EU’s East Succumbs to Chills Afflicting Global Economy

Jasmina Kuzmanovic and Andra Timu
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EU’s East Succumbs to Chills Afflicting Global Economy

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The European Union’s eastern members are succumbing to the slowdown gripping the global economy.

The region, in focus on the anniversary of communism’s collapse for its rapid development over the past three decades, has held up well as key export destinations including Germany struggled. But the nearby weakness is spreading.

Third-quarter growth eased more than analysts predicted in Poland, Romania, the Czech Republic and Slovakia, though expansion in Hungary and Bulgaria inched up.

A report this month by the European Bank for Reconstruction and Development cited a softer economic outlook globally, U.S.-Chinese trade tensions and a contraction in world automobile production as reasons eastern European nations will lose pace.

The region’s “most significant trading partners are facing cooling economic trends that might spill over to our economies,” said Fabris Perusko, chief executive officer of Fortenova Grupa d.d., a retail, food production and agriculture conglomerate based in Croatia.

So far, consumers have stepped in to offset waning demand abroad. Pre-election spending in Poland, plus tax cuts and minimum-wage hikes in Romania, have helped. Central banks in the region have been more concerned with handling the resulting inflation than mimicking the dovish turn in the world’s major economies.

But that’s changing. Benchmark interest rates are now on hold across most of the region and Poland is more inclined to cut than raise. Meanwhile, labor shortages have worsened -- boosting wages in the short term but threatening to crimp expansion further down the line.

Citing deteriorating economic conditions globally, Germany’s Robert Bosch Stiftung GmbH recently shelved the construction of a plant to manufacture washing machines in western Romania.

The company, which invested 120 million euros ($130 million) in the country in 2018, said by email that it “considers it can satisfy current demand with existing production capacity and doesn’t see the need for new production capacities in Europe.”

In Romania itself, Bosch “expects moderate growth in all sectors of activity” this year.

Optimists point to a potential trade truce between Washington and Beijing and the fact Germany avoided a recession. They say eastern Europe’s latest gross domestic product numbers -- while slower -- are nevertheless solid.

But manufacturing remains in the doldrums in the Czech Republic and Poland, where the monthly index hit its lowest level in at least three years last month. London-based Capital Economics warns that economic “growth will slow more sharply than most expect next year.”

In the Czech Republic, domestic demand remains “very strong,” but export-led manufacturing has probably entered moderate contraction, according to Tomas Spurny, chief executive officer at Moneta Money Bank AS.

“Our view is very cautious on the economy,” Spurny said last week. “I’d say the glass is half-empty.”

(Updates with Poland in third paragraph.)

--With assistance from Krystof Chamonikolas.

To contact the reporters on this story: Jasmina Kuzmanovic in Zagreb at jkuzmanovic@bloomberg.net;Andra Timu in Bucharest at atimu@bloomberg.net

To contact the editors responsible for this story: Andrea Dudik at adudik@bloomberg.net, Andrew Langley

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