Eastern Europe's Economies Grow Faster on European Union Entry

East European economic growth accelerated in the first quarter at a record pace, outstripping western Europe's growth as European Union entry boosted exports and investment increased salaries and consumer spending.

Growth in the Czech Republic was a record 7.4 percent, Latvia reported 13.1 percent expansion, the EU's fastest, Slovenian growth accelerated to 5.1 percent and Hungary's gross domestic product was 4.6 percent higher than a year ago, the statistics offices of the countries said today. Slovakia's growth was 6.3 percent and Poland's 5.1 percent.

The former Soviet Bloc nations have benefited as trade barriers crumbled following 2004 EU membership, the EU pumped in funds for highways and railroads and foreign companies invested more than $250 billion. General Electric Co. and PSA Peugeot Citroen are among scores of companies that moved east to build plants, creating jobs, pushing up wages and igniting a consumer spending boom that is underpinning growth in the region. ``We saw an immediate impact when the barriers fell,'' said Jan Cermak, an economist at the Prague unit of KBC Groep NV. ``EU membership is definitely a crucial factor for long-term investors.''

The economies of the 10 newest EU members grew an average 4.4 percent last year, compared with 1.3 percent in the 12 countries sharing the euro. The euro region grew 1.9 percent in the first quarter. Growth of the $130 billion Czech economy, the second- largest among the 10 newest EU members, accelerated from 6.9 percent in the fourth quarter last year to the highest level since the country's 1993 separation from Slovakia.

Wage Growth

In Latvia, average net wages rose an annual 19.2 percent in the first quarter of 2006, the country's statistical office said on June 2. In the Czech Republic, nominal wages are up 13 percent since March 2004, though the average salary of $847 a month is far below the average wage of more than $4,000 a month in Germany.

New factories built by foreign investors such as Peugeot and Toyota, helped spur exports after the country joined the EU two years ago, while companies such as Volkswagen's Skoda Auto AS invested in boosting output. Export-driven growth and the koruna's strength are keeping domestic inflation at bay and allowing Czechs to have the lowest borrowing costs in the EU, along with Sweden.

``The economy is running at full speed,'' said David Navratil, an economist at Ceska Sporitelna AS in Prague. Investment growth ``boosts production capacities, allowing the economy to grow fast without the danger of imbalances such as excessive import growth and a substantial acceleration of inflation.''

Hungarian Growth

Hungary today revised its first-quarter economic growth rate to 4.6 percent from a preliminary 4.5 percent. Expansion accelerated from 4.3 percent, driven by west European demand for the products of manufacturers including Suzuki Motor Corp.

The $104 billion economy, the region's third-largest, also benefited from rising investments, including government spending on highway construction. ``The significant rise in manufacturing industry performance was the primary driver of economic growth from the production side,'' the statistics office said in its statement. ``The exports of products and services and investments grew the most dynamically on the GDP use side.''

Latvia's $16.7 billion economy rose faster than the 10.5 percent pace in the fourth quarter, as surging consumer demand and increases in commercial real-estate services gave impetus to economic expansion, pushing it to a risk of overheating. ``This was something very unexpected,'' said Andris Vilks, the chief economist at SEB Unibanka, Latvia's second-biggest lender, today in a phone interview. The report can be used ``to discuss overheating in Latvia because this figure is so high.''

Downside to Growth

The downside of rapid growth has been accelerating inflation in some eastern European countries, including the Baltic states, which may hurt their chances of adopting the euro any time soon.

Euro candidates need to keep inflation within 1.5 percentage points of the 12-month average of the EU's three lowest inflation rates and meet targets for deficits, debt and currency stability. Inflation in eastern Europe averaged 3.3 percent last year, compared with 1.2 percent in the euro zone. Average annual wage growth was as high as 9.2 percent in Slovakia and 8.7 percent in Hungary last year.

The only eastern European country that's been accepted to use the euro is Slovenia, where growth has averaged 4.05 percent in the past two years and inflation has been kept in check. The country's growth rate rose to 5.1 percent in the first quarter from 3.7 percent in the previous three-month period.

The effects of EU expansion reach beyond its borders, with accelerating growth in Bulgaria and Romania, the Balkan countries next in line to join. Romania's economy expanded an annual 6.9 percent in the first quarter, led by a boom in consumption and growth in the financial services and construction industries. Bulgaria's GDP grew an annual 5.5 percent in the fourth quarter on rising investment and consumer demand.
Bloomberg