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Hungary faces recession risk next year, says City

Central Europe's emerging economies are set to slow sharply next year against a backdrop of worsening external conditions and Hungary faces the risk of sliding back into recession, London-based emerging markets analysts said.

In a comprehensive review of the region's growth outlook for 2012, Capital Economics said that a raft of recent negative indicators "reinforces what we've argued for some time – that the CE3 (Hungary, Poland and the Czech Republic) are not immune from the euro crisis".

"At best, we will see a slowdown in growth via weaker export demand". But close financial ties mean that there is potential for much worse to come if the euro crisis spreads to Western European banks in which case "all bets are off – the ensuing recession would rival that seen in 2008-09".

Meanwhile, there is little scope for a response by CE3 policymakers. In Hungary, the government is actually tightening fiscal policy "in yet another attempt to tackle frailties in the public finances". Likewise, in Poland, constitutional limits on public debt mean that, unlike in 2009, there is now no scope for a fiscal stimulus in response to slowing growth.

"Putting all of this together, the slump in leading indicators is consistent with our view that Central Europe will suffer a sharper slowdown than most expect in 2012".

"We have penciled in growth next year of just 1.5% in Poland – which is slower than the growth registered in 2009 – and now expect growth of 0.7% in the Czech Republic".

Prospects are "even worse" in Hungary where falling external demand combined with a fiscal tightening at home "do not bode well". "We now expect the (Hungarian) economy to contract by 0.5% next year", Capital Economics said.