May 15, 2018 / 1:57 PM / 10 days ago

Strong wage gains propel Central Europe's economies forward

PRAGUE (Reuters) - Central Europe’s economies steamed ahead in the first quarter as rising wages in tightening labour markets propelled household spending, leading to faster-than-expected growth in Poland and Hungary and still strong expansion in the Czech Republic.

With unemployment in much of the region near record lows or at its the lowest in decades, wages have grown quickly, rising at double-digit rates in Hungary and 7 percent in the Czech Republic last year.

Climbing wages and low interest rates are driving economic expansion in the European Union’s eastern wing and is showing no signs of dropping off sharply even if it may ease back slightly.

“Wage growth should continue because of the tight labour market, companies have no other choice but to increase wages to keep their employees,” said Zoltan Arokszallasi, a CEE fixed income analyst at Erste Group Bank.

He said growth would be supported by EU funding and corporate investment, especially in Poland and the Czech Republic where firms are working to increase automation and boost productivity with labour remaining scarce.

Poland’s gross domestic product (GDP) grew 5.1 percent year-on-year in the quarter, accelerating from a 4.9 percent increase in the previous three-month period and above forecasts of 4.8 percent, preliminary estimates showed on Tuesday.

Others in the region reported slightly slower growth than previously, but rates remained strong.

In Hungary, growth came in at 4.4 percent in the first quarter, above forecasts for 4.1 percent. The Czech economy grew 4.5 percent, a touch slower than expected.

Romania’s economy expanded 4.0 percent on the year but was well short of expectations. Bulgaria grew by 3.5 percent year-on-year and car stalwart Slovakia posted a 3.6 percent rise.

The region is an important manufacturing and supply chain cog for western European firms, especially the car industry. The region’s economies rely on exports.

There are signs that some weakness could set in. German data out on Tuesday showed growth below expectations at 1.6 percent year-on-year in the quarter.

Nevertheless, the central European region outpaced the EU’s average growth of 2.4 percent last year and should lead the bloc again this year even with a slight slowdown looming.

“Economic cycles across CEE now look mature, and we expect that rising inflation and interest rates will increasingly weigh on domestic demand,” said Liam Carson, emerging Europe economist at Capital Economics.

Slovakia, a euro zone member, may stand out as its economy will be boosted by the launch of a Jaguar Land Rover factory this year, said Erste’s Arokszallasi.

The Czechs were the first in Europe to begin reversing years of ultra-loose monetary policy, starting with interest rate increases last year. The country’s central bank has lifted its main rate three times since last August to 0.75 percent.

With growth seen close to 4 percent in 2018, the Czech central bank is likely to raise rates again, as early as the third quarter according to a Reuters analyst poll.

Romania has also raised interest rates three times this year and is expecting to continue to tighten conditions.

Poland and Hungary, though, are seen keeping rock-bottom rates in place into 2019, fuelling a lending boom.

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Reporting by Jason Hovet; Additional reporting by Jan Lopatka in Prague, Marcin Goettig in Warsaw, Sandor Peto in Budapest, Luiza Ilie in Bucharest and Tatiana Jancarikova in Bratislava; Editing by Edmund blair

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