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Lower inflows of EU aid dent Central Europe's economic growth

Offices are seen at dusk as St. Paul's cathedral and construction cranes are seen on the skyline in the City of London, Britain November 2, 2015. REUTERS/Toby Melville

By Marcin Goclowski WARSAW (Reuters) - Economic growth slowed in the third quarter across central and eastern Europe, data showed on Tuesday, with economists mainly blaming reduced investment caused by lower inflows of European Union aid. Poland, the region's largest economy, saw growth hit its weakest annual level in three years in the July-September period, while economic expansion in Hungary, the Czech Republic and Romania also lost pace. Together the four largest economies of central and eastern Europe are known as the CEE-4. "For the CEE-4 as a whole, growth weakened compared with the strong previous quarter's data," Goldman Sachs said. "Investment ... has been unusually weak throughout 2016, due to the low absorption of EU funds." Polish gross domestic product expanded by 2.5 percent year-on-year, down from 3.1 percent in the second quarter, a flash estimate from the statistics office showed. Some tenders co-financed with EU money are only now being finalised, Polish officials said, noting that the EU's current seven-year budget cycle only kicked off in 2014 and it takes time for funds to start flowing into member states' coffers. In Hungary third-quarter growth slowed to 2.0 percent year-on-year from 2.8 percent in the previous quarter, while in the Czech Republic it slipped to 1.9 percent from 2.6 percent. In quarter-on-quarter terms, Polish growth slowed to 0.2 percent from a revised 0.8 percent in the April-June period. Analysts polled by Reuters had expected annual growth of 2.9 percent and a quarterly figure of 0.9 percent. In the second quarter, Poland suffered its biggest contraction in investment for almost four years as political uncertainty discouraged firms from spending at a time of reduced EU aid. "Poland's further economic growth hinges on a rebound in investments, but I see no sign that could herald such growth," the CEO of one big Polish bank told Reuters, speaking on condition of anonymity. The contraction was a disappointment for Poland's ruling right-wing, eurosceptic Law and Justice party (PiS), which has vowed to boost investment and push economic growth towards 5 percent. ACCELERATION SEEN IN 2017 A similar pattern has occurred in Hungary, though investments are expected to pick up next year when EU funds start to flow into Budapest on a broader scale. "We expect a significant acceleration in growth next year as investments will pull the economy up rather than down," Takarekbank analyst Gergely Suppan said in a note. "On top of a faster intake of EU funds, investments will be stimulated by a significant rise in investments in homes and offices and state investments and new automotive industry investments," Suppan wrote. A slowing of industrial output weighed on Czech growth in the third quarter, potentially complicating the central bank's (CNB) hopes of exiting its weak crown policy in mid-2017. The export-reliant Czech economy has posted steady quarterly growth since the start of 2014, while unemployment has fallen to the lowest level in the European Union, supporting wages and higher household spending. Unemployment stood at 4.1 percent in September. "Third-quarter data presents a risk for the CNB of weaker GDP growth," Radomir Jac, chief economist at Generali Investments CEE, said in a note. "Personally I don't see the GDP figures as a great surprise but the data again make the point that the CNB could keep its exchange rate commitment somewhat longer than mid-2017." The Polish finance ministry said on Tuesday it expected the inflow of EU funds into Poland also to accelerate next year and said its 3.6 percent growth forecast for 2017 was still "realistic". The ministry also said that consumption was the most important driver of growth in the third quarter, thanks primarily to a low unemployment rate. However, the finance ministry was forced in August to cut its economic growth forecast for this year to 3.4 percent from 3.8 percent previously. Economists said Polish growth this year could in the end fall below 3 percent, especially given an upward revision of last year's economic expansion by the statistics office in October. (Additional reporting by Pawel Sobczak in WARSAW, Robert Muller in PRAGUE and Sandor Peto in BUDAPEST; Writing by Marcin Goettig and Marcin Goclowski; Editing by Gareth Jones)