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[BRATISLAVA, Slovakia] Eastern Europe is close to turning the page on years of charmed growth.
Even as some countries racked up gains in gross domestic product not seen since the 2008 financial crisis, the surge came at little cost: inflation stayed subdued and countries such as Poland and Romania even experienced their longest stretches of price declines in history. Interest rates are at record lows from Hungary to the Czech Republic.
But with the region's economies now running near their potential - Capital Economics Ltd estimates output gaps at "virtually nothing" - policy makers are increasingly on alert as inflation comes back with a sting. And while all six eastern members of the European Union that reported preliminary first-quarter GDP on Tuesday beat the euro area by a wide margin, economic growth is at risk of petering out.
"The 'Goldilocks' period of strong growth accompanied by low inflation which the region has enjoyed in recent years is now coming to an end," said Liam Carson, an analyst at Capital Economics in London. "It looks like 2017 could be the peak year for growth in Poland, Hungary and Romania."
Capacity constraints are getting in the way of the EU's former communist east, with combined economic output of about US$1 trillion. A looming labor shortage is among signs that economic slack has disappeared and any further stimulus could only worsen inflationary risks at a time when a rebound in commodities is already pushing up prices.
The European Commission last week predicted that growth in Bulgaria, Hungary, Poland, Romania and Slovenia will slow next year, quickening only marginally in the Czech Republic.
Governments have relied on loose fiscal and monetary policies to propel their economies, which suffered last year from ebbing flows of EU aid. The measures - from a program of child benefits in Poland to multiple cuts in value-added tax rates in Romania - boosted consumer spending and helped narrow the gap with wealthier western European countries.
But the risk of building imbalances is pushing central banks to lay the ground for tightening, just as fiscal policy turns less supportive and adds strain to growth. The International Monetary Fund last week urged the authorities to prepare for unwinding the stimulus. Economies in all eastern EU countries with the exception of Estonia operated at or above full capacity, according to the fund's estimation of their output gap - or the difference between potential and actual GDP - making them more prone to a buildup in inflation.
The Czech central bank already ended its policy of capping currency gains after more than three years as inflation returned to within its target early in 2017. Romania and Poland are waiting for the right time to end their record-long pauses on rates.
The figures for the start of 2017 make it "clear that there is no more room or need for stimulative policies," said Lucian Croitoru, a monetary-policy adviser to Romanian central bank Governor Mugur Isarescu.
Still, the region shook off last year's sharp slowdown with annual expansions in the first quarter that ranged from 2.9 per cent in the Czech Republic to 5.7 per cent in Romania. Hungary's pace of growth more than doubled to 4.1 per cent, while expansion in Poland accelerated to 4 per cent.
Eastern European currencies accounted for five of the top six best performers in emerging markets against the euro during the past month, led by increases of 1.2 per cent for Poland's zloty and the Hungarian forint.
"The growth rates should be sustained this year as they are supported by a pickup in EU budget flows," said Simon Quijano-Evans, an emerging-market strategist at Legal & General Investments Management Ltd in London. "But they also raise the question about what the future looks like, given the region will then face high base effects and big question marks over future flows as Brexit gradually becomes reality."
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