Reuters
Economy
RPT-WRAPUP 2-Hungarian, Czech economies shrank throughout 2012
Thu, Feb 14 10:55 AM EST

* Hungarian GDP shrinks 2.7 pct y/y in Oct-Dec, more than forecast

* Czech GDP down 1.7 pct y/y, in line with estimates

* Romania, Bulgaria, Slovakia avoid contraction

* Analysts say more monetary easing to come

By Michael Winfrey

PRAGUE, Feb 14 (Reuters) - Weak exports and poor demand in home markets pushed the Czech and Hungarian economies deeper into recession at the end of 2012 with little sign yet of a return to growth.

Government tax hikes and other policies in both states have made consumers reluctant to spend and driven firms to sack workers and halt investment, exacerbating the painful effect of the euro zone debt crisis on the European Union's eastern flank.

In a region whose economies are underpinned by factories pumping out cars and electronics, the debt crisis in the euro zone and government efforts to cut deficits has wiped out the main driver of growth, even if exports - at least for the Czechs - are still growing slightly.

While governments in both countries have sought to shrink public debt, their central banks have eased policy to combat rising unemployment, with Hungary's cutting rates six times in a row.

Rate setters in Prague have slashed the official cost of borrowing to almost zero and have floated the idea of knocking the crown currency weaker, but the moves have done little to drag them out of recession.

Hungary's economy contracted for the fourth straight quarter, by 2.7 percent on the year from October to December on a 20 percent drop in agriculture and a fall in industrial output.

"This is shocking," said Zoltan Torok, an analyst at Raiffeisen Bank in Budapest. "In a nutshell, every segment of the economy is struggling. It was evident before that without net exports the contraction would be as low as 4 or 5 percent."

For the Czech Republic, whose sixth straight quarter of decline or stagnation marks the worst recession in 15 years, the fall was 1.7 percent on the year from October to December.

It was in line with forecasts but worse than the central bank's outlook for a 1.4 percent fall.

But Romania, the beneficiary of an International Monetary Fund-led bailout, continued a slow recovery from a deep two-year contraction.

Its economy grew 0.3 percent on an annual basis, slightly above market expectations. Neighbouring Bulgaria grew 0.5 percent on an annual basis.

Euro zone member Slovakia, too, grew 0.2 percent, beating expectations for a drop. But ratings agency Moody's said slowing growth that threatened Slovakia's worsening budget revenue outlook was credit negative. Both Moody's and its competitor Standard & Poor's have cited Hungary's loan growth as a reason they have kept negative outlooks for that country.

Poland, the region's biggest economy, will release its fourth quarter GDP data on March 1. Some analysts fear it too could contract at the start of this year.

BUDAPEST HIT

Hungarian Prime Minister Viktor Orban's government tried to put a positive spin on Thursday's data, citing an unexpected jump in manufacturing data and improving consumer confidence last month, and saying it was fighting debt.

"Growth can return this year at a time when state finances are in order, state debt is in a continuous decline and employment is expanding," the economy ministry said.

But the figures are real trouble for Orban, who has embarked on an independent policy course, saying it was vital for Hungary's growth to maintain a free hand from the IMF and other international bodies.

With Germany - the main destination for the region's exports - contracting more than expected, analysts say Budapest's own forecast of 0.9 percent for this year now looks optimistic. An election is due early in 2014.

"Our forecast for a 0.2 percent contraction of (Hungarian)GDP in 2013 and 1.0 percent growth in 2014 remains intact," said Zsolt Kondrat, head of research at MKB Bank in Budapest.

Each time an emerging EU economy contracts, it misses a chance to catch up with richer western states in terms of living standards and negates one of the main reasons the mostly ex-Communist countries joined the bloc.

In order to "converge" - Bulgaria's living standards are about 45 percent of the EU average, the Czechs' are 80 percent - they have to outpace more developed states, but for the time being, they are largely holding even.

Czech Prime Minister Petr Necas's government expects growth to resume after two years of decline in the second half of this year, but it cut its forecast last month to almost zero, and the central bank now predicts another full year of contraction.

Although the bank has eased its threat to weaken the crown against the euro, analysts said Thursday's data would add to arguments for the bank to act.

"This GDP figure is evidence of an ongoing recession and maybe some fiscal and/or monetary stimulus is likely to come," said David Marek, chief economist at Prague's Patria Finance.


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