Bloomberg News

Hungary Heads for Recession as Austerity Shackles Growth

May 15, 2012

Hungary is heading toward joining the Czech Republic and Romania in a recession as austerity measures across Europe damp demand for exports and sap consumer spending.

Hungary’s gross domestic product contracted 1.3 percent in the first quarter from the previous three months, when the economy stagnated, while the Czech output fell 1 percent, the third quarterly drop. Romania slipped into its second recession in four years, according to flash estimates today from the countries’ statistics offices.

“A large part of the region was already struggling to achieve growth even before the euro region’s debt crisis escalated,” Neil Shearing, an emerging-market economist at Capital Economics Ltd. in London, said by phone. “The data today painted a pretty downbeat picture and there isn’t much policy makers can do about it.”

Eastern European economies are dependent on export demand from the euro region, which is saddled by a sovereign-debt crisis. Governments across the region have pushed through austerity measures to reduce their debt burden and fend off contagion from their western neighbors, eroding domestic demand.

Hungary’s forint rose 0.38 percent to 292.08 per euro at 1:38 p.m. in Budapest, heading for its first closing gain in three days. The Czech koruna was down 0.19 percent at 25.474 against the common currency at 1:38 p.m. in Prague and the Romanian leu was little change at 4.4424 to the euro at 1:40 p.m. in Bucharest.

The GDP figures contrast with data for the German economy, which advanced a quarterly 0.5 percent, or five-times faster than estimated according to a Bloomberg survey. Of east European countries releasing growth figures today, Slovakia and Bulgaria were positive, reporting 0.8 percent and 0.5 percent quarterly output growth respectively.

German Influence

Germany helped the euro region avoid its second recession in two years as growth in the largest economy in the 17-member bloc offset contraction among peripheral countries. The deepening sovereign-debt crisis in the region has raised the prospect of Greece leaving the currency union. Voters in France and Greece rejected austerity plans by punishing administrations at the ballot box this month.

“Eastern Europe must wake up to a new reality,” said Ales Michl, an economist at Raiffeisenbank AS in Prague. “External demand is going to be weaker than it used to be so the governments must do their homework and make economies more competitive to offset this.”

Hungary’s lack of a bailout agreement with the IMF and the EU prevents the central bank from cutting the trading bloc’s highest benchmark rate from 7 percent as policy makers seek to defend the forint, he said.

Romania’s Easing Cycle

Romania’s central bank may also be unable to lower its main interest rate from 5.25 percent after three quarter-point cuts this year should instability in Greece cause the leu to weaken, said Vlad Nistor, an economist at BT Asset Management SAI in Cluj, Romania.

The Czech contraction, deepened by the effects of consumers and retailers stocking up on tobacco products in late 2011 before a tax increase, prompted investors to boost bets that policy makers will reduce borrowing costs at the next meeting in June.

“The reported contraction exceeded even the most pessimistic expectations,” Radomir Jac, an economist at Generali PPF Asset Management in Prague said in an e-mailed note. “Weak GDP is supportive to the message of the central bank’s quarterly forecast that recommends easing monetary policy.”

The Czech central bank, which on May 3 kept the two-week rate at a record-low 0.75 percent, expects the economy to stagnate this year and a 1.9 percent expansion in 2013. Premier Petr Necas plans to cut the budget by 57 billion koruna ($3 billion) to narrow the deficit to 2.9 percent of GDP next year.

Growth Forecasts

The Hungarian government forecasts a 0.1 percent growth this year, compared with the European Commission forecast for a 0.3 percent contraction.

The resumption of recession in Romania, partially caused also by freezing weather that disrupted transportation and supply chains, may prompt the government to scale back plans for fiscal easing such as an 8 increase in state wages, said Vlad Muscalu, an economist at ING Bank Romania.

The European Commission on May 11 predicted full-year economic growth at 1.4 percent.

To contact the reporter on this story: Radoslav Tomek in Bratislava at rtomek@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net


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