* East EU recovery faces headwinds on weak western demand
* Budget cuts, tight credit, rising unemployment to weigh
* Zloty, Turkish lira, Hungarian bonds seen outperformers
By Michael Winfrey
PRAGUE, Jan 15 (Reuters) - Germany's disappointing fourth
quarter growth figures bode ill for recovery in the European
Union's emerging economies and add to string of factors that
look set to hamper expansion later this year.
Governments prodded west European consumers to spend with
car scrap subsidies and other stimulus last year, but with
German demand slacking off at the end of 2009, factories from
Bavaria to the Black Sea are struggling to shudder back to life.
Manufacturing has mostly arrested a free fall in Hungary,
Romania, Slovakia and the Czech Republic, in annual terms, but
mainly because of a low comparative base from late 2008 caused
by eye-watering drops from the start of the economic crisis.
Now an outlook for a weak first quarter in Germany may
compound other factors that could cause the economies of the
EU's eastern wing to edge back towards zero quarterly growth in
the second half of the year.
Along with the end to some government stimulus programmes
seen in western EU states, they also include still weak western
Europe demand, rising unemployment, banks' persistent caution on
lending, and an effort by some governments to rein in huge
fiscal deficits by cutting spending and raising taxes.
"If you put all of that together, it's a fairly weak
picture," said Neil Shearing, EMEA economist at Capital
Economics. "The relatively strong quarter-on-quarter growth
rates that we've seen in some countries are unlikely to persist
through the course of this year."
This adds to a growing list of question marks over regional
markets, including concerns that elections in several countries
will undermine fiscal prudence while Greece's debt crisis leaves
doubts over the euro and investors' broader appetite for risk.
Most currencies, though, adjusted by losing up to a third of
their value after the financial crisis worsened in 2008, and a
repeat of that sell-off is unlikely for Poland's zloty, the
Czech crown, Hungarian forint, and Romanian leu.
For a graphic on CEE output against German GDP:
http://graphics.thomsonreuters.com/0110/EZ_CEDE0110.gif)
CEE output vs euro zone:
http://graphics.thomsonreuters.com/0110/EZ_CEGDP0110.gif
SCARCE DEMAND
Demand in the euro zone, where the lion's share of eastern
EU exports end up, and Germany in particular, is crucial to
Czech, Hungarian, Romanian and Polish manufacturing, which
closely correlate to German growth.
It may take till around mid-year though for them to feel the
impact of the fourth quarter stagnation in Europe's biggest
economy and harsh winter weather that has hit construction.
"We expect it to come in the second or maybe the third
quarter... In Poland, we expect a slowdown a little later, in Q3
or Q4," said Unicredit economist Gyula Toth. "We won't go back
to negative quarter on quarter GDP, but the acceleration will
slow and in some cases go back to around zero."
German Consumer demand is on the retreat following the end
of a government scheme in September encouraging people to scrap
old cars and buy new ones. Analysts say it accounted for up to a
fifth of Czech and Slovak car production and see those states
eking out growth of only around 1 percent in 2010.
Hungary and Romania, hemmed in by strict aid deals and
wounded domestic lending, may shrink marginally and grow only
very slightly, respectively, this year, while Poland, the only
EU country to escape contraction last year, is expected to grow
by more than 2 percent.
Analysts also say a pick-up in new orders in some countries
is linked to inventory restocking that will eventually peter out
around the middle of the year unless the recovery in the
developed world can live without stimulus-based life support.
Large production overcapacity and moves by Hungary, Romania,
and the Czech Republic to rein in budget gaps could act as a
break on investment and consumer demand.
Aside from western-owned car and electronics factories,
Czech bankruptcies are up 70 percent on the year.
"There are no signs of a particularly robust recovery and
what rebound there is looks heavily dependent on fiscal support
measures, which will have to be withdrawn at some stage,"
Moody's said in a report this week.
MARKET UPSIDE FOR PRESENT
Since central Europe's emerging countries mostly have
flexible currencies -- unlike the Baltic states and Bulgaria --
their prices have adjusted with the huge market selloff in late
2008, giving some support to exports.
Hungary's forint and Romania's leu are still down around 13
and 15 percent from highs 18 months ago and the Czech crown 8
percent. Poland's zloty -- still down 20 percent from July 2008
-- has the most room to gain.
Analysts, however, said expectations that central banks
would eventually start tightening monetary policy, perhaps in
the second half of the year, painted a weak picture for bonds
and that only Hungary, which is cutting back its deficit and
could still cut rates, looked attractive.
"We believe that two currencies will outperform -- the zloty
and the Turkish lira. We would overweight those," said
Unicredit's Toth. "On the bond market, in selected cases there
are positives, like Hungary, where the fiscal story is improving
in the right direction."
(Reporting by Michael Winfrey; editing by Patrick Graham)
