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WRAPUP 1-East EU growth surges in Q3 on exports

By Michael Winfrey PRAGUE, Nov 12 (Reuters) - A German-backed manufacturing and export revival in emerging central Europe lifted growth above expectations in the third quarter, and the momentum should allow some countries to avoid a previously expected year-end slowdown. The open and export-heavy economies of Slovakia, the Czech Republic and Hungary beat analysts' forecasts for July-September growth, mainly on double-digit jumps in industrial output tied to their key role in supplying a German exports surge to Asia. Friday's data follow signs of a small pickup in household spending in those countries. If sustained, that could signal growth in industry could be feeding domestic demand, which economists say would be the key turning point to recovery. But it also indicates a two-speed recovery is underway, as the countries on the EU's Baltic and Balkan fringes that had to raise taxes and slash spending at the height of the crisis still suffer from high unemployment, lower wages, and weak demand. "Everything's surprising on the upside. The Czech Republic, Slovakia and Hungary expanded more than we expected, while Romania didn't contract as much as we had expected," said Neil Shearing, an economist at London-based Capital Economics. "Industry remains the key driver particularly. That's down to strong ties with industry in Germany." The Czech Republic led the way with growth of 1.1 percent on a quarterly basis and 3.0 percent from a year earlier. It eclipsed median forecasts in a Reuters poll that had expected rises of 0.6 and 2.5 percent. Hungary grew by an annual 1.6 percent, beating market forecasts of 1.1 percent. It was helped by a lower base and a pickup in household consumption., which expanded for the first time since early 2007. Romania also beat expectations, but only by shrinking a less-than-expected 0.7 percent quarter-on-quarter. Following austerity measures that are aimed at cutting the public spending deficit almost 3 percentage points to 4.4 percent from 2009-2011, the economy is expected to shrink by around 2 percent this year. Emerging Europe's currencies made limited gains, as the growth data was tempered by renewed risk aversion on continued concerns about the euro, the region's reference currency. Hungary's forint was 0.45 percent higher on the day at 1010 GMT. The Czech crown was up 0.06 percent and the Romanian leu 0.13 percent. PRO-GROWTH VS AUSTERITY Exports account for 60 percent or more of the Czech, Slovak and Hungarian economies, and because Germany is their biggest customer, that country's prospects are key to their recoveries. The news there was mixed. Germany grew 0.7 percent quarter-on-quarter, a slowdown from the previous three months but one analysts said the quality of growth improved as private consumption had increased. That trend -- an improvement in household spending -- showed possible signs of picking up slightly in central Europe, with Czech retail sales growing 3.5 percent in September and Hungarian domestic demand rising for the first time since 2007. A different story, however, is unfolding in Romania, Bulgaria, and the Baltic states, most of which have made double-digit cuts to public wages and pensions to arrest their slides into potential national bankruptcies earlier this year. Bulgaria's gross domestic product grew 0.2 percent on an annual basis after a 0.3 percent contraction from April to June, while earlier this week data showed Latvia's economy grew 2.7 percent, it's first annual expansion in two years. Although all countries showed better-than-expected third quarter results, they are still suffering from the effects of belt-tightening and their economies are still at least 10 percent smaller in nominal terms than before the crisis. In the middle of all of this is Hungary, a country that has the strong exports of the Czechs and Slovaks but is also struggling to overcome a deep economic slowdown and years of austerity measures. Its government is eschewing belt tightening in favour of a pro-growth strategy that includes taxes on banks, utilities, and other mainly foreign firms and a transfer of private pension contributions to state coffers. The moves have shocked markets and cast a pall over the business environment as companies have a cloudy view of future tax regimes, but they will also ease the tax burden on consumers while cutting the fiscal deficit. "We may look back in 12 months and say the Hungarian government's actions were not so bad after all, given that if they had moved down the same way as Romania, we would have been in a similar situation there," said Simon Quijano-Evans, an economist at brokerage Cheuvreux. (Editing by Toby Chopra) Keywords: CENTRALEUROPE GDP/ (michael.winfrey@thomnsonreuters.com ; +420 224 190 472; Reuters Messaging: michael.winfrey.reuters.com@reuters.net ) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.

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