Friday, June 09, 2006

Eastern European Growth Accelerates Further

One of the reasons for the unusual strength of the Swedish economy during the first quarter -together with tax cuts and interest rate cuts- was that exports increased strongly during that period. And it increased particularly much to Eastern Europe. While total Swedish exports increased 20% in nominal non-seasonally adjusted terms during the first quarter, exports to Eastern Europe increased particularly much. Exports to Estonia for example, increased a full 64(!)% and exports to Slovakia increased 62%. Export growth to other Eastern European countries was somewhat more moderate, but still way above the overall average, with exports to Latvia increasing 28%, to Lithuania 50%, to Poland 27%, to the Czech Republic 32% and to Slovenia 29%. The only exception to this general tendency was the 3% decline in exports to Hungary.

So, Sweden have been enjoying windfall gains from Eastern Europe's boom. And while Sweden's 4.1% growth was impressive by historical Swedish and Western European standards, it is pathetic compared to Eastern Europe's growth.

A few days ago, Estonia reported that first quarter growth was a full 11.6% and before that Lithuania reported 8.8% growth. Latvia , we learned today had an incredible 13.1% growth rate.

As Bloomberg News reports, while the other new EU member states have slower growth than the Baltic states, they are still all growing a lot faster than Sweden and the other Western European countries (With the possible exceptions of Ireland and Luxembourg). The Czech Republic , for example, had 7.4% growth, Slovakia had 6.3% growth, Poland and Slovenia both had 5.1% growth while Hungary had 4.6% growth.

To some extent, these growth numbers are cyclical to their nature as monetary policy is far too loose. All except Poland, the Czech Republic and Hungary have fixed exchange rates versus the euro and for that reason is forced to adopt the ECB:s far too loose monetary policy. And as the Bloomberg News article states, Czech monetary policy is in some aspects even looser.

Still, it is clear that the underlying structural growth rate is far higher than in Western Europe too. Both because they have lower initial income and because they pursue sounder microeconomic policies with low taxes in general and low corporate income taxes in particular. So, we should expect Eastern Europe to continue to outperform.


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