Hungary leads east EU economic slide amid war in Ukraine

Bloomberg

Soaring inflation, higher interest rates and supply-chain snarls spurred by the war in Ukraine pushed most of the European Union’s biggest eastern economies into contraction in the fourth quarter.
Poland’s economy shrank 2.4% from the previous three months — much worse than the 0.5% forecast in a Bloomberg survey — for its second non-consecutive decline last year. It economy grew 2% on an annual basis.
Hungary’s economy shrank a less-than-expected 0.4% compared with the previous three months, making it the second country in the region after the Czech Republic to fall into recession. The other larger economy in the region, Romania, posted quarterly growth of 1.1%.
The declines in Poland, Hungary and the Czech Republic contrasted with expectations from the richer euro area, which is expected to have dodged recession.
“The beginning of the year will be difficult for Poland’s economy,” Adam Antoniak, a senior economist at ING Groep NV’s Polish unit, said in a note. “We may see domestic product decline year on year in the first quarter.”
EU member states bordering Ukraine absorbed millions of refugees fleeing Russia’s invasion last year. Exacerbating that strain on the economy was a spike in the prices of energy and food that have driven inflation to the fastest in at least two decades across the region.
In response, central banks have ratcheted up borrowing costs to smother inflation, a wet blanket that also eliminated the prospect of a robust post-pandemic rebound in growth.
In Hungary, consumer prices surged to an EU-high 25.7% from a year earlier in January, which has prompted families and companies to cut back on spending. Price growth is seen elevated in the short term even after the central bank hiked the key interest rate to an EU-high 18% in October.
The country is also struggling to unlock more than $30 billion in EU funds frozen over rule-of-law concerns. The quarterly decline was less than the 1.1% contraction projected in a Bloomberg survey. Gross domestic product grew 0.4% on an annual basis.
“We only expect a short and shallow crisis,” said Peter Virovacz, an economist at ING Group, adding that there was a “realistic chance” that GDP may contract again in the first quarter.
The Czech Republic slid into recession last quarter with a smaller-than-expected 0.3% contraction, according to data released in January.
In Poland, where some retailers complained of a weak Christmas season and expressed worries about the 2023 outlook, the economy shrank grew 2% from the previous year, lower than the median forecast in a Bloomberg survey.
The impact is being felt in the real economy. Polish fashion retailer CCC expects limited demand across the region this year.