loose monetary conditions that underpinned expansion are showing signs of coming to an end, with the Czech Republic delivering the world’s first interest-rate increase of 2020 last week to stem inflation and Hungary also mulling a shift.

Elsewhere, the emergence of the coronavirus is already hurting parts of the region, as well as exacerbating an industrial slump in Germany -- Europe’s biggest economy.

German Economy Looks Ill-Prepared for What May Be Coming in 2020

“Hopes for an industrial revival in the eurozone are slowly evaporating,” said Eliska Jelinkova, an analyst at Raiffeisenbank AS in Prague who cited “persisting uncertainties.”

Weaker growth could spell trouble for politicians across the region who are splashing public funds on everything from pensions to family benefits and state workers’ salaries.

Hungarian Prime Minister Viktor Orban uses prosperity created under his rule to justify his curbs on democracy and may announce more handouts in a state-of-the-nation speech this weekend.

For now, there are no signs of panic.

But Radek Spicar, vice president of the Czech Confederation of Industry, sums up the shift that’s taking place as eastern Europe’s slowdown alleviates a region-wide shortage of workers.

Companies “had a difficult time looking for employees last year -- this year it will be about getting orders,” he said.

(Updates with analyst in fifth paragraph.)

--With assistance from Dorota Bartyzel, Andras Gergely, Lenka Ponikelska and Irina Vilcu.

To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net, Andrew Langley, Michael Winfrey

For more articles like this, please visit us at bloomberg.com

©2020 Bloomberg L.P.

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