Eastern European economies are growth frontrunners

Over the past year, the Eastern European economies have been showing a striking resilience to the growth slowdown in the euro area. In 2020, some real GDP growth deceleration is expected in Eastern Europe. However, relative to the rest of the EU, Eastern European countries are projected to be the economic growth champions. Their economic convergence path is hence set to continue.

Remarkable resilience

While euro area economic growth decelerated throughout 2019, the expansion in Eastern Europe has remained solid. Real GDP growth did slow in some countries but still remained mostly above potential. Such resilience seems striking, particularly in the context of a pronounced slowdown of the German economy, which is highly integrated with the region through trade and financial channels.

The main reason behind the remarkable resilience of the region has been the strong support of private consumption and consumer confidence, which in turn has been underpinned by favourable labour market developments. Low unemployment rates together with a large number of job vacancies – i.e. labour market tightness - drove wage growth up. And although inflation in the region is generally relatively high compared to the euro area, high wage growth figures meant a substantial increase in households’ purchasing power. In addition, government spending was an important growth driver in some of the region’s economies, in particular in Poland and Hungary. An acceleration in the use of EU funds was influenced by the nearing end of the EU Multiannual Financial Framework (2014-2020).

Looking ahead, real GDP growth prospects for the Eastern European region remain positive. Nonetheless, much will be determined by economic momentum in the euro area, in particular, in Germany. Despite the spectacular resilience seen so far, it would be naive to think that the region, which is so highly integrated into the German value chains would remain completely immune to long-lasting weakness in its key trade partner. However, German economic activity should gradually pick up again in 2020, and in the absence of additional significant external shocks, such as a hard Brexit, economic growth across the region should remain healthy and only moderately slower in 2020. Private consumption is expected to be the main growth driver.

 

European growth champions

Thus, real GDP growth in the region is projected to remain significantly above the expected growth rates in Central and Western Europe, despite the expected slowdown. The figure illustrates that Eastern European economies will remain the central pillar of European growth in 2020, as has been the case for several years now. The absolute growth frontrunners are expected to be Poland, Hungary, Bulgaria and Romania.

Convergence continues

This growth outperformance of the region compared to other EU countries implies that the countries’ macroeconomic convergence path is set to continue. After correcting for differences in purchasing power between countries, the level of GDP per capita of all the Eastern European countries is still below that of the EU15 average. There are large differences within the region though. The Czech Republic is most converged, while Bulgaria is the main laggard. By growing at a faster pace than the EU15 countries, the Eastern European economies will be able to catch up further.  

1 We define Eastern Europe as: Czech Republic, Slovakia, Hungary, Poland, Bulgaria, Romania, Slovenia, Croatia, Latvia, Lithuania and Estonia.

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