* Czech GDP growth slows more than expected to 4.5 percent
in the second quarter, Slovak growth softens
* Hungary's growth at 2.2 percent exceeds forecasts but
recovery seen limited by weak euro zone growth
* Slowing growth and moderating inflation seen leading to
rate cuts
By Krisztina Than
BUDAPEST, Aug 14 (Reuters) - Czech economic growth lost
steam in the second quarter and robust Slovak growth also
softened while Hungary's economy picked up, but a slowdown in
the euro zone has dented the region's growth prospects.
Czech economic growth slowed more than expected to 4.5
percent after a revised 5.1 percent growth figure in the first
quarter, while Slovakia's growth slowed to a real 7.6 percent
from 8.7 percent in the first three months.
Slovakia remained one of the fastest growing economies in
the European Union and far outperformed neighbouring Hungary
despite an acceleration of growth there to an annual 2.2 percent
on the back of higher farm output and a pickup in domestic
consumption.
But analysts said a sharp slowdown in the euro zone, where
most of the region's exports go, would take its toll on central
eastern Europe's growth in the coming quarters.
The euro zone economy shrank quarter-on-quarter in the
April-June period for the first time since measurements for the
euro area began in 1995, by 0.2 percent, with the German economy
contracting by 0.5 percent and the French by 0.3 percent.
"More slowdown is to come (in the Czech Republic) given
soaring unit labour costs in euro, already declining
manufacturing orders and the Eurozone on the brink of a
recession," said JPMorgan economist Miroslav Plojhar.
Soft retail sales data in the Czech Republic suggested that
household consumption slowed in the second quarter.
In Hungary, which has been one of the region's laggards, the
economy is recovering from a sharp slowdown last year on the
government's deficit-cutting measures, but the outlook is gloomy
for the export sector which has been the key driver of growth.
Analysts said the slowdown in the euro zone would prevent a
significant recovery in Hungary.
"The GDP data confirm the Hungarian economy reached the
bottom last year. For 2008 we can expect a gradual recovery,
although the worsening external environment could hinder any
strong rebound of GDP growth," said CIB analyst Mariann Trippon.
For this year, analysts project annual GDP growth to come in
at 2.2 percent, up from 1.3 percent last year <HUGDP1>.
RATE CUTS IN THE PIPELINE
As weak demand in the euro zone weighs on central and
eastern Europe's economies and inflation is seen coming down,
helped by strong currencies, central banks in the region are
expected to loosen monetary policy.
The Czech central bank unexpectedly cut interest rates by 25
basis points to 3.5 percent last week following warnings it
could ease policy due to the strong crown, which is seen driving
down inflation and also growth.
"Today's figures support our view that the recent CNB rate
cut was the beginning of the easing cycle, not just a one-off
move to stop the currency appreciation," JPMorgan's Plojhar
said.
In Hungary, where a strong forint also helps curb inflation,
markets expect the central bank to start cutting rates from 8.5
percent in the last quarter of 2008 or early next year if the
currency stays strong and if inflation pressure moderates.
In Poland however, where economic growth is also seen
slowing in the rest of the year, a pickup in annual inflation in
July signalled the central bank may need to hike interest rates.
In Slovakia, which joins the eurozone in January, the
central bank is expected to keep its key rate in line with that
of the European Central Bank regardless of GDP figures.
(Reporting by Krisztina Than; Editing by Gerrard Raven)
