Features

Emerging Europe “is well and truly off the boil”

Emerging Europe is having tough time. Regional year-on-year GDP growth slowed to 1.3% in the fourth quarter, and the MSCI Eastern Europe index slipped by 5% last year.

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The Romanian leu has been the worst-performing emerging-market currencythis year, say Yumi Teso andAline Oyamada on Bloomberg. The currency has come under pressure from Romania's widening current-account deficit and concern about new taxes on banks and energy companies that were introduced to address the deficit. Last December, when these measures were first announced, the Bucharest Stock Exchange index tumbled some 12%.

The sinking leu has prompted declines in other regional currencies, reminding investors that emerging Europe has well and truly come off the boil. Regional year-on-year GDP growth slowed to 1.3% in the fourth quarter, reckons Capital Economics. This is partly due to Turkey's recession following its credit bubble. But central Europe (Czech Republic, Poland, Romania, Slovakia and Hungary) is losing momentum too. The trouble is that the region depends on western Europe: almost two thirds of the value of its exports goesto the rest of the EU.

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The eurozone's soft patch that began in the late summer has extended over half a year, notes the Financial Times. German manufacturing output has contracted, and the eurozone's economic growth was close to zero at the end of last year.

Capital Economics expects GDP growth of 2.8% and 2.3% in the Czech Republic and Hungary respectively for 2019, down from 4.5% and 4% in 2017. Poland's economy continued to expand at a "robust" 5% year-on-year at the start of the fourth quarter in 2018, however. Its large domestic market means it is less dependent on exports than its neighbours. But Poland's relative dynamism may not temper the regional equity market decline: the MSCI Eastern Europe index slipped by 5% last year.

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