Eastern European Economies Excel

by Oct 27, 2017

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Central and eastern European (CEE) countries have shown some highly impressive economic growth this year when compared with other regions of the world and their western European peers. Many of these nations have been economically and culturally scarred by their pasts as members of the Soviet Union or under broader communist rule, but since then they have become attractive targets for foreign investment thanks to booming economic growth. For example, Romania’s economy is growing at an annual rate of 5.6%, while consensus pointed to 4.4%. This is also due to booming activity in in the Eurozone, the CEE’s key trading partner. Germany has historically been the main engine of growth in the EU, but it has been outstripped not only by Romania, but also Poland and the Czech Republic. Poland’s GDP grew by 4.4% vs Germany’s 2.1% in Q2 2017. The Warszawski Indeks Gieldowy (or WIG20 – Polands benchmark index) has also gained around 800 points this year alone, benefitting from favourable economic conditions. This gain comes despite ongoing political tensions between the European Union and Poland’s ruling Law and Justice party. The largest party in the government is a Christian conservative group that is notably eurosceptic, believing that EU directives (such as trying to force Poland to accept migrant quotas) are unacceptable. The bad blood between the two institutions has not turned away foreign capital though. MarketWatch reported in late August that thousands of bank jobs would be coming to Warsaw in the next 3 years, with JPMorgan Chase expected to employ 2,500 back-office operations staff in the city post-Brexit.  The IMF have revised up their forecast for CEE growth this year. Manufacturing has been a key driver here too. All of these economies are heavily reliant on the industry – exporting their production to the rest of the EU. In the Czech Republic, (which has the lowest unemployment rate in the EU) – about 35% of the Czech labor force is employed in manufacturing. This means that when the Eurozone is growing (as it has been this year), demand for goods made in CEE countries increases, causing them to grow further.  Indeed, in a report from 2016, consultancy firm Ernst & Young  noted the regions strength in this regard, saying “Foreign direct investment in Central and Eastern Europe had a strong momentum in 2016. Poland leaped to fifth place in the national ranking, attracting 256 projects, a hefty 21% increase. The Czech Republic secured 110 projects, up 53% and Hungary and Slovakia also achieved firm gains.” They added, “The region attracted nearly half of Europe’s FDI industrial projects. It has become a favorite among European car-makers, which locate assembly plants in countries such as Slovakia where they find committed, skilled and affordable employees.” The firm rated Central & Eastern Europe as the third most attractive region in the world for investment, as North America’s attractiveness levels off and China’s continues to fade, though this is likely to rebalance if President Xi Jinping makes good on his promises to establish China as a better place for foreigners to do business.  Many people still think of only Asia (Vietnam, India, Indonesia in particular) and Latin America (Brazil, Peru) as the hot emerging markets to consider investing in, but Eastern Europe is clearly no slouch and should not be underestimated. Stock prices across the region are generally still cheap and may offer lucrative returns with somewhat less risk than their developing economy counterparts elsewhere.   

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