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36 I Central Europe bne November 2020
The four leading Central European countries are outperforming their EU peers in growth, but they remain vulnerable thanks to their heavy dependence on the automotive sector.
CEE-4 growth pulls ahead of the rest of Europe
bne IntelliNews
After a decade and a half as members of the EU, the leading four Central European countries of Czechia, Hungary, Poland and Romania are pulling ahead of their peers.
With the key institutions set up and key reforms under their belt, the CEE4 are now capitalising on what catch-up growth is left to do and benefiting from young and lean economies.
The four countries have been booming in recent years and have gone into
the coronacrisis with more economic momentum than the other countries of Europe, as well as solid finances.
“It appears that the CEE-4 have increas- ingly decoupled from the euro area’s performance, with robust growth driven by strong private consumption due to high real wage growth (a reflection of tight labour markets), as well as robust capital spending supported by large withdrawals from EU structural funds,” the Institute of International Finance (IIF) said in a note.
When the coronavirus (COVID-19) pandemic began it was feared that the resulting slowdown in Europe would pull these economies back. The EU is expecting a historically large output contraction in 2020. But those fears are proving to be unfounded.
“The CEE-4 have outperformed growth in the euro area substantially in recent years – by roughly 2.5-3.0 pp over 2017- 19. In our projection, they will, however, experience a contraction of above 5.5% in 2020, while the euro area’s real GDP looks likely to fall by 7.5%,” IIF said.
That's not to say the CEE-4 have escaped unscathed. Economic activity declined by 0.8% in Q1 and 10.3% in Q2 quarter on quarter (seasonally adjusted), according to IIF.
“Despite high-frequency data so far indicating a strong rebound in the second half of this year – under the assumption that currently surging COVID-19
cases across the region will not cause
a prolonged disruption to economic
activity – we project that output will not return to its pre-crisis level until 4Q21,” IIF said. “Private consumption and gross fixed capital formation, which have become major drivers of CEE-4’s strong GDP growth in recent years, will likely continue to contribute to the output recovery into 2021, which should be also supported by a rebound in exports.”
Strong private consumption has been one of the main drivers of growth amongst the four and helping them weather the external shocks to the economy as the general European economy slows.
Over 2017-19 the growth contribution from private consumption reached 2.8pp, and from investment 1.6pp, on average, IIF reports.
“We expect these dynamics to persist in the post-crisis period beyond 2021, as (1) demographic factors will continue to lead to tight labour markets, which will likely keep real wage growth in
the CEE-4 higher than the Euro area, and (2) CEE countries will have access