Eastern Europe: slowing growth?

Something other than Georgia for a change. Via the 8th Circle, here’s a recent article in the Economist about a possible economic downturn in Eastern Europe:

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 isn’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 investors’ 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 Out-of-date infrastructure, such as Poland’s notorious roads, is clogging trade.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.

Well… perhaps.

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.

This entry was posted in Economics and demography and tagged , by Douglas Muir. Bookmark the permalink.

About Douglas Muir

American with an Irish passport. Does development work for a big international donor. Has been living in Eastern Europe for the last six years -- first Serbia, then Romania, and now Armenia. Calls himself a Burkean conservative, which would be a liberal in Germany but an unhappy ex-Republican turned Democrat in the US. Husband of Claudia. Parent of Alan, David, Jacob and Leah. Likes birds. Writes Halfway Down The Danube. Writes Halfway Down The Danube.

6 thoughts on “Eastern Europe: slowing growth?

  1. Pingback: Is The Economist being lazy or negligent? « The 8th Circle

  2. I think if you compare 3-4% growth to other middle income countries, or the world economy, or even Africa, it is pretty underwhelming. I think these transition economies are more vulnerable then Western European ones, and their sources of growth are quite limited. I don’t think that the original article is that bad at all.

  3. @Daniel, I said 3% was “the worst performers”, with most between 4% and 5%.

    But let’s look in a little more detail. You can find the individual country reports at


    — scroll down a bit and you’ll notice that the EU as a whole is projected to grow at less than 2% this year.

    Let’s look at the four largest economies of the EU-10.


    2007 6.5%
    2008 5.3%


    2007 6.0%
    2008 6.3%

    Czech Republic

    2007 6.5%
    2006 4.7%


    2007 1.3%
    2008 1.9%

    So, we have one that’s completely tanking, and three that are chugging along. Other than Hungary, not one of the nine other “Eastern” EU members is anticipating growth of less than 3% next year, and only one other country is supposed to be under 4%. I don’t have the time or inclination to do a weighted average, but eyeballing the numbers it has to be a bit under 6% for 2007 and a bit over 5% for 2008.

    Growth between 5% and 6% is good by any standard. So, yeah, that bad.

    Doug M.

  4. Doug, I think you might be being too harsh on the article. I’m with Daniel, for different reasons.

    I’ve seen Economist doom-mongering; this isn’t it. “It has gone on splendidly for years, and the party isn’t quite finished yet … Inevitably, it could not last.” It follows with a list of /true/ factors that will cause growth rates to slow, some internal, some not, and points out that growth is still strong. It’s just slowed.

    This is true. Growth has slowed, and the superfast rates of the ’00s probably can’t go on much longer.

    Since it’s about the E.U., leaving out the non-E.U. countries doesn’t bother me in the slightest.

    The next paragraph points out the Balts special problems (at least two of them), but also clearly states that there hasn’t been any sign of contagion from the Baltic States.

    Then it discusses Poland. I don’t understand your objections. It makes a prediction that growth will slow (consistent with the article’s thesis) and gives some entirely valid reasons for this. Your problem is what, exactly? That the article didn’t discuss the Balassa-Samuelson effect? It did make it pretty clear that the effects that Poland is experiencing are not due to policy errors, but an inevitable consequence of export-led economic growth. Good things can’t go on forever. Given the effects seen in the article, I would be very surprised if Polish growth didn’t slow; in fact, you’d have to bet on an acceleration of TFP growth for it not to. I’m okay with the article’s analysis. Pretty good, actually, for an Economist piece.

    Next paragraph is blather, I admit, but you didn’t mention it.

    Hungary’s problem is then discussed, not as a slowdown like the other countries, but as a potential crash.

    Finally, it ends by pointing out that Bulgaria and Romania have been growing quickly. There the author expresses skepticism about how long they can keep it up without a firm analytic base.

    But everything else is fine. The tone is measured, the analytics are correct, the data is fine. Even the title and subheading are rather moderate. “The Party is Nearly Over: After a good run, Eastern Europe faces an economic slowdown.”

    For an informed reader who has been paying no attention to Eastern European economic developments, it’s not a bad summary at all. For an informed reader who has been paying some but-not-a-whole-lot of attention to the same issue, it’s also not a bad summary.

    Summary of the summary: Eastern Europe has been growing like gangbusters, most of the economies there are slowing down, here are some reasons to think that the slowdown might be permanent. Caveat Hungary on downside, Bulgaria and Romania on up. End.

    Your reaction seems driven by the fear that other readers might take the prose as more Chicken Littlish than it in fact comes across.

  5. Well, there’s at least one obvious mistake in the article.

    The strengthening of the zloty against the euro cannot be a reason why Poles are returning from Britain. On the other hand, the strengthening of the zloty against the pound probably may have something to do with it.

    (I don’t know the first damn thing about economic or financial affairs, so this is just stupid nit-picking, ha-ha. Yes, the article did mention Ireland in the beginning, but on that one sentence, it stated simply “Britain”, and did it in relation to the euro.)

    Anyway. I was exchanging money at Forex just on Saturday, and I certainly noticed myself that the zloty was visibly more expensive than a year ago.


    J. J.

  6. Not really shocked at Hungary’s dismal growth (or loss, considering inflation.) Their taxes, IIRC, are at least 50% at a time when many countries are slashing them to attract business. Oh well, they got territory to recover 🙂

Comments are closed.