Wiener Institut für Internationale Wirtschaftsvergleiche

The Vienna Institute forInternational EconomicStudies

wiiw.ac.at

Germany, Slovakia and central Europe in the post-Coronavirus global economy

April 16th 2020

Richard Grieveson, wiiw Deputy Director

2* University of Pennsylvania Global Go To Think Tank Report, 2019

• Think tank based in Vienna, specialised in economics, finance and political economy of

Central and Eastern Europe since 1973.

• Major clients: Austrian govt ministries; Austrian Central Bank; European Commission;

Foundations; IOs (IMF, EIB, UNODC); private sector.

• Unique database on Eastern Europe, used by govts + international organisations.

• ~25 economists, many from Eastern Europe.

• Third best international economic policy think tank in the world.*

• Strong international media presence (FT, Economist, FAZ, Handelsblatt, Der Spiegel, BBC,

Bloomberg).

(Brief) introduction to wiiw

3

1. Germany and Slovakia/V4: Deep economic relationship and a ‘win win’

2. Current situation: Existing challenges combined with the Coronavirus

shock

3. Future challenges and opportunities: structural shifts, imitation >

innovation, re-shoring

Overview

4

1. Germany and Slovakia/V4:

Ever-deeper economic relationship and a ‚win win‘

outcome

5Source: Eurostat.

Key outcome 1: Strong specialisation in the automotive sector (and growing over time)

0

5

10

15

20

25

30

35

40

Bulgaria CzechRepublic

Croatia Hungary Poland Romania Slovenia Slovakia

2010 2018

Automotive production, % of total production

6Source: wiiw. Note: Relative functional specialisation derived from FDI projects in themanufacturing sector.

Key outcome 2: division of tasks within value chains for mutual benefit

Relative functional specialisation, 2003-15 average

7

2. Current situation: big existing challenges combined

with Coronavirus shock

8Source: wiiw. Total external trade = exports + imports of goods + services.

US/China trade war + weak euro area growth already major challenge for Slovakia

Total external trade, % of GDP, 2019

020406080

100120140160180200

9Source: IMF. 2020 data = forecast.

And of course now hugely compounded by the Coronavirus…

Global trade volume, % change year on year

-15

-10

-5

0

5

10

15

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

10

wiiw assumptions for CESEE and Slovakia

• Global trade collapse will cause deep recession in H1 2020

• Lockdowns will cause strong drop in domestic economic activity for 2-3 months

• But after that, quality of healthcare and fiscal space to support economy + workers

will be positive for 2004 joiners (including Slovakia)

• When full recovery arrives (H2 2021) should be strong

• But do not rule anything out – this is a huge and unprecedented crisis which will

have far-reaching implications

11

3. Future challenges and opportunities

12Sources: Global Trade Alert.

A) Changes in global economy + re-shoring + structural change in automotive industry

0

20

40

60

80

100

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

China USA

‚Harmful‘ trade restrictions EU exports to China and USA, % of total

13

• Push for firms in rich countries to outsource will still be there

• Labour costs + quality

• Infrastructure quality + position in ‘core’ Europe (important for ‘just in time’

manufacturing)

• EU membership + relatively low political risk

• Potential to benefit from greater services outsourcing (but depends on

digital capacity)

Re-shoring: Slovakia has important strengths that make it attractive to investors

14Source: wiiw. https://wiiw.ac.at/eu-faces-a-tough-demographic-reckoning-p-4912.html

B) Demographic decline = low/zero growth future?

The ‚tipping point‘ at which labour supply = labour demand

15Sources: IFR, OECD, national sources, wiiw.

…Automation/robotization developing fast

Estimated number of multipurpose industrial robots per 10,000 persons employed in automotive industry

0

200

400

600

800

1000

1200

1400

1600

1800

PL TR HU CZ CN SK SI AT JP DE US

2010 2017

16Source: wiiw.

C) How to move from imitation to innovation?

The ‚smile curve‘

17Sources: wiiw, OECD.

…R&D and education provide part of the solution

R&D spending, % of GDP

0

0,5

1

1,5

2

2,5

3

3,5

Slovakia Poland Hungary CzechRepublic

EU OECD Germany

18Source: WEF.

