eco TV Week

Central Europe: Growth amid shortages

2/26/2021

Central European economies surprised on the upside in 2020 and should grow again in 2021. However, the first semester should exhibit less visibility as a new wave of Covid and the likelihood of a temporary underperformance of the car sector should weigh on growth.

Stéphane Colliac

TRANSCRIPT // Central Europe: Growth amid shortages : February 2021

Central Europe has benefitted from one of the more limited output loss in 2020. GDP drop was quite abrupt during the first semester, but the recovery came timely thereafter, including during Q4, despite a second wave of the Covid outbreak.

Export growth was the main contributor, benefitting from a catchup effect from H1 loss. The car sector was the main driver for such a V-shaped recovery, as stimulus programs were implemented troughout European Union countries.

Investment growth surprised also on the upside. Together with local fiscal incentives, the acceleration of the transition to electric vehicles everywhere in Europe has played a key role: car plants in Central Europe have to be adapted in order to be able to increase the production pace earlier than planned, including also for car suppliers such as batteries.

In parallel, consumption loss has been more limited than thought, despite the restrictions implemented against the Covid. Households have benefitted from stable income, as unemployment did not soar, fiscal support came through partial unemployment, and a lower inflation pace has given price incentives. Household equipment needs also played on the upside, notably driven by increased home office.

But the new environment nurtured by the Covid has also created bottlenecks. The car sector and some of its suppliers did not expect the high level of consumer demand in 2020H2. As a result, output capacity is constrained which in turn should weigh on growth during the first quarter of 2021.

For example, the sector is currently suffering from a chips shortage, increased as this chips are also inputs for consumer electronics benefitting as well from high demand. As a result, several car plants had suffered from shutdowns during the Q1. E.g., it has weighed on the output (e.g. -12% in January in Czech Republic).

Covid restrictions should also play on the downside. However, the growth drivers of 2020H2 are still there and should fuel a new growth recovery in 2021, as the region is benefitting from its central position in Europe as a competitive industrial powerhouse. Some countries should even be back to pre-Covid GDP levels before year-end.

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