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Poland, Czech Republic & Hungary

Rising inflation shadows CEE’s economic recovery

The CEE region's economic recovery continues and ING experts expect this to continue in the months ahead, although the data is mixed. Inflation has also picked up and is expected to head more to the upside in most of the region, complicating further monetary easing.

Data on this year's first quarter GDP (up by 2.0% year-on-year) and its composition confirmed that the Polish economy is on a path to recovery – albeit a one-legged recovery. Household consumption jumped by 4.6% YoY on the back of a buoyant increase in real disposable income fuelled by rising labour income (double-digit growth in wages) and a generous indexation of social spending (pensions, child benefits) amid lower inflation. Public consumption soared 10.9% YoY, boosted by increases in public sector wages.


Czech Republic
Inflation to remain elevated amid strong consumption but weaker investment
The Czech economy is expected to see a continued cyclical recovery driven by an improving export side and upbeat domestic consumption. The renewed real wage growth of 4.8% YoY in the first quarter will support consumer spending as the emerging rebound of main eurozone trading partners fosters exports. A gradual economic rebound can also be seen in leading indicators such as lofty retail sales and overall positive consumer sentiment.

The upward inflation surprise at 2.9% in April, stronger household consumption and loftier nominal wage growth resulted in an upward revision of our inflation forecast to 2.5% for this year. Both nominal and real wage growth dynamics were 0.6 percentage points stronger than the CNB projection. Strong household spending, higher food prices, and still-elevated price growth in the service sector will contribute to more consciousness in the current CNB easing cycle. Still, monetary policy conditions are rather restrictive right now, so the easing will likely carry on though in a restrained mode. We foresee a 25bp cut at the June meeting, with the terminal rate at 4.50% this year and 3.75% for next year.

While experts have not made a 180-degree turn in their outlook for Hungary, they acknowledge that there have been some positives recently. In general, the high-frequency data still paints a somewhat cloudy picture, but if the recent upturn in retail sales continues, analysts can clearly say that some rays of light are breaking through the clouds. However, it is not only retail spending that is clearly raising hopes that Hungary is indeed recovering. The labour market has shown resilience, with the employment rate rising and the number of unemployed falling in recent months.

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