Ex-communist Europe
Growth in eastern Europe
The roots of growth
Jul 14th 2010, 16:02 by P.D. AND E.L. | LONDON
FEW dispute that 2010 will be a year of economic growth in eastern Europe, ranging from continued prosperity in recession-free Poland to fragile shoots of prosperity farther north, east and south . But not everyone agrees why.Erste Group, a Vienna-based banking consortium, highlights increased household consumption in its latest briefing. Juraj Kotian, one of the bank's top economists, argues that the recession stoked saving by nervy households. The recovery will allow them to relax and start spending.
Given the strong deceleration of credit growth and reversal of net borrowing over the last two years, there is fundamentally less need for further adjustments in saving ratios in CEE countries, consumption will be strongly tied to the growth of disposable income, which we expect to pick up about 1-2.5% y/y in real terms in the region next year, providing support to GDP growth.
The exception is Romania, where higher inflation (due to the VAT increase) will bring real disposable incomes down 0.8% y/y next year. He continues:
We therefore expect the current purely export-led economic revival to become more balanced. Furthermore, sustainable saving ratios and net borrowing/lending ratios should make consumption growth in CEE less vulnerable in the coming years.
Others disagree. Bank Austria, part of the Italian group Unicredit, expects a two-speed recovery with countries such as Hungary and Lithuania in a far weaker positions than Poland or Turkey. It says no meaningful recovery in household demand is likely in the next quarter. The report has this rather nice chart
showing the gulf between rising industrial production (mainly stoked by exports) and flaccid household demand.
In the end, Erste is speculating whilst Unicredit is extrapolating. Both reports ultimately rely on increasing demand for CEE exports and if that doesn’t happen, perhaps because of a double-dip recession or because of new wobbles in the financial system, the pain will be felt quickly and recovery derailed.
In short, the region is not the master of its fate. Governments still have a huge advantage in labour costs 
(see chart below). But they need to keep their productivity edge by reforming public services (especially education) and modernising infrastructure. They also need to keep their labour markets flexible and raise labour-force participation. All those are necessary conditions for the leap in living standards needed to catch up western Europe. But they are not sufficient. Growth in the rich half of the continent is the best way for the poorer countries to catch up.
Eastern approaches deals with the economic, political, security and cultural aspects of the eastern half of the European continent. It incorporates the long-running "Europe.view" weekly column. The blog is named after the wartime memoirs of the British soldier Sir Fitzroy Maclean.
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the report says more about differentiation - Czech Republic with relatively high saving rate (no need of abrupt change) vs. Baltics with consumption and investments exceeding their incomes by 15% before the crisis. A similar picture was in Greece and Ireland... So in countries where households were net borrowers, consumption fell more than their disposable incomes because gross saving rates had to increase. Given already increased saving rates, consumption growth will be closer tied to growth of disposable income next year.
Poland bought the time through fiscal loosening, now they have to consolidate...
@ Victor_D
I fully agree with your comments that's why I emphasized that my opinions are based on the example of Poland, not on a bunch of CEE (or post-communist, if you like, countries).
The deeper you go, the more accurate picture you get.
Even Poland, my home country, seems to be divided on many issues which was clear during the recent presidential elections. There a Poland which is younger, liberal, opting for decentralized model with stronger local governments and another Poland which is more traditional, social who would prefer a strong central government. And the split is almost 50%/50% ;-)
I am so tired of this grouping. CEE - what the heck is it? "Central and Eastern Europe", a euphemism for Eastern Europe, which is (finally) becoming a somewhat politically incorrect label to use for the post-communist countries.
Unfortunately, it doesn't really changes anything. The real issue here is that this region is very diverse (economically, politically, culturally, demographically...) and it makes little sense to treat it as a bloc. (And having Turkey of all countries counted as a part of it is just insane.)
Maybe if the analysts finally started to see the differences between countries like the Czech Rep. (medium sized, low debt, very dependent on exports, especially to Germany, highly industrialized, high rate of foreign investment, comparably closer to Western Europe in terms of living standards than to some other CEE countries), Estonia (small, very low debt, services oriented, business friendly, well-governed, on road to adopting Euro), Hungary (less industrialized, heavily indebted, not as competitive as its neighbours), Slovakia (small, export driven economy, uses Euro) or Poland (large, economy driven by domestic consumption, lots of people working abroad), they'd finally start producing predictions that could actually at least partially reflect the reality.
Imagine a Czech bank produced a prediction of growth in Western Europe taken as a whole, lumping together everything from Portugal, through Spain, Italy, France, Britain, Germany, to Scandinavia, without really paying much attention to the diversity inside the region. It would be ridiculous and nobody would pay attention to it.
zet23's description of Poland well illustrates the limitations of this approach. What's true for Poland isn't true for many other CEE countries (especially points 2., 3. and 4.). The high entrepreneurship of "East Europeans" (gosh) is another myth based on experience with just one country.
the unit labor costs and the increase rate of the industrial production does not show a full picture of the problems faced by CEE economies.
A list (not exhaustive) of other important issues dampening the growth on the example of Poland
1.the composition of state budget expenditures. Here as much as 70% of the spend is fixed which means that the state is obliged by law to put aside fixed amounts of money no matter whether there is a boom or bust (fixed expenditures is paying back debt, army, healthcare, social insurance, welfare etc).
2. Public debt = 55% of GDP. Perhaps a far cry from Japan's or the UK's level but for a developing economy like Poland it is a significant burden.
3. Relatively high unemployment = 10% which is sort of artificially relieved by the Polish migration to the UK, Ireland etc. If they came back, the Polish labour market would be tighter.
4. Export based on low-capital investment products e.g. food. Rather than new technologies
5. Last but not least the Polish society is getting older, which is perhaps the single most important factor that will affect the growth long term, the consequence of this however will be obvious short term e.g. increasing amount of healthcare expenditures
To balance these negatives with a brigher light, the positive thing is a high enterpreneurship of Poles and other East Europeans who take risks starting their companies or learning skills abroad.