East Europe Looks Within For Growth Drivers as Germany Stagnates

(Bloomberg) — The economies in the European Union’s east will be looking to domestic consumers for a lifeline this year as stagnation in Germany keeps factory orders faltering and delays a recovery. 

Growth data for the final quarter of 2023 due on Wednesday are expected to show Poland, the largest economy, slipping back into contraction and Hungary’s timid recovery losing some of its momentum. Romania will probably emerge as the best performer thanks to inflows of EU funds. 

With weakness in Germany bearing down on production, consumers are expected to drive economic recovery this year as inflation abates and labor markets remain tight. 

“The trends in the retail sector, as well as improving consumer confidence, make us believe that households’ spending will provide a positive contribution to the GDP this year,” said Katarzyna Rzentarzewska, an economist at Erste Group Bank AG in Vienna. “We see improving private consumption in 2024 as a key growth driver.”  

Fourth-quarter output in Poland is expected to decline 0.3% from the previous three-month period, while it probably expanded 0.7% in Romania and grew 0.3% in Hungary, according to analysts surveyed by Bloomberg. The Czech Republic will publish its data on March 1.

Growth is likely to remain moderate, at least in the first part of the year, as Germany enters a second post-pandemic year with expansion anticipated to turn out feeble at best. Europe’s biggest economy is the main trading partner for the countries of the EU’s east, accounting for between a fifth and a quarter of their exports.

Germany’s slowdown hit Hungary hardest last year. The economy registered three quarters of contraction as the EU cut access to funding due to rule of law breaches by the government of Prime Minister Viktor Orban.

“Weak external demand and narrowing industrial orders led to export running out of steam,” said Peter Virovacz, an economist at ING Bank Hungary. “On the other hand, domestic consumption is on a recovery path, thanks to rising real wages and falling interest rates.” 

–With assistance from Marton Kasnyik, Barbara Sladkowska and Irina Vilcu.

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