Analysis-Consumer boom nearly over as Central Europe heads into “decade of peril”

div classBodysc17zpet90 cdBBJodivpBy Gergely Szakacs, Alan Charlish and Jason Hovetp

pVELENCE, HungaryWARSAWPRAGUE Reuters – War may be raging on their doorstep but Central Europes economies are outpacing their euro zone peers as consumer spending booms. A reversal could come as soon as this summer, however, leaving a painful, inflationlaced hangover.pdivdivdiv classBodysc17zpet90 cdBBJodiv

pEconomists are already sounding the alarm about inflation momentum in Hungary and Poland, fuelled partly in both countries by government transfers to households that helped supercharge demand in the first quarter.p

pSharp interest rate rises have so far failed to curb price pressures, as a regionwide shortage of workers pushes up wages and the conflict in Ukraine causes energy prices to soar.p

pAt the Velence Resort and Spa, beside a lake just four hours‘ drive from Hungary’s border with Ukraine, director Peter Barsony expects a bumper 2022, with a strong increase in weekend bookings since February despite recent price rises.p

p“Unless trends change, this will be a substantially better year than last in terms of revenue,” Barsony said. “The purchasing power of Hungarians has definitely not deteriorated for the time being.”p

pHungarian retail sales surged by an annual 16.2 in March, driven by higher spending on fuels and nonfood items.p

pWhile economic fundamentals are strong, consumer spending has been boosted by Prime Minister Viktor Orbans preelection wage hikes and handouts to families. In Poland, robust growth in retail sales after pandemic restrictions were lifted has been further supported by spending on millions of refugees fleeing neighbouring Ukraine.p

pHundreds of thousands of Ukrainians have also poured into Hungary, like Poland a member of NATO, since Russia launched its invasion on Feb. 24.p

pAs Europe heads into what Orban described last week as a “decade of peril”, with the war escalating an energy crisis, central banks are struggling to contain inflation that has blasted past their targets and is on track to reach 14 to 15.p

p“DONE IN TWO SENTENCES”p

pZsolt Csombok, a 51yearold IT services entrepreneur, has raised wages three times over the past year – Hungarian unemployment is at a record low – and increased his companys hourly fees by 25 to 30 to cover that and other expenses. p

pHe says his clients, similarly plagued by supply chain issues and rising costs, have simply accepted the price hikes, signalling strong demandside inflation pressures.p

p“Something which would have taken tough negotiations to push through just a year ago can now be done in two sentences,” Csombok said.p

pProjecting firstquarter growth at 7 to 8, Hungarys central bank, already in its thirdsteepest tightening cycle since Communist rule ended in 1989, has warned Orban to start rebalancing the economy. Core inflation, which strips out volatile energy and food, hit a near 21year high in March.p

p“Tighter policy is needed to take the heat out of domestic demand,” said Liam Peach at Capital Economics.p

p“This will require a combination of tax hikes, spending cuts as well as interest rates rising above 8 for a prolonged period of time to cause GDP growth to weaken.”p

pIn Poland, retail sales beat forecasts in March and returned to their prepandemic trend, economists at Bank Pekao said, while warning of “bleak” consumer prospects for later 2022 as the war sours sentiment. Most respondents in an April survey nevertheless said they were not worried about job security.p

pMaciej Skurczynski, a 34yearold specialist in industrial real estate, said he was unsettled by the conflict, but trying to live a normal life.p

p“We can only live or we can stay at home. And I prefer to live,” Skurczynski said as he finished off a lunchtime burger at a food hall in central Warsaw.p

pDEMANDDRIVEN INFLATIONp

pWith inflation still rampant, the Polish and Czech central banks are set to hike borrowing costs again on Thursday.p

pHungarys central bank has raised its base rate by nearly 500 basis points since June, but government price controls, wage hikes and caps on mortgage rates are acting as a counterweight.p

p“Prewar data from retail, industry, and construction sectors, and even the latest big data, are suggesting surprisingly strong firstquarter GDP growth,” ING economist Peter Virovacz said.p

p“This could mean a wider positive output gap, translating into longer and stronger demanddriven inflation for the remainder of the year, in our view.”p

pThe Czech economy grew by a betterthanexpected 4.6 yearonyear in the first quarter, but with less government help for households facing doubledigit inflation, consumer confidence hit its lowest in nearly a decade in April.p

pCentral bank ViceGovernor Marek Mora told Reuters on April 26 that he foresaw a 6 to 8 fall in real wages this year.p

pAnd some companies are already bracing for when consumer appetite, buoyed recently by savings accrued during COVID lockdowns, cools further.p

p“People are still buying our products and volumes are increasing,” Martin Pisklak, chief financial officer of Czech soft drinks maker Kofola Ceskoslovenkso, told an analyst call last month.p

p“But with the high numbers in inflation, we expect in the second half of the year or during the next winter, there will be pressure on the volumes for sure because of the lower purchasing power of our consumers.”p

p

pp Writing by Gergely Szakacs Additional reporting by Krisztina Fenyo Editing by Catherine Evansp

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