Poland posts weaker than expected start to 2013

Central European leader Poland got off to a weaker than expected start this year, quarterly data showed Tuesday, amid expectations that central banks in the region will further cut interest rates to boost demand and spur a sluggish recovery.

The only EU member to have grown each year over the last two decades, Poland mustered just 0.1 percent growth in the first quarter, initial official data showed, after zero growth in the last quarter of 2012.

Analysts pointed to a sharp decline in construction as contributing factor to the doldrums, highlighting trade as a positive driver and room for further interest rate cuts to bolster consumption.

"The weak state of domestic demand in Poland means that the economic recovery is likely to be sluggish," London-based Capital Economics analysts said in a Tuesday statement.

"As such, we expect interest rates to fall further," they added.

Poland's central bank (NBP) cut its key interest rate by a quarter-point to a historic low of 3.0 percent last week, amid forecasts of slower than expected growth.

Although Warsaw is in no rush to join the crisis-struck eurozone, the move echoed the European Central Bank's May 2 decision to slash its key rate to a new historical low of 0.50 percent.

With inflation in Poland under control at 1.0 percent, analysts insist the string of rate cuts since November is intended to perk up demand in this market of 38 million people, central Europe's largest.

While the official preliminary estimate was short of details on the reasons behind the Q1 slowdown, Capital Economics noted "investment is in freefall."

"Output from the construction sector fell at an even faster pace in quarter one than in quarter four," Capital Economics analyst William Jackson said, noting a 15.4-percent year-on-year decline compared to a 11.3-percent drop.

Large-scale construction and infrastructure investments, which were strong economic drivers in Poland as it geared up for the Euro 2012 football championships last June, have since waned.

"We think net trade probably provided the greatest positive contribution to the annual growth rate," Jackson said, adding that for now they were "sticking" to their forecast of 1.0-percent growth in output this year.

The economy expanded by 0.4 percent in the first quarter on an annual comparison after an uptick of 0.7 percent in the fourth quarter of 2012, Poland's Central Statistical Office (GUS) also reported Tuesday.

In 2012, the gross domestic product (GDP) expanded by 1.9 percent, down from 4.5 percent in 2011 primarily due to a drag from the eurozone crisis in its main trade partners, including EU powerhouse and western neighbour Germany.

Inflation, which stood at 3.7 percent in 2012, was expected to decline to 1.6 percent in 2013 and 2014 before dropping to 1.5 percent in 2015, according to the NBP central bank forecast.

To the south, the Czech Republic has been locked in recession for more than a year, having posted a 1.2-percent contraction for 2012. The slowdown in eurozone heavyweight Germany, Prague's main trading partner, is largely to blame.

The crisis prompted the Czech central bank to slash rates to a record-low 0.05 percent in November 2012, with Prague-based Patria Finance analyst Tomas Vlk predicting "stable rates at a low level" in the coming months.

"The highly-open Czech, Hungarian and Slovak economies will be held back by weak growth in their key eurozone trading partners," Capital Economics said Tuesday.

Tiny EU Baltic states of Estonia, Latvia and Lithuania were "likely to be among the best performing economies in the region."

"The slowdown in Emerging Europe appears to have bottomed out at the start of the year and, while we expect growth to pick up over the second half of 2013, the recovery is likely to be sluggish and uneven," it added.

Capital Economics warned however that a "flare-up" in the eurozone crisis, a fragile banking sector and a spike in global investor risk aversion posed significant risks.