“The speed and scale of Europe’s economic recovery has taken almost everyone by surprise,” says Simon Nixon in The Wall Street Journal. And “nowhere has the turnaround been more impressive than in central and eastern Europe [CEE].” In the third quarter, Romania expanded by 8.6% year-on-year. The Czech economy grew by 5%; Poland’s by 4.7%, the fastest pace since 2011. It’s all a far cry from the deep recessions and years of austerity that followed the bursting of bubbles blown up by external credit when the global banking crisis hit.
The region depends on exports to the single currency area, so the eurozone growth bounce has stimulated demand. There should be plenty more momentum where that came from. Germany’s Ifo business confidence indicator has just reached a new all-time high, while the eurozone PMI index covering both manufacturing and services has just reached a fresh six-year high. Emerging European heavyweight Russia is rebounding from the nasty recession caused by the oil price slump in 2014.
The cheer has spread to domestic markets in CEE as unemployment has gradually eased, while government spending has also fuelled confidence. Regional wages have risen by 4.5% a year since 2014, according to the IMF. Strong economic and wage growth suggest that “interest rates will be hiked sooner and by more than most expect across the region”, as Liam Carson of Capital Economics points out on Bloomberg. But that seems unlikely to snuff out the rally in regional equities. Global growth and liquidity remain auspicious and local equities are reasonable enough to entice bargain-hunters. According to StarCapital.de, emerging Europe is on a cyclically adjusted p/e of 8.9, with Russia and the Czech Republic looking enticing at 5.6 and 9.3 respectively.