Economic growth in Europe, can you CEE it?

An interview with Mateusz Walewski, Senior Economist, PwC Poland

As growth in some advanced economies picks up, what are the growth prospects for the CEE economies?

The majority of CEE countries are small, relatively open and heavily dependent on exports for growth, notably to other EU countries. This makes them highly sensitive to developments in advanced economies.

The CEE economies can be grouped into three camps. The smaller economies of the Baltic States were most severely affected by the crisis (annual GDP fell by 15% in 2009), but they are also now bouncing back most strongly. I expect them to grow by around 3.5-4% per annum over the next 5 years.

Next are larger economies, like Bulgaria, Romania and Poland, which are export focused with a reasonably friendly business environment and good stock of human capital. I expect them to grow around 2-3% per annum over the next 5 years.

Finally, there are some problematic stragglers like Hungary (high public debt) and Slovenia (high private debt), which will struggle to reach 1.5% average growth over the next 5 years.

What sectors do you think will drive future growth in the CEE economies?

The CEE region has a clear advantage in the mid-tech sector. Countries like Poland and Slovakia are an important part of the supply chain for German manufacturing, but they are increasingly engineering their own brands and competing in the wider European market.

The IT sector has had a dynamic growth story, benefitting from a wellqualified and relatively cheap specialist local workforce. This is also one of the key sources of competitive advantage for the growing business processes outsourcing industry.

The CEE economies will continue to benefit from EU sponsored infrastructure investment, although in the future the focus will shift from transport to energy infrastructure.

How are local and international businesses reacting to the changes the CEE economies are experiencing?

One has to remember that CEE economies have been in a continuous state of change for more than 20 years.

International and local businesses have become used to continual reform over this period and executives say it has helped them to become both more agile and less fragile.

Most businesses are pro-reform as they recognise that increasing transparency and stronger public institutions will be positive for the CEE region over the mediumto long term.