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WRAPUP 1-Hungary returns to growth but Czech downturn deepens

Hungary's economy unexpectedly broke out of recession in the first quarter and Romania expanded faster than forecast, but their regional peer the Czech Republic plunged deeper into its longest downturn in two decades.

 

The European Union's developing members are struggling with varying success to return to the pace of growth they need to catch up with the richer West, having been dragged back into double-dip contractions by the euro zone debt crisis.

Facing low demand in the single currency area for the cars, electronics, and other goods produced in the region and government cost cutting at home, recovery has been elusive and many economists predict weak growth for years to come.

But Hungary and Romania defied expectations, with the former ending last year's recession with quarterly growth of 0.7 percent from January to March, helped by a low base. It shrank 0.9 percent on annual terms, less than forecast.

Institutions including the European Commission, which has predicted modest 0.2 percent growth for this year, may now have to revisit their forecasts for Hungary. The data could also strengthen Prime Minister Viktor Orban's resolve to continue with pro-growth policies and repudiate urging from abroad to pursue conventional austerity measures.

Analysts say growth could pick up in the second half when new production capacity comes online at German car maker Audi's Hungarian plant. Auto makers Daimler and Opel are also expected to ramp up production.

Zoltan Arokszallasi, an analyst at Erste Bank, warned against being too optimistic, however, as big European economies such as Germany and Poland continued to struggle.

"The region and our export markets are performing weaker, so unless there is a sea change on that front, we can expect the pace of quarterly growth to moderate," he said.

Romania grew 0.5 percent from the previous quarter, the top end of a range predicted by analysts in a Reuters poll. It was up 2.1 percent year-on-year.

Analysts said part of the jump probably came from a recovery in agriculture, an important part of the economy and a sector that suffered in 2012 from an early freeze, followed by a drought. They said better crops this year can also help Hungary.

"Even before today's release, we were starting to turn more optimistic on the economic prospects of Romania in 2013," said Mihai Patrulescu, a senior economist at Unicredit in Bucharest.

Hungary's forint jumped 0.7 percent against the euro after the data was released, while Romania's leu was virtually flat.

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NOT ALL ROSY

But the optimistic news stopped there. The Czech Republic, where some 85 percent of the economy is connected to the export sector, shrank 0.8 percent on a quarterly basis, far exceeding market expectations of a 0.1 percent dip.

The second largest emerging EU economy shrank 1.9 percent versus the same period a year earlier.

Both readings were the worst in a recession that began in mid-2011 and briefly knocked the crown over half a percent weaker against the euro to a new 18-month low.

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"Recession in the Czech Republic is only just reaching its worst," said Peter Dufek, head of macroeconomic analysis at bank CSOB. "German numbers were also disappointing. Thus the Czech economy has nothing to lean on for the time being."

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Its seven quarters of contraction or stagnation has dragged on longer than the recession in the euro zone, its main export market.

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The Statistics Office attributed the fall to weak investment and exports, a shift from the downturn's earlier phase in which government austerity and falling domestic demand were seen as the main culprits.

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Having cut interest rates to almost zero, rate setters say they may have to intervene to weaken the crown currency against the euro to jump-start the economy, a step they have avoided but may be pushed closer to by the first quarter figures.

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"It is pretty clear that the (central bank) needs to do something, but at the same time the CNB does not seem to realize this," said Stanislava Pravdova-Nielsen, analyst at Danske Bank.

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The Czech data followed numbers on Tuesday showing the region's largest economy, Poland, had come within a hair's breadth of sliding into its first recession since the 1990's, dashing hopes of a return to rapid growth later this year.

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Bulgaria's economy also edged up in the first quarter by 0.1 percent versus the previous three months. (Reporting by Michael Winfrey; Editing by Toby Chopra)

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