New Europe Weekly

CEE competitiveness under pressure

Fri, May 9 2008, 15:36 GMT
by Danske Research Team

Danske Bank A/S


Most Central and Eastern European (CEE) countries have seen strong export growth since the EU enlargement of 2004 – driven by EU membership, but also stronger European growth. However, we are now beginning to see signs that export growth is coming under pressure not only from a slowdown in European growth, but also from erosion of CEE competitiveness. Even though wage costs are still low in CEE compared to Western Europe, costs have risen dramatically over particularly the last years, on the back of not only strong wage growth, but also a significant strengthening of most of the CEE currencies over the last couple of years. This is significantly raising wage costs in the CEE measured in foreign currency – for example in euros or dollars.

A good example is Poland where nominal wage growth has over the last year risen by more than 11% y/y. Measured in euros, wage growth over the last year has been higher than 20% y/y significantly outpacing inflation and productivity growth in Polish industry. A recent survey published by the Polish central bank showed that an increasing number of Polish companies are now citing the strength of the zloty as a key constraint on their expansion of production. Hence, the erosion of Polish competitiveness is now beginning to weigh on Polish growth. We are certain that the same is the case in most other CEE countries.

There is no doubt that the erosion of CEE competitiveness is having consequences and is likely to weigh on economic growth going forward. Furthermore, the erosion of competitiveness should also be a reminder to FX investors that it is not a given that the CEE currencies can continue to strengthen with the same kind of pace we have seen over the last year and the likelihood of a setback in currencies in the zloty and the Czech koruna clearly increases as CEE competitiveness is being eroded.

Published on  Fri, May 9 2008, 15:40 GMT

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