Central Europe growth takes another hit from the Eurozone

By bne IntelliNews November 16, 2012

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Preliminary GDP data for Central Europe in the third quarter revealed a split picture, but what growth there is remains subdued as the Eurozone dropped into recession. Other indicators suggest the final three months of 2012 are unlikely to offer much improvement.

The Czech Republic and Hungary, the economies most exposed to Eurozone demand for exports, performed poorly and remain mired in recession, according to the flash estimates. Although not the final date, revisions to tend to be limited. Of particular concern will be that the performance was so poor despite Germany - the pair's biggest export destination by some distance - seeing activity perk up to 0.2% growth on quarter.

By way of contrast to its Visegrad peers, Slovakia, still being driven by its carmakers whose small and efficient models are gaining market share in Europe and making inroads into emerging markets, recorded its third robust quarter of the year at 0.6% on quarter. The Baltic states also continued their recovery, with Estonia and Latvia sharing the top spot in the EU with growth of 1.7% on quarter, and Lithuania in third spot at 1.3%.

With the Eurozone dropping into technical recession with a 0.1% contraction versus the second quarter, the Czechs saw their fifth straight quarter of negative growth at -0.3%, with a drop in manufacturing across the segments looking likely to have done the most damage. Capital Economics points out that the result makes the current recession longer (although not deeper) than that seen in 2008-2009. "The outlook for the coming quarters remains unchanged," says Komercni banka. "We still expect the economy to stagnate at the end of 2012 and the beginning of 2013. For the whole of 2013, we expect GDP to rise 0.3%."

Hungary, also heavily dependent on Eurozone demand for exports, recorded its third consecutive quarter in contraction with a GDP drop of 0.2% on quarter. A plummet in agricultural output, driven by drought, added extra pressure. "It is mostly agriculture to blame, but due to the muted Eurozone outlook and further unorthodox fiscal steps, the outlook for 2013 is not rosy, despite some expected positive one-offs in industry," note Erste analysts. "We have to cut our -1% forecast for 2012, while for 2013, any notable GDP increase is definitely not expected."

"Slovakia aside, it is clear that the crisis in the Eurozone is weighing on Eastern Europe," writes Capital Economics. "The monthly activity data suggest that both exports and industrial production have slowed sharply this year. Meanwhile, although banking sectors have held up reasonably well so far, a squeeze on funding by Western European parents has still kept local credit conditions extremely tight (particularly in Hungary). Finally, it is likely that the problems in the euro-zone are also dragging on consumer and business confidence."

That final point augers ill for the short term, it argues. "Business surveys suggest that the region made an even weaker start to the fourth quarter. The EC's ESI surveys, which tend to track GDP growth reasonably well, fell in every country with the exception of Hungary. There are even signs that Slovakia's economy is starting to slow."

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