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The former communist states of eastern and central Europe have earned a reputation as the offshoring centres of choice for western European car manufacturers and other industrial groups since their accession to the EU in the mid-2000s, driving a dramatic upsurge in their exports.

Yet several of these countries are now seeing their trade balances turn negative as surging imports start to catch up with, and in some cases overwhelm, goods exports.

Romania has long had a trade deficit in goods, but it has now widened out to a five-year high of 6.5 per cent of gross domestic product, according to figures from Bank of America Merrill Lynch and Haver Analytics.

Poland is also within a whisker of slipping into a balance of trade deficit, while Hungary’s surplus has halved over the past year, leading Mai Doan, central and eastern European economist at BofA, to fear it could be “wiped out” entirely this year.

Of the four CEE countries Ms Doan covers, only the Czech Republic has a solid trade surplus. As with its regional peers, though, even in the Czech Republic goods imports are growing faster than exports, as the first chart shows.

“We are slightly worried about the trend that is under way,” said William Jackson, senior emerging market economist at Capital Economics, a consultancy. “We wouldn’t want to see wider trade and current account deficits build up in these countries because it would signal a reliance on foreign capital and mean potentially weaker currencies. It’s something to watch.”

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In some ways, eastern European states are victims of their own success. The region has generated strong economic growth as it has been integrated into western European, particularly German, supply chains.

Romania’s economy expanded 6.8 per cent last year, according to estimates from Consensus Forecasts, its fastest rate since 2008, while Polish growth hit a six-year high of 4.6 per cent, narrowly ahead of expected growth of 4.4 per cent in the Czech Republic and 3.9 per cent in Hungary.

Unemployment has fallen to its lowest levels since at least the early 1990s, and as labour markets tighten, wages are rising at 6-7 per cent and economic sentiment indicators have hit 10-year highs, yet monetary and fiscal policy still remains loose.

Unsurprisingly, the region is now sucking in an unprecedented volume of imports. In Hungary, the year-on-year growth rate in goods imports in volume terms has topped 12 per cent in recent months, according to BofA’s data, exceeded 8 per cent in Poland and Romania and hit 7 per cent in the Czech Republic.

In all four countries, export growth has continued at a robust rate, meaning the deterioration in trade positions is stemming purely from the export side of the equation.

“They are all doing very well on the export side, but the stimulus from both monetary and fiscal policy to various degrees is now leading to higher consumption and pulling in imports,” said Ms Doan.

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“Exports have done pretty well recently, growing at 6-7 per cent over the last few years, but we are increasingly seeing growth in domestic demand leak into imports and cause the trade balances to deteriorate,” said Mr Jackson.

The situation is most serious in Romania, which Ms Doan believed was “overheating”, with consumption growth averaging 9 per cent last year. Mr Jackson also said it was the CEE country Capital Economics was “most worried about”.

As the second chart shows, the country’s current account balance has steadily deteriorated in the past three years, thanks to an increase in its goods deficit and a reversal of its once-positive income balance.

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In Poland, the goods balance is virtually zero, despite oil imports accounting for a much smaller share of GDP than in the period up to 2013. The longstanding current account deficit is steadily being eroded by strong growth in services trade, however, with this sector now running a surplus of almost 4 per cent of GDP, double the level of 2013, as depicted in the third chart.

Hungary still has a goods surplus of 2.3 per cent of GDP, as the fourth chart shows, but given that this has more than halved from 4.7 per cent 15 months earlier, and wage growth hit 13 per cent year on year in December, Ms Doan feared this surplus was in peril.

“Hungary’s underlying performance compares unfavourably with the Czech Republic and Poland despite similar private consumption growth in the past year,” she said.

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“If Hungary’s imports continue to outgrow exports at the current pace, the trade surplus could be wiped out this year. This scenario does not seem unrealistic for 2018 considering consumption and investments will be at [their] cycle peak.”

Despite the strong wage growth, the Hungarian central bank has not taken steps to stop the party, holding its three-month deposit rate at a record low of 0.9 per cent and its overnight rate at -0.15 per cent.

Mr Jackson said this was symptomatic of countries across the region that want to prevent their currencies appreciating in order to maintain export competitiveness.

“Our sense is particularly in Hungary the central bank has been undertaking a range of measures to loosen policy at what is the wrong point in the economic cycle,” he said.

In contrast, the Czech Republic has managed to maintain a solid goods surplus of 5 per cent of GDP. Its broader current account surplus is nearer 1 per cent, however, as (alongside a modest services surplus) it has an income deficit of 6.2 per cent of GDP, as illustrated in the final chart.

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All of the quartet now run consistent deficits on their income account, something Ms Doan viewed as “structural”, given the “massive” inflows of foreign direct investment since they joined the EU.

She argued these flows were “not as bad as they look”, given that a lot of the dividends and profit streams thrown off by FDI-funded projects are reinvested within the country, while outflows mean “corporations in central and eastern Europe are making money and can pay their parents”.

“They are larger when the economy is growing faster,” she added.


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