WRAPUP 2-EU's emerging economies shine in Q1, shrug off Ukraine

Thu May 15, 2014 6:28am EDT

(Adds more detail on Polish and Romanian growth)

* Hungary's economy grows 3.5 pct yr/yr, fastest since 2006

* Romanian, Polish GDP data also beat expectations

* Exports strong, investment, domestic demand picking up

* Impact of Ukrainian crisis not felt so far

* Central banks maintain loose policy stance to aid recovery

By Krisztina Than

BUDAPEST, May 15 (Reuters) - Hungary's economy expanded at its fastest pace since 2006 in the first quarter and growth was also strong in Poland and Romania, as exports to the euro zone flourished and domestic demand recovered.

Concerns parts of the region - notably Poland - might suffer from the impact of the crisis in Ukraine, which entered its current acute phase at the start of March, were allayed as they benefited from a strong economic performance by key trading partner Germany.

"The Ukrainian events have not had a really big impact on the foreign trade performance of the region's countries so far ... " said David Nemeth, an economist at K&H Bank. "It was much more important to the region that German growth picked up in the first quarter, too."

The Polish economy, the region's biggest and the only one to avoid recession since the 2008-09 global crisis, grew 3.3 percent year-on-year, beating forecasts for 3.1 percent growth.

"There is potential for a positive jump in terms of private investment and private consumption," said Grzegorz Ogonek, economist at ING Bank. "It seems... this more than compensates for the negative effect of the situation in the east, which could, however, harm net exports over a number of quarters."

The data seemed, at least for now, to contradict predictions from many economists that Poland would pay a price for the tough stance its government has taken in opposing Russia's intervention in neighbouring Ukraine.

Warsaw has been much more outspoken in its criticism of the Kremlin than most other countries in the region.

Russia has banned imports of Polish pigs and has threatened to restrict imports of apples, citing public health concerns. Polish officials allege there is a political motive.

"It is possible that the negative impact of the Ukrainian crisis (on Poland) may be visible only in 2H14, which, at this point, makes us cautious regarding upward revisions of economic growth," Erste Group said in a note.

GERMAN ENGINE

Hungary's economy grew by 3.5 percent in annual, unadjusted terms, its fastest growth since 2006 and driven by higher industrial output, construction and an increase in investments as well as in domestic demand.

Romanian gross domestic product grew by 3.8 percent, also exceeding analysts' expectations, after retail sales posted the second-highest growth rate in the EU in March according to Eurostat. Industrial output posted double-digit growth, led by manufacturing dominated by car makers.

However, the Czech economy stagnated compared with the previous three months. On a year-on-year basis it expanded by 2.0 percent, slightly less than expected.

Hungarian Economy Minister Mihaly Varga said Hungary had healthy export growth but domestic demand was also rising, as rising retail sales in past months showed.

"The German engine is strong, there is a serious increase in volumes in the German economy, especially in the vehicle industry," Varga told television before the data was released.

The Hungarian unit of Audi, one of Hungary's leading investors and exporters, told Reuters that it was planning to increase car production this year from last year's, which was around 43,000 units.

A spokeswoman said the carmaker hoped to bring Hungarian production near to its full capacity of 125,000 units per year.

CENTRAL BANKS IN EXPANSIVE MODE

Thanks to low inflation, the region's central banks are maintaining a soft monetary stance, which could help economic recovery further in the rest of the year.

In Hungary, where annual inflation was negative in April, the National Bank of Hungary has left the door open to further interest rate cuts, after cutting its main rate to 2.5 percent from a peak of 7 percent in August 2012.

The Czech central bank, which has its rates barely above zero, has said that it was likely to keep the Czech crown weak for longer to aid the economy.

Romania's central bank governor has said that economic fundamentals did not warrant currency appreciation, while the Polish bank is only expected to start hiking rates next year.

Currencies across the region gained on the GDP data. (Additional reporting by the Warsaw, Prague and Bucharest newsrooms; Editing by Larry King, John Stonestreet)

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