At first glance, eastern Europe looks in solid shape, says The Economist. The ten countries that joined the EU in 2004 boast growing economies, shrinking budget deficits and falling unemployment. Eurozone members Estonia, Slovakia and Slovenia “are contributors to the bail-outs, not supplicants”. Longer-term, there is scope for further rapid growth as the region catches up with the west.
But the immediate outlook is hardly encouraging. GDP figures for the second quarter were disappointing. Hungary flatlined compared to the first quarter and expanded by just 1.5% year-on-year. In the Czech Republic, growth slowed sharply to an annual 2.4%. Of Czech GDP, 70% stems from exports, and Germany, where growth has slowed to a crawl, is central Europe’s biggest trading partner. “Sooner or later, if Germany catches a cold, all of [eastern Europe] will start sneezing,” says FT.com’s Ivana Kottasova.
Exposure to the western European downturn is just one reason emerging Europe looks more vulnerable to the darkening global outlook than other developing markets, says Capital Economics. Eastern Europe is more dependent on foreign capital to finance spending and roll over external debt. During times of risk aversion capital flows dwindle or reverse. Budget deficits are high, so there is limited scope for stimulus.
“The macroeconomic policy locker looks bare,” says The Economist. Lowering interest rates would weaken exchange rates and hit house- holds who have borrowed in foreign currencies, a particular problem in Hungary and Poland. Swiss franc-denominated debt is equivalent to 15%-20% of GDP in Hungary, and just over 10% of GDP in Poland, says Capital Economics. With loans increasingly expensive to service as regional currencies have fallen against the franc, recent currency moves have “basically [amounted to] a monetary tightening in these countries”, says Lars Christensen of Danske Bank. That bodes ill for consumption.
The region’s biggest economy, Russia, remains highly dependent on the price of oil. With global growth slowing it seems set for further declines. So eastern European stocks, which have fallen further than other emerging markets over the summer, are likely to keep lagging.