As Russia feels the pinch from slumping oil prices and the single-currency bloc struggles with stagnation, consumers in the east of the European Union are finding more money in their pockets.
That's down to lower prices, from the cost of filling up the car to outlays for the weekly shop. Poland's annual inflation numbers came in below zero for the entire second half of last year.
As their spending spurs business activity, the eastern European shoppers are also finding themselves in more stable jobs, in turn making them more willing to splash some more cash, according to economists from Goldman Sachs Group and Capital Economics. This positive cycle is a change from recent years, when a credit shortage and government austerity made companies more reluctant to hire.
"Domestic demand in the region has strengthened," William Jackson, an emerging-markets economist at Capital Economics in London, said by phone. "Labour markets are strengthening, unemployment rates are starting to fall and real wage growth has picked up. Despite all the talk of the deflation risks, so far it looks like low inflation, or deflation, boosted real wages in the region. Falling oil prices are also providing a further boost to household income."
The buoyancy in consumer spending is welcome news in a region that typically relies on exports to provide a lift to economic growth. Those foreign customers aren't helping right now: To the west, demand in euro-region countries, which buy a majority of the eastern EU nations' exports, is still sluggish. To the east, Russia is probably already in a recession, battered by the plunge in energy prices and western sanctions.
Purchasing managers' indexes released earlier this week showed strong economic momentum at the start of the year in the eastern part of the EU, exceeding that of the euro region as a whole.
This out-performance, helped significantly by perked-up consumer demand, might mean that Poland, the Czech Republic and Hungary will be able to widen their growth advantage over the euro region this year.
"Manufacturing employment continued to rise across the region," Magdalena Polan, a London-based economist at Goldman Sachs, wrote in an e-mailed note. "Together with sustained wage growth, this further supports the outlook for private consumption and our expectations of domestic demand being the key growth driver in 2015."
Bloomberg News, edited by ESM
