Central European economies are roaring, but war will soon dampen growth
Central European economies boomed in the first quarter partly on the back of robust domestic demand, preliminary gross domestic product (GDP) data showed on Tuesday, but soaring inflation and the impact of war in Ukraine are expected to dampen growth later this year.
While an outright recession currently seems unlikely in economies across the region, rising interest rates will weigh on credit demand in the coming months as central banks battle high inflation for decades. , analysts and central bankers said.
“There are several risks ahead, so the performance of the economy over the next few quarters is uncertain. We expect a significant slowdown,” brokerage firm Equilor said.
“The uncertainty of global supply chains, the Russian-Ukrainian war and the resulting potential energy crisis pose a downside risk to European economies.”
Sharp interest rate hikes have so far failed to dampen price pressures in Central Europe due to rapidly rising wages and soaring energy prices. Central banks in the region now face the challenge of fine-tuning their tightening policy to rein in inflation without stifling economic growth this year and next.
Nonetheless, Hungary’s economy grew 8.2% a year in the first quarter, above analysts’ forecasts for 6.9% growth. Poland, the region’s largest economy, recorded 8.5% year-on-year growth, also beating expectations of 7.9% growth.
Poland’s expansion was buoyed by spending on millions of refugees fleeing neighboring Ukraine, while consumer spending in Hungary was boosted by Prime Minister Viktor Orban’s pre-election pay rises and aid to families in the first trimester.
But clouds are gathering on the horizon and growth in the region is set to take a hit later this year, although it could remain above 4% in Poland and Hungary as a whole, analysts said.
“The Polish economy will slow down quite visibly 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 fall around 1% at the end of the year,” said Piotr Bielski, a leading economist at Santander Bank Polska.
Orban on Monday raised the specter of an “era of recession” in Europe and said his government would “defend” economic achievements and regulate prices to curb inflation.
Romania’s economy grew 6.5% YoY in the first quarter, well above market expectations, while Slovakia’s economy grew 3.1% and Bulgaria’s 4.5% .
Ciprian Dascalu, chief economist at BCR Bank in Romania, said supply chain issues are likely to be felt more intensely in the second quarter.
“We expect inflation to bite in the second half of the year, but it could be offset by investments with European funds,” he said.
Data from the Czech Republic earlier this month also showed stronger than expected growth in the first quarter.