April 30 (Reuters) - Hungary's economy expanded in the first quarter while Czech gross domestic product increased at its fastest quarterly rate in two years, according to preliminary data releases on Tuesday showing their recoveries are gaining some momentum.
Central Europe's economies are looking to shake off an inflation surge that hammered consumer activity last year, hoping renewed spending powers will compensate for factory activity that remains muted as order books have shrunk.
In Hungary, the economy expanded by 0.8% quarter-on-quarter, its second biggest quarterly growth since climbing out of recession nearly a year ago. On a year-on-year basis, GDP rose 1.1%, above a poll forecast of 1.0% and the biggest gain since the third quarter of 2022.
The Czech economy also rose rose 0.5% quarter-on-quarter, above expectations of 0.4%. On a year-on-year basis the rise was 0.4%.
The data did not include a complete breakdown, although the Czech statistics office said rising household consumption was a quarterly driver. Foreign trade also gained on a year-on-year basis.
"Today's figures were a positive surprise and confirmed the slight optimistic turn in foreign demand and household consumption that has been seen in data in the past few months," Jakub Seidler, chief economist of the Czech Banking Association, said.
Consumer confidence is the strongest since 2021, according to statistics office surveys, while business sentiment is also improving.
Policymakers are watching to see how quickly real wage growth picks up and gives a lift to household spending now that inflation is sharply down and borrowing costs in Hungary and the Czech Republic are falling.
In Hungary, the services sector was a main contributor to first-quarter growth.
ING senior economist Peter Virovacz said it was not surprising "given double-digit wage-growth and people spending less cautiously".
"I don't yet see an overall recovery, as not every sector is out of the woods, but it is definitely better than before," he said.
The data could provide some notes of caution to policymakers in both countries where signals point to a possible slowdown in the pace of interest rate cuts in easing cycles started last year.
Service sector price rises remain an area of concern even after inflation eased from double-digit levels. Another reason for caution is delays to cuts in U.S. interest rates that are supporting the dollar and, in turn, adding pressure to emerging market currencies like those in Central Europe.
"With falling inflation reducing pressure on households’ real incomes and monetary easing cycles well under way in both countries, we think that domestic demand should continue to support a recovery in activity," Capital Economics said. (Reporting by Jason Hovet in Prague and Boldizsar Gyori in Budapest, Editing by Angus MacSwan and Alison Williams)
