Two resilient European economies, the Czech Republic and Slovakia, dodged the global downturn in the third quarter with strong economic growth but Hungary veered closer to recession and analysts expected worse numbers to come.
Investors have ditched assets in the European Union newcomers and expect the manufacturing-heavy region to suffer, after the euro zone, and particularly Germany -- the main markets for its exports -- saw growth contract. But data released on Friday showed the Czechs and Slovaks still holding up well last quarter, with the Czech economy accelerating over the previous three months to 4.7% year on year, well above forecasts of 3.8% in a Reuters poll. Slovak growth slowed to 7.1%, from 7.6% in the Q2, and was in line with forecasts. That was where the optimism ended.
Hungary, which staved off economic crisis with a $25 billion IMF/EU rescue deal last month, expanding only 0.8%, versus expectations of 2.2% growth. Analysts said forward looking data from the region, including Purchasing Managers’ Index numbers showing record drops in new orders, and parallel data on Friday showing a euro zone contraction, meant the Q4 would be grim. That would be exacerbated by the credit crunch, which has raised the cost of borrowing, pinching purchasing power of firms and consumers at home even as the big car and electronics makers that drive much of the region have to cut back.
“Third quarter numbers in central and Eastern Europe are not really important as the Q4 is likely to be horrible on the back of the sharp worsening of the situation in October,” said Lars Christensen, chief economist at Danske Bank. Markets, dominated by general gloom over growth in recent days, showed little response to the data.
NO PLACE TO HIDE
Further south and east, fellow EU member Bulgaria saw its growth rate slow to 5.6% from July to September, from 7.1% the previous quarter.
For Hungary -- which had only just recovered from two lean years when last month’s crisis hit -- analysts said a broad slowing in exports, construction and consumer demand was to blame. The government expects a contraction next year and has announced huge spending cuts in 2009, but it will also try to stimulate the economy by injecting cash into small and medium sized firms. But producers are cutting thousands of jobs -- up to 30% of car industry workers are expected to go -- and the data showed Hungary was already on the brink of its first recession since the hard years after the fall of communism.
“This is the first time (since the early 1990s) that Hungary will see a real downturn in the business cycle and a recession,” said György Barcza, analyst at KBC’s Hungarian unit K&H Bank. “Higher unemployment, and corporate defaults ... will make 2009 a painful year for Hungarians.” Analysts said while the Czech result was a good surprise, it was possibly due to big car and electronics firms continuing to produce goods and build up inventories despite falling demand, rather than sacking workers and mothballing production lines.
Market watchers said one factor shielding the Czechs may have been aggressive rate cuts by its central bank -- a luxury not afforded to the Hungarians, who had to hike by 3 percentage points to prop up the forint currency. But firms like Czech carmaker Skoda and its foreign-owned counterparts in Slovakia are shutting production lines as fewer Germans and other west Europeans line up for new vehicles. And analysts said the inevitable march of the slowdown was coming.
“We still expect the Czech Republic will be able to avoid an outright recession next year, which is not the case of Hungary,” said Ivailo Vesselinov, emerging markets analyst at Dresdner Kleinwort. “Growth overall will slow and that will be mainly due to deterioration in the export sector on the back of the euro zone, which we are expecting to shrink by 0.3% next year.” (Reuters)