Economy 20 September 2017, 1:04pm

Erste expects highest CEE growth rate since 2008

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After the release of detailed GDP data for the second quarter, Erste Group has made a couple of upward revisions to its full-year GDP growth forecast for several Central and Eastern European economies. As a result, Erste’s 2017 GDP estimate for the CEE rose to 4.1%, from 3.7% previously.

The upward revisions made in view of detailed Q217 GDP data have moved Erste’s full-year GDP growth forecasts for the CEE region to 4.1% for this year, from 3.7% previously. That would be the highest growth rate since 2008.

“The question is whether CEE can continue to grow at such a pace in the coming years. At the moment, we see very firm support from household consumption, which benefits from improved labor market conditions and higher wage growth, while foreign demand is supportive as well," Erste said in a research note on Tuesday.

As they do not see any external imbalances emerging at this point and inflation remains well anchored, they expect central banks to take only slow steps towards the normalization of their monetary policies.

The revised 2017 GDP growth estimate is lower than the previous one only for Serbia, where Erste now sees 2.1% growth vs. 2.5% projected earlier. It has, however, raised its projections upward for the Czech Republic to 3.9% (from 2.9%), for Croatia to 3.0% (2.7%), for Poland to 4.1% (3.8%), for Romania to 5.5% (5.1%) and for Slovenia to 4.0% (3.7%).

Erste has maintained its previous growth estimates for Hungary at 3.7% and for Slovakia at 3.3%.

Looking at the details of the growth, domestic demand is the main driver everywhere, and in contrast to 2016, investment is again back in play, Erste’s economists said.

“This is mainly the effect of a strong pickup of EU-funded investments. High volatility is especially evidenced in Hungary, where the collapse of investments has been followed this year by extremely high growth in capital formation. Elsewhere, the pattern is more stable, but still strongly tied to EU funds."

The economists also noted that consumption seems to be a much more stable contributor to growth.

“Continuous increases in employment and hefty wage growth are raising the disposable incomes of households in the region, which can easily back the current level in consumption growth. As we expect wages to grow and employment levels to stay firm, we think that this development is very likely to continue in subsequent quarters," they added.