Eastern European states boosted by German upswing

East European economies strengthened from a year earlier in the second quarter on increasing demand for their cars and electronic goods in western Europe. The Czech Republic, the largest eastern economy to report gross domestic product (GDP) last week, posted 2.2 percent annual growth compared with 1.1 percent in the previous period. Hungary’s GDP expanded 1 percent, after a 0.1 percent increase in the first quarter. Euro-member Slovakia had the fastest growth in the region at 4.6 percent, slowing from 4.8 percent. Germany’s economy, the region’s largest trading partner, expanded in the second quarter at the fastest pace since reunification two decades ago, as the global recovery boosted its own exports and companies stepped up investment. Eastern Europe’s recovery may slow in the second half because consumer demand is constrained by unemployment and planned budget cuts. «There is a decent V-shaped recovery in industry that’s now under way,» said Neil Shearing, a London-based senior economist at Capital Economics. «The key driver in the industrial recovery has been the resurgence seen in German industry.» Romania said the pace of its economic decline slowed to an annual 0.5 percent in the second quarter, after a 2.6 percent contraction in the previous period. Bulgaria said GDP shrank 1.5 percent after a 3.6 percent decline in the first quarter. Earlier this month, Estonia reported that its economy grew 3.5 percent from a year earlier, the first annual expansion in two-and-a-half years. Latvia said August 9 that its economy shrank 3 percent, the slowest contraction in two years. The Czech Republic, Hungary and Slovakia, home to factories owned by Volkswagen AG and Samsung Electronics Co, elected new governments this year after the global slowdown triggered their deepest recessions since the end of communism two decades ago. All three face EU demands to cut the budget deficits that swelled during the crisis. The Czech economy gained from rising exports, which account for about 70 percent of GDP. The country had an 18th consecutive trade surplus in June, with exports rising 19 percent from a year earlier. Skoda Auto, Volkswagen’s Czech unit and the country’s largest exporter, sold 15 percent more cars in the first half of the year than a year ago. «Germany did very well in the second quarter, which is our main trading partner,» said Jiri Skop, an analyst at Komercni Banka AS, the Czech unit of Societe Generale SA. «Industrial production driven by export sectors saw solid growth and, after a very bad first quarter, construction also improved.» In Hungary, the first European Union member to get an International Monetary Fund-led bailout in 2008, quarter-over-quarter growth stagnated as rising exports failed to compensate for austerity measures that stifled domestic demand. «While exports and consequently industrial production enjoy healthy foreign demand, household consumption and investments very likely contracted further,» Janos Samu, an economist at Concorde Securities in Budapest, said in an e-mail. Prime Minister Viktor Orban, elected on a pro-growth platform in April, has resisted pressure from the International Monetary Fund and EU to honor the previous government’s pledge to reduce the budget deficit to under 3 percent of GDP next year. The IMF and EU, which provided the bulk of a 20-billion-euro bailout in 2008, suspended their review of the program last month after the government refused to agree to further budget cuts. «All these countries will continue to face significant headwinds going forward: the Czech Republic from the lack of domestic demand, Hungary from financial market uncertainty and Romania from additional fiscal tightening,» London-based analysts at BNP Paribas SA wrote in a report to clients. The region’s reliance on exports may mean the recovery will weaken in the second half because it will take time for the domestic demand to revive, said Shearing of Capital Economics. «It’s going to take a lot for that industrial-led recovery to spill over into more sustainable domestic-focused industries and sectors,» he said. «And we have doubts whether German industrial recovery can continue at its current pace.» (Bloomberg)