Analysis – Eastern Europe’s Celebration Is Over As Double-Digit Inflation Bites

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By Krisztina Than

ESZTERGOM, Hungary (Reuters) – In the weeks following Russia’s invasion of Ukraine, Western Europe’s major economies began to falter. But further east, things were still rampant thanks to double-digit wage increases and generous state aids in some countries.

Not anymore.

A sharp slowdown in retail sales and falling confidence indicators show that the cost of living crisis has overtaken Europe’s eastern wing, where people are now facing a harsh reality check as persistent double-digit inflation erodes their incomes as food prices rise by more than 15% increase. 22% and energy costs are rising.

With household consumption taking a hit, analysts are lowering their GDP forecasts and a Europe-wide recession is looming.

Families have begun to tighten their belts. Poles are taking shorter vacations, Czechs are saving on restaurant bills while some are looking for second jobs, and in Hungary – where food inflation stood at 22.1% year-on-year in June alone – people are cutting bills for groceries and purchases of consumer durables as a slump the forint currency is pushing up entry prices.

“I went to the bakery one day and a loaf of bread cost 550 forints. I go in the next day and it costs 650. For God’s sake!” exclaimed Lajos, a 73-year-old man who shops at a market in the north. city ​​of Esztergom on the Danube River.

By his bike, gray-bearded Lajos, who did not mention his last name, said the rise in food prices had consumed some of his monthly pension and he would not be able to afford higher utility bills, which will rise after the government last month scrapped price caps for what it called higher consumption households.

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So he makes his own plans.

“I can heat with gas, but also with wood… because I have a tiled stove. So we go to one room with my wife, heat the stove, put on some warm sweaters and watch TV.”

Across Hungary, retail sales growth slowed to 4.5% year-on-year in June from 10.9% in May, with furniture and electronic goods sales falling 4.3%, pointing to the impact of huge tax breaks and fiscal transfers from Prime Minister Viktor Orban’s government ahead of the April election has now faded.

Polish retail sales growth also slowed to 3.2% year-on-year in June from 8.2% in May, while Czech retail sales excluding cars and motorcycles declined 6.0% year-on-year in June after falling 6.6 % in May, data shows. on Friday.

“Households have responded meaningfully to the rising cost of living and consumption of things is starting to slow,” said Peter Virovacz, an analyst at ING in Budapest.

According to a survey by the National Bank of Hungary on Friday, commercial banks expect loan demand to decline and credit conditions to tighten in the second half.

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The slowdown in domestic demand, rising interest rates, government austerity and rising corporate costs appear to dampen economic growth in Central Europe in the second half of this year and to slow sharply in 2023.

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Citigroup said the Hungarian economy could grow by nearly 5% in 2022, but there were downside risks to its 1% forecast for next year.

“The risk of energy prices remaining persistently high will keep inflation in double-digit territory even into 2023, and our updated internal eurozone forecasts point to downside risks,” the report said.

The Hungarian central bank still forecasts 2.0%-3.0% growth for 2023 and will release new forecasts in September.

According to government forecasts, the Polish economy is expected to grow by 3.8% this year and 3.2% in 2023.

The Czech central bank, the first to halt its rate hike cycle on Thursday, is forecasting a recession at the turn of the year as the economy will contract 0.4% in the fourth quarter of 2022 and 1% in the first quarter of 2022. 2023.

“Our base case includes a mild recession – a technical recession – we have two quarters in a row with a quarterly decline there… That would be a healthy recession, which also allows for inflation,” said Governor Ales Michl.

While summer is still expected to see a boom in the tourism industry, Poles have started to cut back on travel, according to travel website Noclegi.pl.

“We can see that this season is characterized by shortening trips, on average by a day, and postponing the booking until the last minute,” says Natalia Jaworska, an expert at Noclegi.pl. Poles have also started to save on food.

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Data from several restaurant payment services, such as Sodexo, also shows declining spending in restaurants in the Czech Republic. The latest survey by the STEM polling station in June found that 80% of Czech households were cutting back or limiting their purchases due to rapidly rising energy bills.

Czech consumer confidence hit a new low in July, according to the statistical office’s monthly survey, while a study by think tank GKI found that Hungary’s consumer confidence index fell during the first wave of the COVID-19 pandemic in July.

Martin Hulovec, a 43-year-old Czech film producer, said he is not worried about his income right now, but is less optimistic about the future.

“The difficult times have not yet come for me to deal with them immediately… but they will come,” said Hulovec.

“I will definitely look for more energy savings… I certainly won’t buy new stuff for the kids, clothes or sports equipment. You can find them second-hand for half the price.”

And he too will turn on the heating less when winter comes.

(Reporting and writing by Krisztina Than, additional repotting by Jason Hovet and Robert Muller in Prague, and Anna Wlodarczak-Semczuk in Warsaw, editing by Hugh Lawson)

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