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Homeland Security

Central Europe Bracing for Economic Turbulence

By Jamie Dettmer June 16, 2020

Central European governments were among the first to impose lockdowns and have been in the forefront of nations easing coronavirus restrictions, but even though they appear to have escaped high death tolls from the pandemic, they're likely to be hit harder than many of their neighbors by the economic repercussions, warn economists.

Relieved by their low number of infections and few deaths – Slovakia recorded just 1,513 confirmed cases and 28 fatalities – central Europeans are bracing for turbulent economic times. Economists are warning of a region-wide recession, as bad as the economic turmoil following the collapse of Communism and the transition to capitalism.

"Manufacturing production figures show that the economic downturn has gathered pace in central Europe," the French bank BNP Paribas warns their investors. "This downturn is now stronger in Hungary, Romania and Slovakia than the European Union's average," the bank said.

BNP Paribas is forecasting sharp downtowns in 2020 for all Central European states, with Slovakia likely to see a six percent reduction in its GDP and Hungary more than five percent.

"Export loss is already stronger in several of them compared to EU average export loss," particularly in the auto sector, BNP said.

Other forecasts for central Europe are gloomier.

Much will depend on how quickly Western Europe, the main economic engine of the eurozone, can bounce back – and also whether a second wave of wave of infections is avoided. Like their western neighbors, central and southeastern states have opened their borders.

All appear to have passed their coronavirus peak of infections – with the exception of Poland, according to a risk assessment released last week by the European Center for Disease Prevention and Control (ECDC), an independent agency of the European Union.

Fearful as the coronavirus started to appear in Europe, central European states imposed restrictions quickly, aware that there more fragile health-care systems would be quickly overwhelmed, if their hospitals saw a high influx of severely ill patients.

But Poland has been an outlier with higher number of infections being reported than its near neighbors, reaching 30,195 Tuesday, according to the country's the Ministry of Health. Poland's coronavirus-tied death toll now stands at 1,272. Poland's mining region of Silesia has been the biggest hotspot of the coronavirus pandemic in Poland for months with almost half of the new infections found there.

Nonetheless, Poland has also been unlocking, to avoid doing more economic damage.

Central European economies are export dependent. More than 80% of Hungary's GDP comes from the exports of goods and services, mainly to western Europe, and 96% in Slovakia's case.

From March to April, the eurozone as a whole saw a staggering 30% drop in economic activity compared to the previous year. And that was in the early stages of the lockdowns. The second quarter figure due to be revealed early next month likely will be worse.

The European Commission is predicting the European Union's economy as a whole will contract this year contracting by 7.5%. Investment bank Morgan Stanley is more bearish, forecasting an 11% contraction.

Even before the pandemic unfolded, central Europeans were fearful that 2020 would bring economic woes. Last autumn Germany – the biggest trading partner for much of central Europe – started sliding toward recession.

"The COVID-19 recession is singular in many respects and is likely to be the deepest one in advanced economies since World War II, and the first output contraction in emerging and developing economies in at least the past six decades," says Ayhan Kose, a director at the World Bank.

Of all the economies in the region, the World Bank expects Croatia to be the worst affected, with a predicted 2020 contraction of minus 9.3% in 2020, thanks to a plunge in tourism, which accounts for nearly a quarter of its GDP.

Hungary's automotive industry, a key industrial sector for the country, contracted 80% in April because of the shutdowns at the country's major manufacturing sites. And banks in the region have been plunged into one of their worst years since the 2008 financial crash, according to a new report from the European Investment Bank (EIB).

Peter Virovacz, an economist in Hungary for the Dutch banking group ING, worries the economic downturns could "morph into a deeper financial and economic depression."

Many economies in the region likely will struggle to attract foreign direct investment, and governments will find it a challenge to borrow on the bond markets loans to help stimulate their flagging economies, especially with a collapse exports. Those outside the eurozone already are seeing their currencies weaken, contributing to higher borrowing costs, say economists.

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