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Eastern Europe’s party is over, double-digit inflation hurts

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 check as the Stubborn double-digit inflation is eating into their incomes, while food prices are rising by 15-22% and energy costs are soaring.

While household consumption is taking a hit, analysts are revising their GDP forecasts downwards and the risk of a European-wide recession is looming.

Families have started 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% in June – people are cutting their bills by groceries and their purchases of durable consumer goods as the falling forint pushes up import prices.

“One day I went to the bakery and a loaf of bread cost 550 forints. I go there 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 town of Esztergom, in the north of the country, on the Danube.

Standing by his bicycle, Lajos, who did not give his surname, said soaring food prices had eaten up part of his monthly pension and he would not be able to pay bills. higher electricity bills, which will rise after the government last month scrapped price caps for what it calls high-consumption households.

So he makes his own plans.

“I can heat myself with gas but also with wood … because I have a tiled stove. So, with my wife, we will settle in a room, heat the stove, put on warm sweaters and watch television as has.”

Across Hungary, retail sales growth slowed to an annual rate of 4.5% in June from 10.9% in May, with furniture and electronics sales down 4.3% , suggesting that the impact of the massive tax breaks and tax transfers granted by the government of Prime Minister Viktor Orban before 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 in June, after falling 6.6% in May, data showed on Friday.

“Households have reacted to the rising cost of living significantly, and consumption of items has started to slow down,” said Peter Virovacz, an analyst at ING Budapest.

According to a survey conducted on Friday by the National Bank of Hungary, commercial banks expect lower demand for loans and tighter credit conditions in the second half of the year.

TO TIGHTEN ONE’S BELT

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 down sharply in 2023.

Citigroup said Hungary’s economy could grow nearly 5% in 2022, but downside risks to its 1% forecast for next year.

“The risk that prolonged high energy prices will keep 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 it will publish new forecasts in September.

The Polish 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 at the turn of the year as it sees the economy contracting 0.4% in the fourth quarter of 2022 and 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 helps to reduce inflation,” Governor Ales Michl said. .

With the summer still expected to be a boom in the tourism sector, Poles have started saving on travel, according to travel website Noclegi.pl.

“We see that what characterizes this season is the shortening of trips, on average by one day, and the postponement of booking at the last moment,” said Natalia Jaworska, expert at Noclegi.pl. The Poles also began to economize on food.

Data from various restaurant payment services, such as Sodexo, showed a drop in restaurant spending in the Czech Republic as well. The latest survey by the STEM polling institute in June revealed 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 plunged to its lowest point in July. low level since April 2020, during the first wave of the COVID-19 pandemic.

Martin Hulovec, a 43-year-old Czech film producer, said he was not worried about his earnings at the moment, but he was less optimistic about the future.

“Difficult times have not yet come for me to face them immediately…but they will come,” said Hulovec.

“I will definitely look to save more energy… I definitely won’t buy new things for children, clothes or sports equipment. You can find it second-hand for half the price.”

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

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