By Gergely Szakacs
BUDAPEST (Reuters) – Protracted economic weakness in the euro zone could harm central Europe’s recovery prospects, a key risk that could ultimately put downward pressure on sovereign ratings in the region, S&P Global Director Karen Vartapetov said on Thursday.
Data published earlier this week showed November industrial output falling in the Czech Republic and Hungary following a decline in industrial production in Germany, Europe’s largest economy and central Europe’s key trading partner.
The data highlighted risks to central Europe’s recovery from last year’s inflation-induced downturn, even as many of the region’s central banks have started paring back rate rises.
“One of the key risks which we see is what could be a more protracted weakness in advanced Europe, including Germany,” Vartapetov, Lead Analyst for CEE & CIS Sovereign Ratings, told an online briefing on the central European sovereign outlook.
While the region’s reliance on German exports has declined over the past decades, the Czech Republic still sends a third of its exports to Germany, followed by Poland and Hungary, with Germany accounting for a fourth of Hungary’s exports.
S&P sees economic growth in central Europe outperforming the euro zone this year, helped by an expected rebound in domestic demand as real wages recover from last year’s steep falls induced by inflation surging into the double digits.
“But there are substantial risks to this very strong recovery driven by domestic demand if we’re talking about protracted and more structural, let’s say, weakness in the German economy,” Vartapetov said.
“And of course, weaker growth could put pressure on the public finances and put government debt on the upward path,” he said, adding that in the global context, government debt levels in central Europe were still moderate.
He said slower take-up of European Union funds, increasingly linked to rule-of-law reforms, was another downside risk, which could undermine medium-term growth potential and pressure public deficits, already “exceptionally wide” in historical terms.
Risks to fiscal consolidation were high given a heavy electoral calendar in the region this year and next, featuring presidential, parliamentary, local government and European Parliament ballots.
(Reporting by Gergely Szakacs; Editing by Mark Potter)
