The economies of Central and Eastern Europe (CEE)—Poland, the Czech Republic, Slovakia, Hungary and Romania—have a good deal in common but also areas where they diverge. All five countries receive good risk and business environment ratings from the trade credit insurer Coface and several were upgraded in the past year, contrary to the global trend.
All five were once communist-controlled countries with command economies that have since developed democratic institutions and market economies and have joined the European Union, resulting in booming growth rates in the earlier years of their emergence and nice growth rates since.
The United States is not a major trading partner with any of the five, which suggests there is room for growth for US exporters, especially since America and its products are viewed favorably by the locals. Substantial opportunities exist for US exporters in many sectors, but especially in pharmaceuticals and retail goods.
“There is good reason to hope for increased levels of trade with the US, both in terms of exports and imports,” said Gregor Sielewicz, the chief CEE economist at Coface.
Less than 30 years ago, political upheavals in Poland touched off the changes that swept the CEE countries, resulting in economic and political transformations. The economies emerged from decades of state control, industries were privatized and market-based competition was introduced. Living standards and GDPs rose significantly and accession to the European Union began with Poland’s in 2004. The Polish economy doubled in size since emerging from the shadow of communism to become the eighth-largest economy in the European Union. The other CEE countries experienced comparable economic successes on smaller scales.
Poland is by far the largest of the five, with a population of 38 million; Romania boasts 20 million people while the others are much smaller, with populations of 10 million or less. All five, but especially the Czech Republic and Slovakia, are within the German economic orbit and are affected by developments there. When the German economy hit a speed bump in 2014, the Czechs and Slovaks felt the jolt. Three of the five are Slavic in language and culture; Hungary and Romania are not, and Hungary, especially, is zealous about defending its ethnic identity.
One recent economic trend to be aware of is the emerging labor shortage in the region. That’s not great news for businesses that have invested there because wages have ticked upward, but it could be good news for US exporters because local workers have more money to spend. More good news: They want to buy products that enhance their health and upgrade their lifestyles.
One word of caution: These CEE countries are not emerging economies in the same sense as China or other high-growth economies in Africa or South America. Following an early boom these economies have now matured, but with a forecast 3.2-percent growth rate for this year from Coface, they beat western Europe and the United States in this area.
“I would call these countries, with the exception of Romania, success stories,” said Phillippe Belot, a banker who lived and worked in Poland for 18 years when he was with the European Bank for Reconstruction and Development. Romania started at a lower point than the others economically and its transition has been marred by corruption, according to Belot.
Hungary has become quite prosperous but is protective of its Magyar ethnicity. “They tend resist the influence of foreigners,” said Belot.
Sielewicz urges US companies in the pharmaceuticals sector and those that supply retail goods to check out the CEE countries. “On one hand the population is becoming wealthier and on the other the population is aging,” he explained. “People in these countries are willing to spend more on pharmaceuticals and on household goods.”
Bigger global retailers, including US brands, are coming to dominate the business in the CEE countries, as they are elsewhere, with their volume buys and lower margins and prices, while smaller companies are increasingly finding it difficult to compete. “The tight labor market and rising consumer sentiment means there is a growing retail sector in the CEE countries,” said Sielewicz. “There is reason to believe that retailers and their suppliers can continue to benefit from increasing household spending. In my view there is still some room for some new companies from the US to enter the market.”
The demographics in the CEE countries also favor US exporters that are able to supply pharmaceuticals and related products. “There is an increasing share of the population that is aging and that has meant more demand for pharmaceuticals as well as for products, equipment and services associated with medical treatments,” said Sielewicz.
Belot noted that many Americans are of Central and Eastern European background and suggested those with the language skills and the attachment to local culture might be the ideal candidates to take the first steps on behalf of companies looking to penetrate these markets. “The locals like to meet Americans with similar backgrounds to theirs,” he said. “A strong play for a US exporter would be to find Americans that have the right background to conquer those markets.”
Sielewicz advises US exporters new to the region to locate a strong local trading partner. “A new exporter will need good advice on local demand for products,” he said. “They will also need support and advice in terms of imports, customs and duties.”
Both Sielewicz and Belot agree that the outlook for these economies is quite positive for 2017 and into 2018. “With a growth rate of about three percent they are not great but not bad either,” said Belot. “They are doing better than most western countries and I wouldn’t be surprised if these countries see growth of up to four percent.” The EU has been pouring money into CEE to build up infrastructure and another such wave of investments is forthcoming.
“The economies have a strong consumer component,” Belot added, “and CEE consumers want to have a way of life which is more western. That makes for a great opportunity for US products in those countries.”