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Eastern Europe Recovery Hinges on Germany: Report

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First quarter gross domestic product data points towards a continued slowdown in Central and Eastern Europe unless the German economy improves, according to Lombard Street Research.

"The near-term outlook for the region is discouraging. The long-awaited recovery is unlikely to materialize, until the German economy shows more sustained improvement and consumer spending gains momentum," said Lombard economist Kasia Zatorska, in a report published after the release of flash GDP estimates for the region.

The most disappointing numbers came from the Czech Republic, where the economy contracted for a sixth consecutive quarter. Real GDP fell by 0.8 percent on the quarter, deeper than market expectations for a 0.1 percent decline.

"High dependency on exports, both in relation to GDP (85 percent), and their destination (63 percent goes to the euro area) will limit the country's capacity to recover swiftly, and most likely result in another year of contraction," said Zatorska.

(Read More: Euro Zone Economy Shrinks in Longest Ever Recession)

Nicholas Spiro of Spiro Sovereign Strategy concurred with Zatorska regarding the detrimental impact of Germany's slowdown on the Czech Republic and other countries in the region.

"The after-effects of the euro zone crisis are being felt throughout central Europe. Clearly the fact that Germany has been hit harder than many thought six months ago has undermined the prospects for growth, particularly in the small export-orientated open economies like Hungary, Czech Republic and Slovakia," Spiro told CNBC.

Polish growth was also weak in the first quarter, with real GDP expanding only 0.1 percent on the quarter. "This was a second consecutive quarter of a particularly weak expansion in the Polish economy, undermined by deficient domestic demand and a sharp deceleration of export growth," said Zatorska, who forecast the country, viewed as bellweather for Eastern Europe, will grow by only 1.3 percent in 2013.

(Read More: Poland to Grow Ireland-Style as Crisis Heads East)

While Hungary posted comparatively upbeat growth of 0.7 percent on the quarter, Zatorska warned the upturn could prove fragile.

"Private consumption is still muted, while the government might have to implement further fiscal cuts and freeze spending, if the planned 0.3 percent of GDP consolidation proves insufficient to narrow the budget to the required 3 percent of GDP this year," she said. The Hungarian economy contracted in every quarter last year, with performance significantly impaired by external shocks, such as a draught hitting the agriculture.

Contact Europe: Economy

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