ANALYSIS-Eastern Europe’s party is over as double-digit inflation bites

In the weeks following Russia’s invasion of Ukraine, major Western European economies began to falter. But further east, it was still boom time thanks to double-digit wage increases and generous state aid in some countries.

Not anymore. A sharp slowdown in retail sales and plummeting confidence indicators show that the cost of living crisis has caught up with the eastern wing of Europe, where people are now facing a harsh reality as inflation stubborn double digits is eroding their incomes while food prices rise by 15% – 22% and energy costs soar.

As household consumption suffers, analysts are revising their GDP forecasts downwards and the risk of a European-wide recession is looming. Families began to tighten their belts. Poles are taking shorter vacations, Czechs are saving on restaurant bills while some seek second jobs, and in Hungary – where food inflation alone was 22.1% a year in June – people are cutting their grocery bills and purchases of durable consumer goods due to a falling forint currency drives up import prices.

“I went to the bakery one day and a loaf of bread costs 550 forints. I go the next day and it costs 650. For God’s sake!” exclaims Lajos, a 73-year-old man who makes shopping at a market in the northern town of Esztergom on the Danube. Standing next to his bicycle, gray-bearded Lajos, who did not give his surname, said soaring food prices had eaten up part of his monthly pension and he would not be in able to pay higher utility bills, which will rise after the last government. month removed price caps for what it called higher-use households.

So he makes his own plans. “I can heat with gas but also with wood… because I have a tiled stove. So with my wife we ​​will move into a room, heat the stove, put on warm sweaters and watch TV like that.”

Across Hungary, retail sales growth slowed to an annual rate of 4.5% in June, from 10.9% in May, with a 4.3% decline in sales of furniture and electronics , suggesting the impact of huge tax breaks and tax transfers from Prime Minister Viktor Orban’s government ahead of the April elections. has now faded. Polish retail sales growth also slowed to an annual rate of 3.2% in June from 8.2% in May, while Czech adjusted retail sales excluding cars and motorcycles fell 6.0% year-on-year. year in June after a 6.6% drop in May, the data showed. Friday.

“Households reacted to the rising cost of living significantly, and the consumption of things started to slow down,” said Peter Virovacz, an analyst at ING in Budapest. According to a survey by the National Bank of Hungary on Friday, commercial banks expect lower loan demand and tighter credit conditions in the second half of the year.

BELT TIGHTENING Slowing domestic demand, rising interest rates, cuts in government spending and rising business costs are expected to dampen economic growth in Central Europe in the second half of this year and slow it sharply in 2023 .

Citigroup said Hungary’s economy could grow nearly 5% in 2022, but its forecast of 1% for next year carries downside risks. “The risk of prolonged high energy prices is keeping inflation in double-digit territory even in 2023 and our updated internal forecasts for the eurozone point to downside risks,” he said.

The Hungarian central bank still forecasts growth of 2.0% to 3.0% for 2023 and will publish new forecasts in September. Poland’s economy is expected to grow by 3.8% this year and 3.2% in 2023, according to government projections.

The Czech central bank, the first to end its rate hike cycle on Thursday, predicts a recession early in the year as it sees the economy shrink 0.4% in the fourth quarter of 2022 and of 1% in the first quarter of 2023. “Our base case includes a mild recession – a technical recession – we have two consecutive quarters with a quarterly decline there… It would be a healthy recession, which also reduces the ‘inflation,” Governor Ales Michl said.

With summer still expected to see a boom in the tourism sector, Poles have started saving on travel according to travel site “We can see that what characterizes this season is the shortening of trips, on average by one day, and the postponement of booking until the last moment,” said Natalia Jaworska, expert at Poles also started saving on food.

Data from various restaurant payment services, such as Sodexo, also showed a drop in restaurant spending in the Czech Republic. Polling agency STEM’s latest survey in June found that 80% of Czech households were reducing or limiting their purchases due to rapidly rising energy bills. Czech consumer confidence hit a new low in July, according to the statistics office’s monthly survey, while a survey by think tank GKI showed Hungary’s consumer confidence index in July plunged to its lowest level since April 2020 during the first wave of COVID-19. 19 pandemic.

Martin Hulovec, a 43-year-old Czech film producer, said he was not worried about his earnings at the moment, but was less optimistic about the future. “Hard times haven’t arrived yet for me to deal with immediately…but it will come,” Hulovec said.

“I will definitely be looking to save more energy…I definitely won’t be buying new things for the kids, clothes or sports equipment. You can find it used for half the price.” And he too will turn on the heating less when winter arrives. (Reporting and writing by Krisztina Than, additional reporting by Jason Hovet and Robert Muller in Prague, and Anna Wlodarczak-Semczuk in Warsaw, Editing by Hugh Lawson)

(This story has not been edited by the Devdiscourse team and is auto-generated from a syndicated feed.)

Mary I. Bruner