Central Europe's economies roared ahead in the first quarter due partly to robust domestic demand, preliminary GDP data showed on Tuesday, but surging inflation and the impact of the Ukraine war are set to dampen growth later this year.
While an outright recession at the moment looks unlikely in the region's economies, rising interest rates will weigh on credit demand in coming months as central banks fight decades' high inflation, analysts and central bankers said.
"There are several risks ahead, so how the economy will perform in the coming quarters is uncertain. We expect a significant slowdown," brokerage Equilor said.
"The uncertainty in global supply chains, the Russia-Ukraine war and a resulting potential energy crisis pose a downward risk to European economies."
Sharp interest rate rises have so far failed to curb price pressures in Central Europe due to a fast rise in wages and soaring energy prices. Central banks across the region now face the challenge of fine-tuning their policy tightening to dampen inflation without stifling economic growth this year and next.
Nonetheless, Hungary's economy expanded by an annual 8.2 per cent in the first quarter, above analysts' forecasts for 6.9 per cent growth. The region's largest economy, Poland, grew by 8.5 per cent year-on-year, also exceeding expectations for 7.9 per cent growth.
Poland's expansion has been supported by spending on millions of refugees fleeing neighbouring Ukraine, while consumer spending in Hungary has been boosted by prime minister Viktor Orban's pre-election wage hikes and handouts to families in the first quarter.
Clouds on horizon
But clouds are gathering on the horizon, and growth in the region is widely expected to take a hit later this year, although it could remain above 4 per cent in Poland and Hungary overall, analysts say.
"The Polish economy will slow down quite visibly in the second half of the year. However, the fact that we are starting from such a high level means that the average growth for the whole year will be above 4 per cent, even if we drop to around 1 per cent at the end of the year," said Piotr Bielski, a leading economist at Santander Bank Polska.
Orban on Monday raised the spectre of an "era of recession" in Europe and said his government would "defend" economic achievements and regulate prices to curb inflation.
Romania's economy expanded 6.5 per cent on the year in the first quarter, sharply above market expectations, while Slovakia's economy grew 3.1 per cent and Bulgaria's by 4.5 per cent.
Ciprian Dascalu, chief economist at BCR Bank in Romania, said supply chain problems will likely be felt more acutely in the second quarter.
"We expect inflation to bite in the second half of the year, but it could be offset by investment with EU funds," he said.
Data from the Czech Republic earlier this month also showed stronger-than-expected first-quarter growth.
