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Surging wages, spending kick central Europe's economies into higher gear

A block of new flats is built as the growing economy and low interest rates are fuelling a housing boom in Budapest, Hungary October 9, 2017. REUTERS/Bernadett Szabo

By Jason Hovet and Radu-Sorin Marinas

PRAGUE/BUCHAREST (Reuters) - Central and eastern Europe's economies kicked into higher gear in the third quarter with forecast-beating growth, as manufacturers thrived and tightening labour markets boosted wages and consumer spending.

The European Union's eastern half has been outpacing growth in the richer euro zone, moving the region further along a path towards catching up with its western neighbours -- a trend that Tuesday's preliminary estimates suggested would continue.

The data may also shift some of emerging Europe's central banks closer to raising interest rates, weeks after the European Central Bank extended the stimulus programme that underpins its ultra-loose policy to next September.

Romania's economy was the standout, with a near 9 percent year-on-year jump in output.

Czech year-on-year growth, at 5.0 percent, was the fastest in two years, while Poland expanded by 4.7 percent to mark the biggest gain since 2011.

Hungary grew by 3.6 percent, Slovakia 3.3 percent and Bulgaria 3.9 percent.

The growth surge, which is expected to peak this year, has been driven by rising demand for exports of cars, electronics and supply chain parts. Fast-falling unemployment is, in turn, driving wages higher and lifting households' spending.

That combination is also putting monetary authorities on alert over inflation after years of easy policy.

"We still think growth will slow in 2018, but today's data mean the risks to our forecasts lie to the upside," Capital Economics emerging Europe economist Liam Carson said.

"These strong GDP data support our view that interest rates will be hiked sooner and by more than most expect across the region."

Moving first to get ahead of price growth, the Czech central bank has already lifted its main rate - which had sat near zero since 2012 - to 0.5 percent with two hikes since August.

With Czech wages set to grow over 7 percent this year and next, according to central bank forecasts, analysts are expecting a steady stream of rate hikes in 2018 as well. (CZCBIR=ECI)

Poland may start hiking next year and Romania, too, is forecast to begin lifting its base rate, at 1.75 percent, by the end of the first quarter.


While private employers have lifted wages to get workers, governments have also been promising hefty pay rises and other benefits. Poland launched a child benefit programme in the first half of 2016 worth about 1 percent of GDP and an outgoing Czech government lifted state workers' pay by 10-15 percent this year.

Wage and pension hikes are also fuelling consumption in Romania, where third-quarter GDP growth surged to 8.8 percent, a full 3 percentage points above expectations.

Without a clear breakdown yet, analysts saw consumption as the main economic driver.

"(The Romanian central bank) will surely need to tighten policy," Ionut Dumitru, chief economist at Raiffeisen Bank in Bucharest, said. "The size of economic growth is way above potential, we’re probably discussing now clear signs of overheating."

ING estimated the data will help push full-year growth to above 7.0 percent before it slows next year due to labour shortages.

Faster growth in the euro zone, seen in third-quarter German data on Tuesday showing GDP rising 2.3 percent year-on-year, should continue to nurse Romania and others in central Europe through any slowdowns.

Growth in Poland, where unemployment is around the lowest level since its transition from communism in the early 1990s, may reach over 4 percent in 2017, while the Czech central bank sees its economy growing 4.5 percent this year before slowing to 3.4 percent in 2018.

The two countries are also seeing recovering investments adding another driver to growth following a lull in recent years connected to a drop in EU subsidy flows.

"The fast and pronounced revival of investments, strong household consumption and robust export growth will push this year's (Czech) GDP growth," the Czech Banking Association said.

(Reporting by Jason Hovet and Robert Muller in Prague, Krisztina Than in Budapest, and Marcin Goettig in Warsaw; editing by John Stonestreet)