bne IntelliNews -

Building on record expansion levels in the first three months of the year, the Czech economy powered onwards in the second quarter to lead the Central European region for growth. GDP growth hit 4.4% y/y, data from the country's statistics office showed on August 14. 

 The economic expansion shows an acceleration from the 4% growth recorded in January-March, and was the strongest since 2007. On a quarterly basis, GDP expanded 0.9% in the second quarter. That followed the record-high of 2.5% seen in Q1. 

Both the annual and quarterly GDP growth figures were well above market expectations. Analysts had forecast annual growth of 3.4%, while a 0.2% contraction was predicted on the quarter due to the high base effect. 

Growth was driven by rising household consumption and investments, the statistics office noted. The improving labour market, low inflation and supportive monetary and fiscal policy are supporting consumer spending. The strength of domestic demand helps to explain how the country seems to have shrugged off weakness in key Eurozone trading partners, Capital Economics suggests. 

Looking ahead, the conditions are in place for domestic demand to remain robust. Confidence has improved, the labour market is strengthening, and fiscal policy is becoming more supportive, William Jackson notes. "Against this backdrop, we think the economy could maintain growth rates of 4% over the rest of the year," he sums up. 

The strong GDP readings in the first two quarters of the year suggest the government and the central bank might further raise full-year growth estimates. Last month the finance ministry sharply raised its forecast to 3.9% from 2.7%, while the central bank sees this year's growth at 3.8%, up from 2.6% expected previously. 

Analysts have already acted. With an evident buzz, Kommercni Banka raised its full year GDP growth forecast to 4.6%. "The Czech economy is regaining its lost position as the region's high flyer," writes Viktor Zeisel. "Despite the disappointment brought by German statistics, the Czech economy is accelerating and growing quicker than that of Slovakia or Hungary."

The koruna was also quick to respond. The currency, which has been testing the Czech National Bank's cap of CZK27 to the euro for weeks, dropped 0.02% to CZK27.02 as the strong result offered the policy added support. The CNB is fighting political pressure against the cap, which it launched as the country emerged from its longest ever recession in late 2013. President Milos Zeman recently reiterated claims that the koruna cap "hurts most Czech citizens". 

Misleading

The Polish zloty and Hungarian forint also weakened as they reported second quarter growth rates below expectations. The 3.3% growth seen in Poland was disappointing compared with the first quarter's 3.5%. A Bloomberg survey had put consensus at 3.6%. 

However, Jackson suggests Poland's data is somewhat misleading, because the number is not adjusted for seasonal and working day effects. "Taking these into account, the data showed a pick-up in growth in Poland," he insists. Adjusted data would likely see Polish GDP 3.6% higher in April-June.

The result was likely caused by a weaker contribution of net exports Bank BGK suggests. On the positive side, they note, growth is likely being helped by "domestic demand driven by growing consumption and investments."

"We do not see this slowdown as alarming and in the coming quarters we again expect higher growth dynamics," write Erste analysts. "The beginning of Q3 especially shows relatively strong performance, as the PMI is again heading upwards."

Hungary's 2.7% y/y, by way of contrast, is evidence of significant weakening, Jackson admits, going on to suggest that seasonally adjusted, the reading would come in even lower at 2.4%. Industrial production continued to drive growth in the second quarter, statistics office KSH notes, adding that much of the slowdown stemmed from the agricultural sector.

However, analysts have been forecasting a sharp drop in Hungarian growth for over a year, as they eye the effects of the government's tough policy on lending and investment. The impressive 3.5% growth seen last year was largely state-driven, and with EU funds falling, Budapest is no longer able to keep up the pace. 

Analysts at Portfolio.hu note the role of "stronger consumption [and] feeble investments," in the second quarter growth in particular. They now suggest Hungarian growth will struggle to cross the 3% threshold this year. A 3.5% expansion in the first quarter convinced the finance ministry to raise its forecast for the year to 3.1%.

Meanwhile, Visegrad's only Eurozone member Slovakia put in a steady performance. GDP expanded 3.2% in the second quarter, strengthening from 3.1% in January-March. On a seasonally-adjusted basis, GDP grew 0.8% q/q.