Eurozone recession exit helps Central Europe out of its hole

By bne IntelliNews August 15, 2013

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The Eurozone finally pushed its way out of recession in the second quarter. That saw growth - albeit fragile - return to the economies of Central Europe.

As forecast on the back of improving industrial production and other data for April-June, the Eurozone economy saw expansion for the first quarter in seven. Mirroring the contraction suffered in the first three months of the year, the single currency area put in growth of 0.3%, reported Eurostat.

Despite the relief of exiting recession at last, analysts warn that the recovery remains fragile. "The Eurozone will grow only modestly in the second half of 2013 before the pace picks up gradually in the coming years," forecasts Zach Witton at Moody's Analytics. "The main growth driver will be higher exports, particularly to the US and emerging economies. However, high levels of public and private sector debt in fiscally troubled countries, and slow progress towards banking and fiscal union, will weigh on the recovery."

Of particular note for Central and Eastern Europe, the main driver of the improved Eurozone performance was strong growth in Germany and France. The German economy - which expanded 0.7% following a stagnant first three months of the year - dictates a huge chunk of the region's economic fate via its demand for exports.

It was no surprise then that the Czech Republic also finally crawled out of recession - the country's longest-ever, matching the Eurozone's six quarters of contraction - to record a 0.7% economic expansion. The statistical office said that exports did most of the legwork, with investment and consumption both falling on an annual basis.

Analysts at Komercni banka expect a slow but steady recovery from the recession, which wiped out a full 3.1% of the economy. "Industry conditions are slowly starting to improve," they note. "The hard-hit construction sector should start to stabilise slowly, helped by the post-flood recovery. Finally, households should enjoy better times, too."

Hungary had escaped its recession in the first three months of 2013 with 0.6% growth, so it was disappointing to see the country lagging this time around. Although the economy registered its first expansion on an annual basis for over a year, it could manage no more than 0.1% quarter on quarter. "As for the outlook," write analysts at Erste bank, "the picture is mixed. Although we expect car production to be better in July-August and beyond, poor export figures in May-June warn that other sectors of the industry are not performing well Summing it up, we stick to our view that there can be only a very low growth in Hungary this year (we currently see it at +0.2%). For 2014, we see growth at +1.2%."

The Polish economy grew by a seasonally-adjusted 0.4%, an improvement from the 0.2% it managed to open the year's reporting. While no breakdown is available, analysts suggest that exports are still in the driving seat, with domestic demand - the country's shield against the crisis until around a year ago - still likely in the doldrums as employment and wages remain weak.

However, that didn't prevent a shock hike in prices in July. The statistical office reported on August 14 that Polish annual inflation was 1.1%, after falling to a record low of 0.2% in June. Erste analysts say that although surprised by the rise, "we believe that, from now on, the inflation rate will follow an upward trend."

Hand in hand with improving growth, the spectre of inflation is likely to confirm the National Bank of Poland's stance as expressed at its last meeting that the easing cycle is over.

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