PRAGUE – Falling domestic demand and weak exports pushed the Czech and Hungarian economies further into the red at the end of 2012, deepening a grim picture for countries possibly facing another year of recession.
Government tax hikes and other policies in both European Union states have spurred consumers to stop spending and firms to sack workers and halt investment, exacerbating the painful effect of the euro zone debt crisis on the bloc's eastern flank.
In a region whose economies are underpinned by factories pumping out cars and electronics, the slide in the single currency area has wiped out the main driver of growth, even if exports - at least for the Czechs - are still growing slightly.
While governments in both countries have aimed policy at shrinking public debt, their central banks have eased policy to combat rising unemployment, with Hungary's cutting rates six times in a row.
Rate setters in Prague have slashed the official cost of borrowing to almost zero and have floated the idea of knocking the crown currency weaker, but the moves have done little to drag them out of recession.
Hungary's economy contracted for the fourth straight quarter, by 2.7 percent on the year from October to December on a 20 percent drop in agriculture and a decline in industrial output. Versus the previous three months, it fell 0.9 percent.
"This is shocking," said Zoltan Torok, an analyst at Raiffeisen Bank in Budapest. "In a nutshell, every segment of the economy is struggling. It was evident before that without net exports the contraction would be as low as 4 or 5 percent."
For the Czech Republic, whose sixth straight quarter of decline or stagnation marks the worst recession in 15 years, the fall was 1.7 percent on the year from October to December.
It was in line with forecasts but worse than the central bank's outlook for a 1.4 percent fall.
A bright spot in the region was Romania, the beneficiary of an International Monetary Fund-led bailout, continued its slow recovery following a deep two-year contraction.
Its economy rose 0.3 percent on an annual basis, slightly above market expectations. Neighboring Bulgaria also grew 0.5 percent on an annual basis and Euro zone member Slovakia also 0.2 percent, beating expectations for a drop.
Poland, the region's biggest economy, will release its fourth quarter GDP data on March 1. Some analysts fear it could also contract at the start of this year.
Hungarian Prime Minister Viktor Orban's government tried to put a positive spin on Thursday's data, citing an unexpected jump in manufacturing data and improving consumer confidence last month, and highlighting its fight against debt.
"Growth can return this year at a time when state finances are in order, state debt is in a continuous decline and employment is expanding," the economy ministry said.
But the figures are real trouble for Orban - who has embarked on an independent policy course, saying it was vital for Hungary's growth to maintain a free hand from the IMF and other international bodies.
With Germany - the main destination for the region's exports - contracting more than expected, analysts say Budapest's own forecast of 0.9 percent for this now looks optimistic. An election is due early in 2014.
"Our forecast for a -0.2 percent contraction of GDP in 2013 and +1.0 percent growth in 2014 remains intact," said Zsolt Kondrat, head of research at MKB Bank in Budapest.
Each time an emerging EU member contracts, it misses a chance to catch up with richer western states in terms of living standards and negates one of the main reasons the mostly ex-Communist countries joined the bloc.
In order to "converge" - Romania's living standards are about 40 percent of the EU average, the Czechs' are 84 percent - they have to outpace more developed states in growth, but for the time being, they are largely holding even.
Czech Prime Minister Petr Necas's government expects growth to resume after two years of decline in the second half of this year, but it cut its forecast last month to almost zero, and the central bank now predicts another full year of contraction.
Although the bank has eased its threat to weaken the crown against the euro, analysts said Thursday's data would add to arguments for the bank to take action.
"This GDP figure is evidence of an ongoing recession and maybe some fiscal and/or monetary stimulus is likely to come," said David Marek, chief economist at Prague's Patria Finance.
(Reporting by Michael Winfrey and Gergely ; editing by Patrick Graham)