BUDAPEST – Central European economies advanced in the first quarter, partly due to strong domestic demand, preliminary GDP data showed on Tuesday, but rising inflation and the effects of the Ukraine war will slow growth later this year.
Although a full recession seems unlikely in the region’s economy at the moment, rising interest rates will weigh on loan demand in the coming months as central banks fight decades of high inflation, analysts and central bankers say.
“There are a number of risks ahead, so it is uncertain how the economy will function in the next quarter. We expect a significant downturn, “said Brokerage Equilibrium.
“Uncertainty in the global supply chain, the Russia-Ukraine war and the resulting potential energy crisis have created downward risks for the European economy.”
The sharp rise in interest rates in Central Europe has so far failed to control price pressures due to sharp rise in wages and rising electricity prices. Central banks across the region now face the challenge of refining their policies to reduce inflation without impeding economic growth this year and next.
Nevertheless, the Hungarian economy expanded by 8.2% year-on-year in the first quarter, exceeding analysts’ forecasts of 6.9% growth. Poland, the region’s largest economy, grew 8.5% year-on-year, exceeding growth expectations of 7.9%.
Poland’s expansion has been backed by spending on millions of refugees fleeing neighboring Ukraine, while consumer spending in Hungary has risen with Prime Minister Viktor Orban raising pre-election wages and handing out families in the first quarter.
But clouds are gathering on the horizon, and growth in the region is expected to hit hard by the end of this year, although in Poland and Hungary overall it could be above 4%, analysts say.
“The Polish economy will slow down significantly in the second half of the year. However, the fact that we are starting from such a high level means that the average growth for the whole year will be above 4%, even if we go down to about 1% at the end of the year, “said Piotr Bielski, a leading economist at Santander Bank Polska. .
On Monday, Urban hinted at a “recession” in Europe, saying his government would “protect” economic gains and control inflation.
Romania’s economy expanded 6.5% in the first quarter of the year, sharply exceeding market expectations, while Slovakia’s economy grew 3.1% and Bulgaria’s 4.5%.
Cyprian Daskalu, chief economist at Romania’s BCR Bank, said the supply chain problem would be felt more strongly in the second quarter.
“We expect inflation to bite in the second half of the year, but this can be met by investing with EU funds,” he said.
Data from the Czech Republic earlier this month also showed stronger-than-expected growth in the first quarter. (Reporting by Christina Than; Additional reporting by Luiza Ely in Bucharest and Anna Loderkzak-Semjuk in Warsaw; Editing by John Harvey, Kirsten Donovan)