Insight from Monday: Cold winds of inflation are weighing on growth prospects in Eastern Europe

In the weeks following Russia’s invasion of Ukraine, the major economies of Western Europe faltered. But further east, thanks to double-digit wage increases and generous government grants in some countries, it was still boom time.

no longer.

A sharp fall in retail sales and falling confidence indicators show the cost-of-living crisis has caught up with the eastern wing of Europe, where people now face a harsh reality check as stubborn double-digit inflation erodes their incomes while food prices soar to over 15 percent. 22pc and energy costs increase.

As household consumption suffers, analysts are downgrading their GDP forecasts and the risk of a Europe-wide recession looms.

Families have started to tighten their belts. Poles are taking shorter vacations, Czechs are saving on restaurant bills while some seek second jobs, and in Hungary — where grocery inflation was 22.1 percent a year in June alone — people are cutting grocery bills and buying durable goods as a boost, the forint currency pushing up import prices up.

“One day I went to the bakery and a loaf of bread cost 550 forints. I go in the next day and it’s 650. Jesus Christ!” said Lajos, a 73-year-old man shopping at a market in the northern city of Esztergom on the Danube River.

Lajos said the rise in food prices has eaten up some of his monthly pension and he is unable to pay higher electricity bills, which are set to rise after the government scrapped price caps on higher-consumption households last month.

So he makes his own plans. “I can heat with gas, but also with wood… because I have a tiled stove. So we’re going to move into a room, fire up the stove, put on warm sweaters and watch TV like that.”

Across Hungary, retail sales growth slowed to 4.5 percent in June, from 10.9 percent in May, with sales of furniture and electrical goods falling 4.3 percent, reflecting the impact of huge tax breaks and tax transfers by the government of Hungary Prime Minister Viktor Orban suggesting before the April elections has now faded.

Polish retail sales growth slowed to 3.2% year-on-year in June from 8.2% in May, while adjusted retail sales in the Czech Republic excluding cars and motorcycles fell 6% yoy in June, after falling 6.6% in May percent had fallen.

“Households have reacted meaningfully to the rising cost of living and consumption of things has started to slow down,” said Peter Virovacz, an analyst at ING in Budapest.

According to a survey by the Hungarian National Bank on Friday, commercial banks expect credit demand to fall and credit conditions to tighten in the second half of the year.

Slowing domestic demand, rising interest rates, government spending cuts and rising corporate costs are likely to dampen economic growth in Central Europe in the second half of the year and slow sharply in 2023.

Citigroup said Hungary’s economy could grow by nearly 5 percent in 2022, but said there were downside risks to its 1 percent forecast for next year.

“The risk of persistently high energy prices, keeping inflation in double digits in 2023, and our updated internal projections for the eurozone point to downside risks,” it said.

The Central Bank of Hungary still forecasts growth of 2 to 3 percent for 2023 and will publish new forecasts in September.

According to government forecasts, the Polish economy is expected to grow by 3.8 percent this year and by 3.2 percent in 2023.

The Czech central bank, which was the first to halt its rate-hiking cycle on Thursday, is forecasting a turn-of-the-year recession as the economy will contract by 0.4 percent in the fourth quarter of 2022 and 1 percent in the first quarter of 2023.

“Our base case is a mild recession – a technical recession – we’ve got two straight quarters of quarterly decline there…

“That would be a healthy recession that also allows inflation to come down,” Gov. Ales Michl said.

According to the travel website, while a boom in the tourism sector is still expected for the summer, Poles have started to save on travel.

“We can see that this season is characterized by shortening trips by an average of one day and postponing booking until the last moment,” said Natalia Jaworska, an expert at Poles have also started to save on food.

Data from various restaurant payment services, such as Sodexo, also shows declining spending in restaurants in the Czech Republic.

The latest survey by STEM survey bureau in June found that 80 percent of Czech households are cutting back or cutting back on their purchases because of soaring energy bills.

Czech consumer confidence hit a new low in July, according to the Statistics Office’s monthly survey, while a survey by think-tank GKI showed that Hungary’s consumer confidence index fell to its lowest level since April 2020 during the first wave of the pandemic in July.

Reuters Insight from Monday: Cold winds of inflation are weighing on growth prospects in Eastern Europe

Fry Electronics Team

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