Gergely Skakacs by Alan Charlish, Jason Hovet 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. But, the reversal might come this summer. However, it could lead to a severe, inflation-infected hangover.

Already, economists have raised alarm about the inflation momentum in Hungary (and Poland) due to government transfers to households which helped boost demand during the first quarter.

Sharp (OTC-) Interest Rate Rises Have So Far Failed to Reduce Price Pressures. A region-wide shortage in workers causes wages to rise and conflicts in Ukraine cause energy prices to skyrocket.

Director Peter Barsony of the Velence Resort & Spa in Budapest, just four hours from Hungary’s border to Ukraine, expects an impressive 2022. He anticipates strong weekend bookings, despite price increases, and a record number of guests.

Barsony stated that “unless trends change”, this year will be significantly better than the last for revenue. The purchasing power of Hungarians is not declining for now.

Hungarian retail sales soared an average 16.2% per year in March. This was due to increased spending on fuels and other non-food products.

Although economic fundamentals remain strong, Prime Minister Viktor Orban’s pre-election wage increases and family handouts have helped to boost consumer spending. The millions of Ukrainian refugees who fled to Poland have helped spur a robust increase in Polish retail sales.

Since Russia’s invasion of Ukraine, February 24, 2018, hundreds of thousands have moved into Hungary.

Europe enters what Orban refers to as “a decade of peril” with an escalating energy crisis and war, the central banks face a difficult task in controlling inflation. They have already exceeded their targets but are on pace to surpass 14%-15%.

“DONE IN 2 SENTENCES.”

Zsolt, 51, is an IT services entrepreneur. In the past year, his wages have been raised three times. Hungarian unemployment has fallen to a new low. To cover this, Csombok increased hourly charges by 25%-30%.

According to him, his clients have also been plagued by rising costs and supply chain issues. They simply accept the price rises. This is a sign of strong demand-side inflation pressures.

Csombok declared, “Something that would have required tough negotiations just one year ago can now been done in two sentences.”

The central bank of Hungary, which is in the third most severe tightening cycle since 1989’s end under Communist rule, projects first quarter growth between 7% and 8%. Orban has been warned to start rebalancing his economy. Core inflation which excludes volatile food and energy, reached an almost 21-year record in March.

Capital Economics’ Liam Peach stated that “Tighter policies are needed to remove the heat from domestic demand.”

To slow down GDP growth, it will take a mix of spending cuts and tax increases.

Polish retail sales beat projections in March, and they returned to the pre-pandemic trend. Bank Pekao economists said that this was despite warnings of “bleak” consumer prospects after 2022, when war sentiments are rampant. However, the majority of respondents to an April survey said that they weren’t worried about their job security.

Maciej Skurczynski is a 34 year-old expert in industrial real property. He said he felt uneasy by the conflict and was trying to maintain a normal daily life.

You can choose to live or you can remain at home. Skurczynski admitted that he preferred to live as he finished his lunchtime burger in a central Warsaw food court.

DEMAND-DRIVEN INSULATION

Inflation is still high in Poland and Czech, so the central banks of these countries are expected to increase borrowing costs on Thursday.

Hungary’s central banks has increased the base rate by 500 basis points over June. However, price controls, wage rises, and cap on mortgage rates act as counterweights.

Peter Virovacz from ING stated, “Prewar data from industry and retail as well as the most recent big data are suggesting surprisingly strong GDP growth in the first quarter.”

We believe this could translate to an increase in the positive output gap and a longer-term, more demand-driven, inflation.

Although the Czech economy experienced a 4.6% increase in year-on-year growth in its first quarter, consumers’ confidence was at its lowest level in almost a decade with less government assistance for households that face double-digit inflation.

Marek Mora, Vice-Governor of the Central Bank, told Reuters that he saw a 6% to 8% drop in real wages for this year.

Some companies have already begun to plan for the day when consumers’ appetites will cool further, buoyed by recent COVID lockdown savings.

Martin Pisklak was the chief financial officer at Czech soft drinks manufacturer Kofola Ceskoslovenkso. He stated this to an analyst conference last month.

We expect that the volume of goods will increase due to the low purchasing power of consumers, despite the inflation numbers being high.