By Kuba Jaworowski
WARSAW, April 30 (Reuters) - Booming exports and eager
consumers in central Europe should help much of the region
weather the global storm better than mature economies in the
richer West.
The slide in the United States and the euro zone will
certainly be felt in ex-communist Europe, especially in
countries with budget or external deficit problems.
But three of the area's best performers -- Poland, Slovakia
and the Czech Republic -- are well insulated, analysts said.
High growth and relatively low labour costs make them
attractive to portfolio and greenfield investors and they are
also tapping billions of euros in European Union funds to help
them converge with the bloc's more developed states.
Mortgage lending, although booming, is mostly without the
complex derivative instruments that have caused hundreds of
billions of dollars in damage among Western banks.
Domestic demand also continues to drive growth without
creating a fragile credit bubble and the main market for the
region's soaring exports -- the euro zone -- appears, so far, to
have avoided the full impact of the U.S.-led slowdown.
"Emerging Europe looks much better placed to weather this
global slowdown better than it ever has," said emerging Europe
economist Neil Shearing from Capital Economics.
A Reuters poll this week showed analysts saw growth in the
United States braking to its slowest pace in over five years as
consumers cut spending and jobs vanish.
The EU's executive said on Monday growth in the 15 states
sharing the euro would slow to 1.7 percent this year.
It also cut its forecasts for central Europe's biggest
economies but still said growth in Poland and the Czech Republic
would stay close to five percent both this year and next.
"The effects of financial turmoil are foreseen to remain
limited due to ample liquidity in the market and strong demand
for housing supported by rising employment and wages," the
Commission said in a report on Poland.
It also said: "The Czech economy is likely to be less
exposed due to the focus of the banking sector on the retail
sector and the relatively low indebtedness of households."
The Slovaks have drawn billions of euros in foreign
investment to become an industry powerhouse. Now the mountainous
nation of 5.4 million leads the world in per capita car
production. It grew 10.6 percent last year and was seen slowing
like its neighbours, but only to 7.0 percent in 2008.
Poland, the biggest EU newcomer with 38 million people,
expects to attract 50 billion euros in foreign investment in
2008-2010 as well as 63 billion euros in EU funds, and although
some companies say they are being hurt by a strong zloty its
exports jumped by 29 percent in the first quarter.
Growth in Hungary, by contrast, is forecast to remain weak
after the government let its budget deficit balloon to the
highest level in the EU in recent years, analysts said.
INVESTMENT, CONSUMERS
In Western Europe, the auguries for consumers' spending are
bleak, with house price gloom in Britain expected to tighten
their grip on their wallets and French consumer confidence at
its lowest level in more than two decades.
Consumer confidence in central Europe has also dipped, but
rising wages as the countries converge -- their per capita gross
domestic production in terms of purchasing power parity ranges
from 55 to 82 percent of the euro zone average -- means Poles,
Slovaks and Czechs are splashing out on consumer goods.
The Poles and Slovaks saw blistering 15.7 and 16.6 percent
jumps in February retail sales, versus a 1.1 percent rise in the
biggest euro zone economy, Germany.
There have been signs of credit tightening. Asset swap
spreads on state bonds have jumped, following the worsening of
government credit in some EU countries.
Policy makers have also hiked rates across the region to
deal with the rising tide of global inflation, and analysts said
the potential vicious circle of rising wage demands driving
consumer prices ever higher remained a risk.
But their currencies are firming steadily. Poland's zloty
<PLN=> has risen more than 11 percent this year against the
euro. Slovakia, which is set to adopt the single European
currency in 2009, has seen its crown gain 4 percent.
"If the crisis hits the euro zone those currencies would
obviously be negatively affected but at the same time domestic
demand in those countries has been and is very strong, so they
look as a pretty safe bet," said senior FX strategist Henrik
Gullberg at Credit Agricole in London.
Not all countries have such a rosy outlook.
Those with large external deficits, such as the Baltics,
Bulgaria and Romania, will have a harder time -- the European
Commission expects Latvian growth to drop to 4.5 percent this
year from 10.3 percent in 2007 -- and analysts said no country
would fully withstand a more sustained global downturn.
"Countries like the Czech Republic, Poland and Slovakia will
be capable of creating growth on their own, but the longer the
downturn is... the more they will be affected," said Fitch
Ratings analyst David Heslam.
(Writing by Michael Winfrey; Editing by Gerrard Raven)
