Wide Angle Shot: Modest CEE crisis hit - fortune, politics or what else?

Most CE/SEE countries face (short-term) moderate economic COVID-19 crisis costs. We attribute moderate 2020 GDP slumps to a complex and interdependent mix of structural causes. Moreover, solid Q4 GDP figures that can be possibly repeated in Q1 are laying a solid base for the 2021 GDP trajectory in CEE. However, we are also putting ourselves not at the top-end of the consensus due to an overall economically weak start into the year in Western Europe and an up to now mediocre overall “vaccination performance” in Europe as a whole.

CE/SEE vs peers: Consumption of services by individuals

Eurostat, RBI/Raiffeisen Research; Note: Imputed rent excluded from consumption of services

Large variation of COVID-19 crisis hit within EU - CE/SEE on the brighter side of life

There are plenty of factors shaping the COVID-19 fallout on a given economy. State structures could make a difference as revealed by China’s performance. However, this is possibly less a differentiating factor in EU countries, where authorities cannot pursue ultra-strict control over individuals/companies. Nevertheless, if we want to assess the COVID-19 impact within the EU, we see a large variation across EU countries. However, EU members have been able to come together to fight the pandemic, showing a strong solidarity in helping those that were the most negatively impacted as indicated by the NGEU package with sizeable re-distributional elements (partially based on COVID-19 crisis hit measurements). However, having a precise view on the COVID-19 crisis costs on a country level and ranking economies based on those costs is a complex task. Some crisis costs are more visible, others may materialize only at a later stage (e.g. those related to mental health, human capital disruption or lack of social interactions). Turning to more visible costs, e.g. COVID-19 fatalities or drops in economic output, it is difficult to quantify them in one single figure. That said, we are safe to say that (most) EU members in Central and Southeastern Europe (CE/SEE) have incurred lower economic costs than larger and/or more developed Western EU members — not to speak about UK. Or in other words: with similar COVID-19 fatalities, CE/SEE countries incurred lower economic losses in 2020. It is an issue of debate if this (relative) success was the result of better (short-term) policies or structural factors outside the control of politics.

CE/SEE countries: On a better-than-expected course in 2020

The management of the pandemic by authorities, i.e. how quickly lockdowns were declared and implemented, is a crucial factor of differentiation among countries. It is also true that the duration and severity of national lockdowns is an important factor in economic development — which became clear at least from Q1 to Q3 2020. However, social and economic peculiarities ultimately decided on the size of economic costs resulting from lockdowns. Psychological traits, demography (average age, health of the population), biology/genetics and climate (temperature, humidity) also rank among factors that are shaping the dynamics of the pandemic ... and they are far outside the control of authorities. Having an exact quantification of the impact of the previous factors on the economic performance of EU member countries is not the key objective here. We “just” want to shed some light on aspects that are providing certain advantages to the CE/SEE countries to better navigate the COVID-19 crisis up to now.

Lockdowns in spring 2020 were severe and simultaneous in almost all EU countries and on an international level, resulting in a sharp reduction in mobility and a broad-based closure of economic activities. The second/third COVID-19 waves that materialized later in H2 2020 and/or early 2021 also resulted in containment measures. However, restrictions on mobility and (international) economic activities were less severe compared to spring lockdowns. Compliance with restrictions was possibly a tad weaker as well. Moreover, the global economy/industry was in a much better shape in H2 2020 and early 2021, providing support to trade-open and industry-exposed CE/SEE economies with a GDP share of gross value added in industry above levels in Western Europe. Except Croatia, all CE/SEE countries have a GDP share of industry outpacing the EU average. The CE/SEE countries are integrated in global value chains mainly by their connections with Western European countries. Therefore, CE/SEE countries succeeded to fully profit from a strong rebound in global goods trade that gained traction in 2020 and after spring lockdowns were removed. Renewed lockdowns were also less globally in sync in H2 2020.

Gross value added in industry (% of GDP, 2019)

Eurostat, RBI/Raiffeisen Research

Foreign trade balance Jan-Nov 2020 (chg vs Jan-Nov 2019, % of GDP)

Eurostat, RBI/Raiffeisen Research
Note: data for Jan-Sep in case of Croatia

Industry & consumption less sensitive in CE/SEE - solid trade balance developments

The rebound in exports of goods and in industrial output in CE/SEE has been rapid, advancing at a faster pace compared with Western economies. At the end of year 2020, the level of industrial output in Poland, Serbia, Bosnia and Croatia already outpaced the levels prevailing on the onset of COVID-19 pandemic (January-February). In the remaining CE/SEE countries (except Bulgaria) the production gap against pre-pandemic levels has not been closed as of December 2020, but shortfalls are substantially below those in key trading partners in Western Europe (Germany, Italy, France, UK). This performance might have been supported by the characteristics of industrial activities in CE/SEE, located at earlier stages of production processes.

All CE/SEE countries except Romania recorded an improvement in trade balances (for goods) from January-November 2020, compared to a similar period in 2019. On the other hand, Croatia and Bulgaria for which the exports of tourism services are key recorded a sharp deterioration in their balances of foreign trade with services. An ample GDP contraction in Croatia and Bulgaria was fueled by a negative contribution stemming from foreign trade, i.e. a faster decline in exports of goods and services than imports. Nevertheless, on a regional level the balance for foreign trade with goods and services supported the GDP performance in 2020, especially in Poland, Slovakia, Czechia and Serbia.

