# Analysis-Consumer boom nearly over as Central Europe heads into “decade of peril” Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2022-05-04 Category: NEWS Category URL: https://financedigest.com/category/news Meta Title: Central Europe's economies outpace euro zone peers as Meta Description: Discover how Central Europe's economies are surging ahead, outpacing Eurozone peers. But could a summer reversal bring inflation woes? URL: https://financedigest.com/analysis-consumer-boom-nearly-over-as-central-europe-heads-into-decade-of-perilhtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2022-05-04t135824z1lynxnpei430kirtroptp4easteurope-economy-1736815785420-compressed.jpg) By Gergely Szakacs, Alan Charlish and Jason Hovet VELENCE, Hungary/WARSAW/PRAGUE (Reuters) – War may be raging on their doorstep but Central Europe’s economies are outpacing their euro zone peers as consumer spending booms. A reversal could come as soon as this summer, however, leaving a painful, inflation-laced hangover. Economists are already sounding the alarm about [inflation momentum in Hungary](https://www.financedigest.com/hungary-ramps-up-rate-hikes-as-war-stokes-inflation-risks.html "Hungary ramps up rate hikes as war stokes inflation risks") and Poland, fuelled partly in both countries by government transfers to households that helped supercharge demand in the first quarter. Sharp [interest rate](https://www.financedigest.com/ecb-raises-interest-rates-again-cuts-bank-subsidies.html "ECB raises interest rates again, cuts bank subsidies") rises have so far failed to curb price pressures, as a region-wide shortage of workers pushes up wages and the conflict in Ukraine causes energy prices to soar. At the Velence Resort and Spa, beside a lake just four hours’ drive from Hungary’s border with Ukraine, director Peter Barsony expects a bumper 2022, with a strong increase in weekend bookings [since February despite recent price rises](https://www.financedigest.com/uk-credit-card-borrowing-rises-by-most-since-2005-boe.html "UK credit card borrowing rises by most since 2005 – BoE"). Unless [trends change](https://www.financedigest.com/five-tech-trends-changing-the-face-of-finance.html "Five Tech Trends Changing The Face Of Finance"), this will be a substantially better year than last in terms of revenue,” Barsony said. The [purchasing power](https://www.financedigest.com/powering-purchasing-with-process-mining.html "POWERING PURCHASING WITH PROCESS MINING") of Hungarians has definitely not deteriorated for the time being. Hungarian [retail sales](https://www.financedigest.com/spains-november-retail-sales-fall-0-6-on-year.html "Spain’s November retail sales fall 0.6% on year") surged by an annual 16.2% in March, driven by higher spending on fuels and non-food items. While economic fundamentals are strong, [consumer spending has been boosted by Prime Minister Viktor Orban’s pre-election wage hikes](https://www.financedigest.com/ikea-reports-record-sales-as-price-hikes-offset-weakening-consumer-confidence.html "IKEA reports record sales as price hikes offset weakening consumer confidence") and handouts to families. In Poland, robust growth in [retail sales after pandemic restrictions were lifted has been further supported by spending](https://www.financedigest.com/valentines-day-spending-boosts-british-retail-sales-in-february-brc.html "Valentine’s Day spending boosts British retail sales in February – BRC") on millions of refugees fleeing neighbouring Ukraine. Hundreds of thousands of Ukrainians have also poured into Hungary, like Poland a member of NATO, since [Russia launched its invasion](https://www.financedigest.com/ukraine-asks-for-south-korea-cybersecurity-aid-amid-russia-invasion.html "Ukraine asks for South Korea cybersecurity aid amid Russia invasion") on Feb. 24. As Europe heads into what Orban described last week as a “decade of peril”, with the war escalating an energy crisis, central [banks are struggling to contain inflation](https://www.financedigest.com/be-really-really-careful-on-inflation-bank-of-englands-haskel.html "Be ‘really, really careful’ on inflation – Bank of England’s Haskel") that has blasted past their targets and is on track to reach 14% to 15%. “DONE IN TWO SENTENCES” Zsolt Csombok, a 51-year-old IT services entrepreneur, has raised wages three times over the past year – Hungarian unemployment is at a [record low – and increased his company’s hourly fees](https://www.financedigest.com/recruiter-hays-boosted-by-record-net-fees-but-cautious-on-outlook.html "Recruiter Hays boosted by record net fees, but cautious on outlook") by 25% to 30% to cover that and other expenses. He says his clients, similarly plagued by [supply chain issues](https://www.financedigest.com/uks-j-d-wetherspoon-returns-to-profit-as-supply-issues-ease.html "UK’s J D Wetherspoon returns to profit as supply issues ease") and rising costs, have simply accepted the price hikes, signalling strong demand-side inflation pressures. Something which would have taken tough negotiations to push through just a [year ago can now be done in two sentences,”](https://www.financedigest.com/belarus-sentences-in-absentia-former-olympian-herasimenia-to-12-years-in-prison-belta.html "Belarus sentences in absentia former Olympian Herasimenia to 12 years in prison – BelTA") Csombok said. Projecting first-quarter growth at 7% to 8%, Hungary’s [central bank](https://www.financedigest.com/stock-pickers-reckon-its-time-to-move-on-from-central-banks.html "Stock pickers reckon it’s time to move on