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CEE ECONOMY-Q1 upside surprises brighten Central Europe’s recovery outlook

Central Europe’s economies surprised on the upside in the first quarter, data showed on Tuesday, with industry buoying activity through COVID-19 lockdowns and helping prime a recovery that analysts said could be stronger than expected.

The Slovak economy recorded year-on-year growth of 0.3% after four consecutive quarters of decline while Romania’s gross domestic product hit pre-COVID levels, analysts said.

In Hungary, where the central bank has joined Czech rate setters in flagging a possible interest rate hike this year, gross domestic product (GDP) shrank by an annual 2.3%, less than forecast, and bounced 1.9% from the last quarter of 2020.

Bulgaria’s economy contracted 1.8% on an annual basis, a slower pace than the previous quarter’s drop, while Romania’s economy shrank 0.2% but showed a region-leading quarterly gain of 2.8%.

The preliminary data comes after Poland last week reported a 1.2% year-on-year contraction for the first quarter while the Czech economy eased 2.1%.

Capital Economics said Hungary and Romania outperformed the region when looking at quarterly developments and the latter was the most advanced in recovery so far, with other economies still below pre-pandemic levels.

Only the Slovak and Czech economies slipped on a quarterly basis.

“Conditions are in place for a strong regional recovery in the second half of this year and into 2022,” it said.

Central European countries, geared strongly to the auto industry, contracted sharply last year after factory shutdowns at the start of the pandemic. The region was hit again in the first quarter by a spike in COVID-19 infections and deaths and as lockdown restrictions hammered the retail and hospitality sectors.

Industry, though, has remained open and factory sentiment is strong with demand coming from higher up the supply chain in western Europe even as global component shortages and delayed supply deliveries hit costs. Fiscal support – with elections in view in some countries – is also up.

The region’s economies are beginning to open up again as COVID-19 infection rates slow and vaccinations rise. The unleashing of consumer demand is set to add to an inflation spike, for which central banks are on alert.

On Monday, Hungary’s central bank flagged a possible rate hike already in June. The Czech central bank has also signalled a rate hike this year, with debate likely starting also in June.

“With such a start to the year, 6% growth or even higher could be on the horizon (in Hungary),” Peter Virovacz, an analyst at ING, said. “It may not be a coincidence that the central bank started discussing rate hikes.”

ING said its 5.5% growth forecast in Romania “clearly skewed to the upside” while Raiffeisen said 7% growth was possible.
Source: Reuters (Reporting by Gergely Szakacs and Krisztina Than in Budapest, Radu Marinas in Bucharest, and Jason Hovet in Prague; editing by John Stonestreet, Kirsten Donovan)

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