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 increases, disruptions in supply chains, low consumer confidence and austerity measures weigh on output.

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

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

The economy grew 5.3 per cent between the second quarter of 2021 and the same three months of 2022 — also a smaller rise than anticipated.

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

While Poles are struggling with the higher cost of living, they are also facing problems with their housing costs. Last month, the government introduced a moratorium on mortgage payments to help ease the pain.

Poland’s economy was likely to contract year on year by late 2022 or early 2023, according to Marcin Kujawski, an economist at the Polish subsidiary of BNP Paribas.

Inflation and slowing industrial activity put “policymakers in a difficult spot” but the Polish central bank could still raise the benchmark interest rate by 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 stay positive in the second quarter.

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

“The region’s exposure to the German economy, which struggles with its own problems, will dent growth,” said David Nemeth, a Budapest-based economist with banking and insurance group KBC. “Inflation and rising interest rates at the same time will eat into domestic demand. A marked slowdown is definitely coming, and recession is likely as well.”

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

That was before prime minister Viktor Orbán’s government, facing a gaping fiscal shortfall, soaring inflation and financial market pressures, hit the brakes in July, removing generous energy price caps for much of the population and eliminating low taxes for hundreds of thousands of entrepreneurs.

Hungary is the only EU country that requested but has not yet been granted an EU post-pandemic recovery subsidy because of rule of law concerns. The lack of EU funds has also made a drag on growth prospects. Budapest and Brussels are expected to come to an agreement and release the funds later this year.

The tensions have undermined investor confidence in Hungarian assets, prompting a big sell-off of the country’s stocks and bonds and pushing the forint to record lows — although an eventual deal might offer Hungary a degree of relief, say analysts.

Are we heading towards a global recession? Our economics editor Chris Giles and US economics editor Colby Smith discussed this and how different countries are likely to react in our latest IG Live. Watch it here.