from central banks"), already in its third-steepest tightening cycle since Communist rule ended in 1989, has warned Orban to start rebalancing the economy. Core inflation, which strips out volatile energy and food, [hit a near 21-year high in March](https://www.financedigest.com/u-s-oil-exports-to-europe-hit-record-in-march-on-steep-discounts.html "U.S. oil exports to Europe hit record in March on steep discounts"). Tighter policy is needed to take the heat out of [domestic demand,”](https://www.financedigest.com/turkeys-economy-grew-7-6-in-q2-driven-by-domestic-demand-exports.html "Turkey’s economy grew 7.6% in Q2 driven by domestic demand, exports") said Liam Peach at Capital Economics. This will require a combination of tax hikes, spending cuts as well as interest [rates rising above 8% for a prolonged period of time to cause GDP](https://www.financedigest.com/hopes-of-slowdown-in-rate-hikes-bolster-shares-ahead-of-u-s-gdp.html "Hopes of slowdown in rate hikes bolster shares ahead of U.S. GDP") growth to weaken. In Poland, retail [sales beat forecasts in March and returned to their pre-pandemic trend](https://www.financedigest.com/why-sales-enablement-is-the-trend-to-watch-out-for-in-2023.html "Why sales enablement is THE trend to watch out for in 2023"), economists at Bank Pekao said, while warning of “bleak” consumer prospects for later 2022 as the war sours sentiment. Most respondents in an April [survey nevertheless said they were not worried about job](https://www.financedigest.com/half-brits-taken-pay-cut-job-made-happier-according-wrike-survey.html "Over half of Brits have taken a pay cut for a job that made them happier, according to Wrike survey") security. Maciej Skurczynski, a 34-year-old specialist in industrial [real estate](https://www.financedigest.com/gold-london-real-estate-and-the-theresa-may-effect.html "GOLD, LONDON REAL ESTATE AND THE THERESA MAY EFFECT"), said he was unsettled by the conflict, but trying to live a normal life. We can only [live or we can stay at home](https://www.financedigest.com/still-living-at-home-a-third-of-the-nation-cant-afford-to-rent.html "Still living at home? A third of the nation can’t afford to rent"). And I prefer to live,” Skurczynski said as he finished off a lunchtime burger at a food hall in central Warsaw. DEMAND-DRIVEN INFLATION With inflation still rampant, the Polish and Czech [central banks are set to hike](https://www.financedigest.com/central-banks-hike-rates-again-but-a-pause-is-coming.html "Central banks hike rates again, but a pause is coming") borrowing costs again on Thursday. Hungary’s [central bank](https://www.financedigest.com/dollar-skulks-at-eight-month-low-central-bank-meetings-in-focus.html "Dollar skulks at eight-month low, central bank meetings in focus") has raised its base rate by nearly 500 basis points since June, but government price controls, wage hikes and caps on mortgage rates are acting as a counterweight. Pre-war data from retail, industry, and construction sectors, and even the latest [big data](https://www.financedigest.com/big-data-suggests-leicesters-football-success-could-usher-in-economic-boom.html "Big data suggests Leicester’s football success could usher in economic boom"), are suggesting surprisingly strong first-quarter GDP growth,” ING economist Peter Virovacz said. This could mean a wider positive output gap, translating into longer and [stronger demand-driven inflation](https://www.financedigest.com/dollar-stronger-as-inflation-worries-dampen-risk-sentiment.html "Dollar stronger as inflation worries dampen risk sentiment") for the remainder of the year, in our view. The Czech economy grew by a better-than-expected 4.6% year-on-year in the first quarter, but with less government help for households facing double-digit inflation, [consumer confidence hit](https://www.financedigest.com/uk-consumer-mood-hits-one-year-high-but-financial-gloom-persists.html "UK consumer mood hits one-year high, but financial gloom persists") its lowest in nearly a decade in April. Central bank Vice-Governor Marek Mora told [Reuters on April 26 that he foresaw a 6% to 8% fall in real wages this year](https://www.financedigest.com/germany-home-prices-to-sink-nearly-6-this-year-reuters-poll.html "Germany home prices to sink nearly 6% this year – Reuters Poll"). And some companies are already bracing for when consumer appetite, buoyed recently by savings accrued during [COVID lockdowns](https://www.financedigest.com/in-shanghai-lockdown-blues-make-way-for-covid-testing-gripes.html "In Shanghai, lockdown blues make way for COVID testing gripes"), cools further. People are still [buying our products](https://www.financedigest.com/over-half-of-britons-say-loyalty-cards-encourage-them-to-buy-a-product-niq.html "Over half of Britons say loyalty cards encourage them to buy a product – NIQ") and volumes are increasing,” Martin Pisklak, chief financial officer of Czech soft drinks maker Kofola Ceskoslovenkso, told an analyst call last month. But with the high numbers in inflation, we expect in the second half of the year or during the next winter, there will be pressure on the volumes for sure because of the [lower purchasing power of our consumers.”](https://www.financedigest.com/britains-next-sees-lower-profit-in-2023-as-consumer-outlook-darkens.html "Britain’s Next sees lower profit in 2023 as consumer outlook darkens") (Writing by Gergely Szakacs; Additional reporting by Krisztina Fenyo; Editing by Catherine Evans) --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---