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28 I Cover story bne November 2017
As bne IntelliNews reported in its cover story “China Rising,” China’s One Belt, One Road (OBOR) project that is now rapidly gathering momentum will only catalyse this process – which is the raison d’etre of the project in the first place. And Chinese trade is already making itself felt in Central Europe and to an even larger extent in Southeastern Europe.
Turning the wheels of industry
Industrial production is also flourishing as the wheels of industry start to turn faster across all of emerging Europe,
not just CEE. In July 2017, the volume of industrial production in Europe and Cen- tral Asia (ECA) was 4.2% above its level
a year earlier, which is well above the annual average 1.5% growth since 2000, according to the World Bank. The Baltics have done especially well with industrial production rising across the board to over 10% in Lithuania and Latvia.
Industrial growth in CEE is still lower than in China, where industrial production has accelerated by 6.2% over the last 12 months (which is just half China’s average annual growth rate since 2000), but above the rate in the rest of the world.
Low unemployment creates
labour shortage
All this success is bringing its own prob- lems: there is already talk of “overheating” in several economies as record low unem- ployment is leading to labour shortages and pushing up wages that could start to undo Central Europe’s low-cost manufac- turing model, the source of its success.
In Slovakia production at the three main carmakers – VW, Peugeot Citroën owner PSA and Kia – has increased fivefold
in the past decade to more than 1mn vehicles a year, according to the Slovak government’s investment arm Sario.
This year Porsche will move its entire production to the VW plant outside of Bratislava, making the first Porsche ever to be entirely assembled outside of Germany.
The problem is that these companies are increasingly struggling to find workers. Skoda recently confirmed that VW was
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in talks with the government about moving its Czech production back to Germany because of the problems (see related piece in SE section “BUCHAREST BLOG - Southeast Europe steps up its FDI challenge”).
Unemployment is low and falling in almost all the Central European states and several Eastern European states too; Russia currently has record-breaking unemployment rate of only 4.9%. Hungary’s employment levels hit historic lows surpassing the EU average for the first time this summer as unemployment dropped to near 4%. Czech unemploy- ment is at 3.8% – its lowest level in more than a decade. In Lithuania, unemploy-
The highest increase in Slovakia’s aver- age nominal monthly wage was in the transportation and storage sector, where it soared by 8.1% to €905, the Statisti- cal Office of the Slovak Republic said. This was followed by food and beverage service activities (up 7.4% to €433), retail trade (up 7.3% to €687) and the sale and repair of motor vehicles (up 6.6% to €975). Wage growth in the industrial sec- tor was a slightly more modest at 5.9%, reaching €1,020 per month. But the story is repeated pretty much across the board.
Inflation
Economic overheating is already visible in the rising inflation rates in many countries. The labour shortages and
“Growth is strong in all the Central European countries and accelerating in the three Baltic countries”
ment will be 7% in 2017 before falling further to 6.5% in 2018. In Latvia, the joblessness rate is expected to fall to 9% in 2017 and 8.7% in 2018. The excep- tion to the trend is Estonia, where the government’s labour market reforms are expected to push the unemployment rate up to 8.4% in 2017 and 9% in 2018.
Wage growth
The lack of labour is sending wages soaring. Hungarian gross wages grew at the fastest pace in more than a decade, up 13.2% in August, to stand at HUF292,400 (€949), statistics office KSH reported
in its preliminary report on October 19. The rise in wages – which remain below the CEE average – is partially due to strong demand for skilled labour, said the Economy Ministry.
All the Visegrad 4 states are seeing sharp increases in wages as they finally come into their economic own. Slovakia is already experiencing intense wage pres- sure that is hurting its biggest foreign investors, including in its key auto manufacturing sector, leaving the likes of Jaguar Land Rover struggling to fill vacancies.
rising wages are pushing up inflation to uncomfortable levels especially in the Baltic countries, which are also the fastest growing.
This year the Baltics will see the highest rates of inflation in the Eurozone,
with 3.8% expected for Estonia, 3.5% for Lithuania and 3% for Latvia.
Lithuania is in the worst shape and
saw inflation surge to a six-year high in September as the consumer price index (CPI) surged to 4.8% y/y, according
to Statistics Lithuania .The Septem-
ber reading – the fastest annual price growth since mid-2011 – extends the surge in the Lithuanian CPI that is part of a regional phenomenon that is affect- ing all of Central Europe. Even if price growth is expected to cool somewhat in 2018, the Baltics will still see the highest inflation growth in the Eurozone next year, says the World Bank.
What next?
Central Europe is clearly reaching a tip- ping point. The Great Recession has come to an end and these countries are still mak- ing use of the their low-wage competitive