Eastern European recovery starts to slow
PRAGUE (Reuters) - Growth was weaker in much of the EU's emerging east in the second quarter, auguring a broad slowdown for the rest of the year as western Europe struggles and the whole region starts to feel the impact of the Ukraine crisis.
The Polish economy slowed in the quarter while the Czech Republic stagnated and Romania actually contracted 1 percent, surprising analysts and raising chances that the central bank will cut interest rates further in the Balkan country.
There were bright spots, with preliminary gross domestic product (GDP) readings in Slovakia, Bulgaria and Hungary all better than expected, led by the latter's 0.8 percent quarter-on-quarter expansion.
But while analysts see the recovery as on track longer-term, few expect the pace of growth to stay as strong in the second half of the year because of economies to the west - namely Germany - weakening, and rumblings to the east with tit-for-tat sanctions between the European Union and Russia over Ukraine.
"The bigger factor will be what happens to the west of these countries not to the east," Capital Economics economist William Jackson said, referring to data showing Germany's economy shrank in the second quarter and France's showed no growth.
"The second half is going to be more challenging for the region. We might see growth weaker but as long as we don't see a continued slowdown in Germany, it is not likely that the region's recovery is going to go into reverse," he said.
The Czech economy stagnated on a quarterly basis, missing forecasts for a 0.2 percent rise and after expanding by 0.8 percent at the start of the year. On a year-on-year basis, GDP grew 2.6 percent in real terms.
The Czech economy exited a record 18-month recession last year and the central bank helped the recovery in November by intervening to weaken the crown to fight deflation risks. The weaker currency has boosted exporters and helped spur a revival in consumer demand.
"The positive fact is that leading indicators suggest the expansion of the Czech economy should continue in the coming months," Raiffeisenbank's chief analyst Michal Brozka said.
"However, an important inconvenience... is Europe's poor performance this year, even in the first half when the Ukraine crisis was weaker than today."
In Poland, the region's biggest economy with strong trade links to Russia, a flash estimate from the state statistics office showed growth in quarterly terms nearly halved to 0.6 percent in the second quarter from 1.1 percent in the first three months of the year.
GDP slowed to 3.2 percent year-on-year growth, down from 3.4 percent in the previous quarter.
RATE CUTS AGAIN?
Poland has some of the highest interest rates in Europe with a base rate of 2.5 percent and some analysts said the data together with a bleaker outlook and the fact that consumer prices fell on an annual basis in July - the first time in decades - meant rate cuts may start again.
"The GDP numbers (...) point to a slowing growth momentum in the Polish economy during the spring," BNP Paribas economist Michal Dybula said.
"Coupled with the negative CPI print in July they support the resumption of interest rate cuts over the coming months, especially as the growth and inflation outlook are getting worse on Russia sanctions."
Price growth across central Europe has remain subdued despite an economic revival, and Russian sanctions against EU food imports may add downward price pressure as food normally exported floods markets.
The Romanian central bank is likely to look at cutting its key interest rate again in September given the latest data, analysts said after Romania showed a surprise quarterly contraction while year-on-year growth slowed sharply to 1.2 percent from 3.9 percent in the first quarter.
"While the final data will probably show an upward revision, this is a very weak number by all accounts," UniCredit Bank economist Dan Bucsa said.
"On the demand side, investment continues to drag on growth, since the state is spending almost nothing on infrastructure and co-financing of EU funds. We expect the NBR to cut twice more to 2.75 percent."