Exports and a slight pickup in domestic demand fueled growth in Hungary and the Czech Republic in the first quarter, though analysts said fiscal tightening in the euro zone will slow the pace of recovery later this year.

Crawling out of last year's deep slumps, they outpaced Bulgaria, whose economy relies more on internal demand and which continued to contract as it tries to overcome the bursting of a foreign-lending-fueled credit bubble that led to double-digit growth before the global financial crisis.

Following an export-led recovery fueled by inventory restocking and stimulus projects in euro zone states, which form the main export market for the European Union newcomers, domestic spending is now showing signs of gaining traction in the Czech Republic and Hungary.

The Czech economy grew 0.5 percent versus the previous quarter, significantly more than an earlier flash estimate showing growth of only 0.2 percent.

On an annual basis, it grew by a real 1.1 percent between January and March, a touch below a preliminary reading of 1.2 percent released on May 12 that matched analysts' forecasts.

Hungary grew 0.9 percent versus the last quarter of 2009, according to seasonally adjusted and calendar-adjusted figures. it was up 0.1 percent on the year, in line with a preliminary estimate.

On the quarterly basis, both Czech and Hungary show the recovery is (on)going, said Raffaella Tenconi, chief economist at Wood & Co.

Net exports remain very important, but we do see a switch in that domestic demand, although it is not driving growth, is not detracting from it as much as before. The economic situation still warrants an accommodative monetary stance.

Czech exports grew 3 percent quarter on quarter, and household spending was up 0.7 percent. In Hungary, they rose 3.2 and 0.3 percent, respectively.

Like other countries in the region, both the Czech and Hungarian central banks have slashed official borrowing costs to all-time lows due to weak demand. The Czechs' official rate is now at 0.75 percent and Hungary's is 5.25 percent.

In other data, Czech consumer prices rose 0.1 percent in May from April, putting the annual inflation rate at 1.2 percent but showing there was no demand-led pressures.

Bulgaria's economy shrank by 3.6 percent on the year, less than a preliminary 4.0 percent estimate. The Balkan state shrank 5.0 percent last year due to plunging domestic consumption that hit imports. The government sees 2010 growth at 1.0 percent.

The European Commission expressed concerns about the quality of the country's statistics, sending Bulgaria's debt insurance costs to 11-month highs.


This year's growth outlook for the Czech Republic and Hungary remains uncertain, not least because Hungary's new government has announced major tax changes and cost cuts and the Czechs look set for a center-right government that has pledged to push through significant fiscal consolidation measures.

The Czech Civic Democrats party is in government coalition talks with two other austerity-minded groupings and has said it will try to cut the 2010 budget deficit more than originally planned to 4.0-4.5 percent of gross domestic product, from 5.3 percent.

On Tuesday, Hungary's rightist Fidesz Prime Minister Viktor Orban said he would cut taxes for families and small businesses, measures economists say may be hard to square with a budget deficit target of 3.8 percent of GDP.

It has also said it will raise a levy on banking profits and ban foreign currency mortgage loans -- a main economic driver for Hungary this decade.

Against a broader backdrop of fiscal consolidation moves in the euro zone that have been prompted by market worries over the size of Western EU states' debt loads, analysts said they expected the pace of growth in the CEE region to slow at the end of the year.

Domestic demand still hasn't picked up convincingly and uncertain growth prospects remain in our major export markets, said Gyorgy Barta, an analyst at CIB in Budapest, referring to Hungary.

We still expect the recovery from the bottom to remain slow. We only expect a slightly positive full-year figure.

(Additional reporting by Martin Dunai and Jason Hovet; editing by John Stonestreet)