Hungary Leads East EU Economic Slide Amid War in Ukraine

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(Bloomberg) — Soaring inflation, higher interest rates and supply-chain snarls spurred by the war in Ukraine probably pushed most of the European Union’s biggest eastern economies into contraction at end-2022, with Hungary leading the way down.

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Hungary’s economy shrank a less-than-expected 0.4% in the fourth quarter compared with the previous three months, its statistics office said Tuesday, making it the second country in the region after the Czech Republic to fall into recession. 

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Poland is also expected to have contracted for the second time in 2022 — although not in consecutive quarters. The other larger economy in the region, Romania, posted growth of 1.1%. 

While the Hungarian and Czech declines were smaller than expected, they still contrasted with expectations from the richer euro area, which is expected to have dodged recession.

EU member states bordering Ukraine absorbed millions of refugees fleeing Russia’s invasion last year. Exacerbating that strain on the economy was a spike in the prices of energy and food caused by sanctions and tangled supply lines that have driven inflation to the fastest in at least two decades across the region.

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In response, central banks have ratcheted up borrowing costs to smother inflation, a wet blanket that also eliminated the prospect of a robust post-pandemic rebound in growth. 

Hungary has suffered the worst, with consumer prices surging to an EU-high 25.7% from a year earlier in January, which has prompted families and companies to cut back on spending. Price growth is seen elevated in the short term even after the central bank hiked the key interest rate to an EU-high 18% in October. 

The country is also struggling to unlock more than $30 billion in EU funds frozen over rule-of-law concerns. The quarterly decline was less than the 1.1% contraction projected in a Bloomberg survey. Gross domestic product grew 0.4% on an annual basis.

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“It’s hard to think of any component of the GDP index that would have helped growth,” ING Bank Hungary economist Peter Virovacz said.

The Czech Republic slid into recession last quarter with a smaller-than-expected 0.3% contraction, according to data released in January. In Poland, where some retailers complained of a weak Christmas season and expressed worries about the 2023 outlook, economists see the economy shrinking 0.5% quarter-on-quarter, for 2.2% annual growth. 

The forecast is factoring into the real economy. Polish fashion retailer CCC expects limited demand across the region this year. InPost SA, the country’s leading logistics operator for online retailers, sees Polish e-commerce growth sowing to 5%-10% from 15%-17% last year.

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Still, the EU’s largest eastern economy is due for a “soft landing,” central bank Governor Adam Glapinski said last week. Polish data is due out at 10 a.m.

Romania grew 4.6% from a year earlier. The result was fueled by a shift away from the typical driver, consumption, toward investment by companies and the public sector, while foreign-direct investment increased to a record 11 billion euros ($11.8 billion), according to the central bank.

“In Romania, growth is likely to be particularly strong compared to its peers, driven by large government spending at the end of the year,” Erste analyst Juraj Kotian said.

(Updates with Hungarian data in second paragraph.)