Central Europe's Quiet Recovery

For better or worse, Central Europe’s emerging markets have largely been overlooked in recent years, as the economic troubles in Europe have led most analysts to turn their attention elsewhere in search of growth markets.  However, while economic growth rates in Central Europe cannot match those of Asia’s larger emerging markets, the region has managed to avoid the severe economic downturns that have occurred in other emerging markets such as Russia and Brazil.  Moreover, while much of this region suffered from the impact of the severe economic crises that have rocked Europe over the past eight years, most of the countries in the region are now recording healthy rates of growth.  The big question for Central Europe is whether or not the region can maintain its recent run of strong economic growth and which countries will drive this growth.

In recent years, most of Europe’s best-performing economies have been found among the four countries that make up Central Europe (Poland, Hungary, Slovakia and the Czech Republic).  Of these, Poland has been the region’s success story, as economic reforms and a large domestic market have allowed it to average better than 3% GDP growth for the past two decades.  Moreover, Poland was the only European economy not to fall into a recession during the turmoil of the past eight years.  Meanwhile, the Czech Republic, Hungary and Slovakia have managed to overcome their recent downturns to record healthy rates of growth over the past three years.  Across this region, wealth levels have risen significantly over the past two decades, allowing these four countries to significantly reduce the wealth gap with most West European countries.  However, shrinking populations are holding back domestic market growth and this is maintaining the region’s dependence upon exports for growth, leaving the region (apart from Poland) heavily exposed to West Europe and its slow-growing markets.

As wealth levels (and costs) rise in Central Europe, Southeast Europe is emerging as a key center of low-cost manufacturing for the European region.  However, the economic performance of this region’s leading economies has been mixed.  The region’s largest economy, Romania, has rebounded strongly from its severe recession that was the result of the collapse in demand in West Europe and that country has recently recorded some of the highest rates of economic growth in Europe.  In contrast, neighboring Bulgaria’s economic struggles continue as that country’s population continues to decline at a dramatic rate.  Meanwhile, the countries of the former Yugoslavia have struggled mightily in recent years, but countries such as Serbia and Croatia are poised to record higher rates of growth as foreign investment flows into those countries in the coming years.  Altogether, those countries that can attract foreign investment by improving their export competitiveness will be the ones that lead Southeast Europe’s economic expansion for the foreseeable future.

As Central and Southeast European countries are forecast to continue to realize dramatic declines in their working- and consuming-age populations, their overall potential for economic growth will be limited.  Nevertheless, rising purchasing power levels will prevent their domestic markets from falling too far.  Meanwhile, the economies of this region, particularly the region’s smaller and poorer economies, will remain dependent upon exports to the rest of Europe for much of their growth.  As such, Central and Southeast Europe need the economies of West Europe to improve in the years ahead, as that region will remain the primary market for Central and Southeast European exports.  When considering these domestic and external factors, it appears that economic growth rates in Central and Southeast Europe will be solid, if not spectacular, in the coming years, with the region’s larger economies (such as Poland and Romania) continuing to lead the way in terms of growth.  Given the state of so many of the world’s larger emerging markets, this outlook for steady growth will be welcome news for businesses and investors in search of more stable growth markets.