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Poland’s economy contracts as threat of recession across eastern Europe mounts

Russia’s war in Ukraine looks set to trigger a recession in Eastern Europe later this year, as energy price hikes, supply chain disruptions, low consumer confidence and austerity measures weigh on production.

The region’s largest economy, Poland, surprised analysts by contracting in the second quarter, falling 2.3 percent, according to preliminary data from the statistics office.

“We see it as a first step in a recession,” said Katarzyna Rzentarzewska, senior analyst for Central and Eastern Europe at Erste Group. “The economic growth in Poland is a huge surprise for the downside. . .[it]the expansion wiped out from the beginning of the year.”

The economy grew 5.3 percent between the second quarter of 2021 and the same three months of 2022 — also a smaller-than-expected increase.

Consumer confidence in Poland is now at its lowest level since the first weeks of the pandemic, while inflation is at a 25-year high of 15.6 percent, driven by rising food and energy prices. That has prompted the central bank to raise its benchmark interest rate for six consecutive months to 6.5 percent from nearly zero in the fall.

While Poles now struggle with the higher cost of living, they also have problems with their housing costs. Last month, the government imposed a moratorium on mortgage payments to ease the pain.

According to Marcin Kujawski, an economist at the Polish subsidiary of BNP Paribas, the Polish economy is expected to shrink year-on-year in late 2022 or early 2023.

Inflation and slowing industrial activity put “policymakers in a difficult position,” but the Bank of Poland could raise benchmark interest rates another 50 basis points this year, Kujawski said.

Manufacturers in the Czech Republic are also reporting a downturn, according to surveys in July, signs of trouble, even as domestic demand helped Czech growth remain positive in the second quarter.

Other economies in the region, such as Hungary and Romania, benefited from the economic momentum that had built up before Russia’s large-scale invasion of Ukraine. Analysts warned, however, that there was little doubt that the reality of an economic downturn would soon set in.

“The region’s exposure to the German economy, which is struggling with its own problems, will dent growth,” said David Nemeth, a Budapest-based economist at banking and insurance group KBC. “At the same time, inflation and rising interest rates will affect domestic demand. There is definitely going to be a definite slowdown, and a recession is likely too.”

Hungary’s annual growth slowed from 8 percent in the first quarter to 6.5 percent, while quarterly growth halved to 1 percent in the three months to June, the statistics office said.

That was before Prime Minister Viktor Orbán’s government, faced with a gaping budget deficit, rising inflation and pressure on the financial markets, put the brakes on in July, abolished the generous energy price ceilings for a large part of the population and the low abolished taxes for hundreds of thousands of entrepreneurs.

Hungary is the only EU country that has applied for an EU grant for recovery after a pandemic, but has not yet received it due to concerns about the rule of law. The lack of EU funds has also held back growth prospects. Budapest and Brussels are expected to reach an agreement and release the funds later this year.

Tensions have undermined investor confidence in Hungarian assets, leading to a major sell-off of the country’s stocks and bonds and pushing the forint to record lows – though a possible deal could offer some relief to Hungary, analysts say.

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