The hospitality industry, travel related activities, and recreational activities have been hit hard by the COVID-19 pandemic. However, economic structures in most CE/SEE countries are less geared to services that are very sensitive to COVID-19 containment measures compared to Western countries and the EU average. Also, consumption of services in CE/SEE is below the average level inside the EU. In fact, the lower share of services in these economies — especially of those sensitive to the level of income — reflects the lower economic development of these countries. However, there is one exception: Croatia. In this case, tourism is an economic key sector and related services (hospitality, recreational, travel related) account for a large share of GDP. Croatia has a similar position like other EU members relying to a large extent on tourism: Spain, Greece, Portugal, Cyprus, and Malta. Therefore, Croatia has seen the strongest GDP hit in our region in 2020. As all CE/SEE countries had a relatively good control over spreading of COVID-19 pandemic in 2020, a lower share of services in the economy resulted in smaller losses in economic output on aggregate and for private consumption in particular (a key component for the overall GDP performance). For CE/SEE, the decline in private consumption was therefore “only” -3-4% in 2020, while in the euro area it is estimated at around -8.

CE/SEE vs euro area COVID-19 crisis performance snapshot

Eurostat, national sources, RBI/Raiffeisen Research

Another catalyst for all the trends outlined above was then in H2 2020 and also currently the fact that the industrial sector in Europe benefited from a solid global demand (with solid industrial growth rates especially in Asia and the US), while the services sector slipped back into recession. The decent industry performance has also helped global trade returning to its pre-crisis level already in Q4 2020, supporting trade balances in CE/SEE. Given the sketched divergences and importance of external developments national lockdowns in Q4 had less of an impact on economic performance than in H1 2020.

Besides the change in economic output, the efficacy of governmental support can be gauged by several supplementary indicators, e.g. change in unemployment rates, number of bankruptcies, or change in non-performing loans. All these indicators point to a limited deterioration in all CE/SEE countries until the end of 2020, suggesting a decent efficiency of governmental support packages. Although the 2020 unemployment rate increases in CE/SEE are possibly a tad higher than for the euro area (i.e. a bit more front loaded), the CE/SEE region remains with a lower aggregated unemployment rate. Moreover, the region entered the crisis with a much lower unemployment rate than prior to the Global Financial Crisis (GFC), while the euro area unemployment rate stood “just” at its 2007 level in 2019. However, unemployment rates are possibly not the best indicator for tracking the deterioration of labour market conditions. Due to a forced or voluntary decrease of active population, their increases since the onset of COVID-19 pandemic have possibly underestimated the increase in slack of labour force. Still, the limited increase of unemployment rates from February 2020 to December 2020 in all EU member countries reveals a strong resilience of labour markets.

Economic outlook and lockdown reflections

All in all, we see some CE/SEE countries as being well positioned in the “vaccination race”, or as having already been able to vaccinate larger parts of the population than some Western European countries. This is certainly a starting advantage in the subsequent “opening race” for 2021. However, some CE countries are currently also strongly affected by the still rolling second/third COVID-19 wave. Currently, we expect GDP advances in the range of 4-5%in the next few years (2021-2022) in CE/SEE. Definitely, there is nothing like a “euro area” crisis around the corner, that derailed the CE/SEE recovery following the GFC. Moreover, solid Q4 GDP figures that can be possibly repeated in Q1 are laying a solid base for the 2021 GDP trajectory in CE/SEE countries. However, we are also putting ourselves not at the top-end of the forecaster consensus (expecting GDP growth rates of 5-7% yoy in CE/SEE in 2021/2022) due to several reasons. Firstly, the pent-up demand is possibly lower in our region than in more hard-hit economies in Western Europe given only half the decline in private consumption in 2020 in the CE/SEE region. Secondly, we see the recovery prospects in Europe as a whole to remain capped in 2021 in due to a very weak start into the year and a mediocre overall “vaccination performance” in Europe up to now. Thirdly, the recovery will also depend on the ability to profit from all governmental and EU funding available and here some Western European economies might ultimately outpace the CE/SEE region.

We also note that there can be complex trade-offs between economic trends and national lockdowns. On the one hand, tighter/longer lockdowns tend to contribute to weaker economic developments, while on the other hand weak GDP figures can contribute to risking openings too quickly. At the same time, economic structures can contribute to national lockdowns having less severe effects than superficially assumed. In this respect, the most important learning of this crisis for us is that policymaking and social debates must deal with a broad set of data and indicators.

CE/SEE: Raiffeisen Research forecasts vs Consenus (Real GDP, % yoy)

Eurostat, national sources, RBI/Raiffeisen Research; * Consensus figures taken from FocusEconomics February Consensus Survey

For more info on the regional crisis outperformance, taking Romania as a prime example, see our note (Romania as perfect reflection of CEE crisis outperformance), while overall we remain constructive on the 2021 CE/SEE recovery prospects given the overall solid international backdrop (see our Wide Angle Shot: Stronger recovery in Europe & CE/SEE in 2021 than back in 2010)

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Nicolae COVRIG

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Gunter Deuber is heading the Economics and Financial Analysis division (Raiffeisen Research) at Raiffeisen Bank International (RBI) since 1 January 2021. Since 2011, Gunter Deuber has held leading positions in RBI's Economic and CEE Research and has continuously expanded the cooperation with his research colleagues in RBI’s subsidiary banks in CEE. Since the early 2000s, he has been analysing economies, banking sectors and market topics with a focus on CEE and EU/euro area topics for RBI in Vienna, but also in the international (investment) banking context in Frankfurt. He regularly presents the views of Raiffeisen Research and his research team at meetings with investors and clients. He is a well sought-after speaker at landmark events in the finance and banking industry and a guest lecturer at several universities/teaching institutions. In 2019, he was nominated for the US State Department's IVLP (International Visitor Leadership Program). Gunter has published several edited volumes on Euro/EU crisis issues and published various articles in professional journals and industry magazines. Outside the office, Gunter enjoys travelling with his family and long-distance running.