Eastern Europe Set for Strongest Economic Growth Since Crisis

By Paul Hannon Features Dow Jones Newswires

Central and southeastern European economies are on course for their strongest year of growth since the global financial crisis, in part due to a surge in wages and stronger demand from the recovering eurozone, according to forecasts from the European Bank for Reconstruction and Development.

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The 18 nations in the region, seven of which are eurozone members, suffered a sharp slowdown in the wake of the crisis and that was prolonged by the euro area's subsequent struggles with government debt and weak banks. As a consequence, for much of the past decade, the expected convergence between incomes in eastern and western Europe has stalled.

But there are signs it has resumed, with the EBRD significantly raising its growth forecast for 2017 and to a lesser degree, for 2018. It now expects Poland's economy to grow by 4.1% in 2017, having projected an expansion of 3.2% in May. It now expects Romania's economy to grow by 5.3% in 2017, having previously forecast an expansion of 4%.

In contrast to developed economies, the pickup in growth is driving and in turn being supported by, a jump in wages. According to Sergei Guriev, the-EBRD's chief economist, the region hasn't lost middle-income jobs to lower wage countries, unlike the U.S. and parts of western Europe.

"In our region it's somewhat different, especially in parts where we have demographic challenges and outflows of the young and skilled," he told The Wall Street Journal.

Many countries in the region have aging populations, while younger workers have moved to Germany, the U.K. and elsewhere in search of better jobs and higher pay. The EBRD warned that a scarcity of skilled workers could hold back growth over coming years.

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The EBRD also expects inflation rates to pick up across the region, while remaining below the targets set by its central banks. The National Bank of Romania raised one of its interest rates for the second-straight month Tuesday, but most banks have held back as they await the effects of the European Central Bank's January reduction in its bond-buying program.

The acceleration in growth in a region that was particularly hobbled by the financial crisis and its aftermath is another sign that the global economy is having a better year than many had expected.

However, the EBRD warned that pose threats to the region's prospects.

global developments

"The outlook is subject to numerous risks, including growing geopolitical tensions, persistent security threats, the growing appeal of populist anti-globalization policies in advanced economies and a high degree of concentration of sources of global growth, with China accounting for up to half of the total," it said.

The pickup in 2017 will go well beyond central and southeastern Europe, according to the EBRD, which invests in 37 countries from Morocco to Mongolia.

It sharply raised its growth forecast for Turkey to 5.1% from 2.6% in May and it now expects Russia to record a stronger return to growth after two years of contraction than it did in May. It now sees the economy growing by 1.8% in 2017 and 1.7% in 2018, but warned longer-term prospects are poor.

"Without significant reforms, long-term growth may remain at around 1% to 2% annually due to low investments, outdated production capacities and less favorable internal structural factors such as weak demographics, outdated infrastructure and unfavorable institutional characteristics of the economy," it said.

The EBRD stopped investing in Russia in 2014 as part of western sanctions following its annexation of Crimea.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

November 07, 2017 09:14 ET (14:14 GMT)