The party is nearly over
After a good run, Eastern Europe faces an economic slowdown
IT HAS gone on splendidly for years, and the party isnâ€™t quite finished yet. For a decade or more eastern Europe has benefited from exceptional (and mostly unforeseen) good fortune. Economic and political stability, including for ten countries membership of the European Union, has boosted investorsâ€™ confidence and cut borrowing costs. A big pool of cheap and diligent workers, along with the unleashing of entrepreneurial talents, has produced thriving new private businesses. In most countries, growth rates have been stellar (see chart).
Inevitably, it could not last. Wage costs are creeping up. Labour shortages are biting. Out-of-date infrastructure, such as Polandâ€™s notorious roads, is clogging trade. In several countries inflation is rising. And world markets, both for raising capital and for exporting, are looking tougher.
It’s kind of a crappy article. The scary-looking graphic omits several countries (Romania, Bulgaria, Lithuania) because they don’t fit the pattern; Romania’s growth has been accelerating, while the other two have been constant. It ignores the non-EU part of Eastern Europe, which — excluding Russia, but including Ukraine — is most of it. And even just focusing on the EU members, it fails to note that of the region’s three largest economies (Poland,Czech Republic, and Romania), two seem to be doing just fine.
And when it talks about Poland? Check this out:
In the biggest economy, Poland, things look better. Growth in the first quarter of 2008 was a sprightly 6.1% on a year earlier. Many Poles who left to work in Britain and Ireland are coming home, tempted by higher wages. Unemployment, which was 20% in 2003, has all but vanished in most parts of the country. But growth is now likely to slow, particularly if interest rates keep rising: they were 4% in 2007 and are 6% now, with another rise likely. That will strengthen the zloty further; it has risen against the euro. That may be a reason why Poles are returning from Britain, but it hurts Polish exporters.
So we have a bunch of good news — fast growth, rising wages, pretty much zero unemployment — but rising interest rates are strengthening the zloty! Oh horrors.
I dunno. I’ll freely confess that I slept through a lot of my Macroeconomics of Development class, but I seem to recall that rising interest rates are fairly common in a rapidly growing middle-income economy. (When you have fast growth, rising wages and low unemployment, it’s either that or allow inflation. There are pretty good historical reasons for the Polish central bank to choose this instead of that.) As for the zloty, again, absent a peg a rising currency is almost de rigeur. I realize there’s not much room for analysis in a ~500 word article, but this is really underwhelming.
Also… take a look at the graph again. Even the worst performers are still projected to grow around 3%, and most are between 4% and 5%. Those are still growth rates that would make a Western European Finance Minister weep with joy. Of the EU-8, only two seem like plausible candidates for a crash or a recession in the next two years; the others are looking at, at worst, growth slowing to “merely fast”.
Eastern Europe has problems, no question. The region as a whole is running a huge current account deficit. Interest rates are rising. Corruption is a problem, especially in the two newest members. Public investment, especially in infrastructure, lags badly. At least one economy — Hungary — looks like it could suffer a serious crash in the next couple of years. And looming over all is the demographic crisis… not an issue at the moment, but set to start contracting labor pools and raising dependent-to-worker ratios in just a few more years.
But still: we’re talking about a region that hasn’t seen a contraction, a recession, or even a slowdown in seven years. Where growth rates of 5% or 6% have been common, even normal. Where income, productivity and wages have been rising steadily for most of a decade. In the long term, of course growth rates are going to drop. That’s inevitable. The interesting questions are how and when… and at a macro level, whether (say) Romania will stabilize at an income level 50% of the EU average, or 75%, or more.
But meanwhile, the 00’s are shaping up as Eastern Europe’s golden decade, when they closed a big chunk of the gap with the EU-15.