D) Harnessing the new digital economy (and the push it will get from the Coronavirus)

3

3,5

4

4,5

5

5,5

6

World Economic Forum Network Readiness Index; Business Readiness sub-component (7 = best; 1= worst)

19

1. Economic relationship is extensive and vitally important for both Germany

and the V4 („win win“).

2. Current conditions are extremely challenging. Recession will be deep, but

decent chance that Slovak recovery will be strong.

3. Challenges: less globalization/re-shoring/structural change in auto

industry; demographic decline; imitation > innovation; harnessing the

digital economy.

Conclusions

20

New forecast due end April or early May – 2020-21 projections for all 23 countries.

Weekly updates on our website, including:- Economic fallout;- Market reaction;- Full summary of fiscal, monetary, public order measures by country.

Regular policy on our website including:- Opportunities for Eastern Europe in the crisis;- Emergency powers and the fiscal response in Hungary;- How to save Italy?

wiiw analysis of the Coronavirus in CESEE and beyond

21

• Roman Stöllinger (wiiw), Functional Specialisation in Global Value Chains and the Middle-Income Trap.

• wiiw, Competitiveness of the European Economy and the Central European Manufacturing Core.

• wiiw, Looking Back, Looking Forward: Central and Eastern Europe 30 Years After the Fall of the Berlin Wall.

• Richard Grieveson (wiiw), Demographic decline does not necessarily condemn CESEE EU countries to a low growth future.

• wiiw, EU Faces a Tough Demographic Reckoning.

• Vasily Astrov (wiiw), Labour Market Trends in Visegrád Countries: Implications for Austria.

• wiiw, Die Lohnentwicklung in den mittel- und osteuropäischen Mitgliedsländern der EU.

• Philipp Heimberger (wiiw), How Much Do Trading Partners Matter for Austria’s Competitiveness and Export Performance?

• Hyun Song Shin (BIS), Global imbalances and the international footprint of firms: what role for exchange rates?

Further reading suggestions (non-Corona)

22

Wiener Institut für Internationale Wirtschaftsvergleiche

The Vienna Institute forInternational EconomicStudies

www.wiiw.ac.at

Thank you for your attention!

Follow us:www.wiiw.ac.at

23

Extra slides

24Source: Google.

Some signs that the lockdown in Slovakia having bigger economic impact than regional peers

Google mobility data versus baseline, %, April 5th 2020

-100

-90

-80

-70

-60

-50

-40

-30

-20

-10

0

Slovakia Czech Republic Hungary Italy Germany

Retail and recreation Grocery and pharmacy Workplaces

25Source: WHO, wiiw.

How will Slovakia and rest of Visegrad be affected?1. Health sector

Public healthcare spending, PPP, Italy = 100, 2016

01020304050607080

26Source: Moody’s, S&P, Fitch, wiiw.

How will Slovakia and rest of Visegrad be affected?2. Fiscal space to support economy

X axis: Average credit rating (1 = best; 7 = worst)

Y axis: Public debt, % of GDP, 2019

Albania

Belarus

Bosnia

Bulgaria

Croatia

Czech Republic

Estonia

Hungary

Kazakhstan

Latvia

Lithuania

Moldova

Montenegro

North MacedoniaPoland

Romania

Russia

SerbiaSlovakia

Slovenia

Turkey

Ukraine

0

10

20

30

40

50

60

70

80

1 2 3 4 5 6 7

27Source: IMF April 2020 World Economic Outlook.

So although downturn this year will be very steep, decent chance that Slovak recovery will be quite strong

IMF forecasts for real GDP change in CESEE, %

-10

-8

-6

-4

-2

0

2

4

6

8

Germany Italy Slovakia Slovenia CzechRepublic

Poland Hungary

2020 2021

28Source: wiiw. Note: CEE ex-V4 = other EU member states from CEE, Western Balkans, CIS, Ukraine.

Massive inflows of FDI into V4 since the mid-1990s (around one quarter from Germany)

FDI per capita, EUR

0

2000

4000

6000

8000

10000

12000

14000

CZ V4 average CEE ex-V4 average

29Source: World Bank.

Global context: Germany and V4 have ridden wave of “hyper-globalisation”, driven above all by China

Exports of goods and services, % of GDP, global economy

10

15

20

25

30

35

30Source: German Federal Statistical Office (Destatis).

German manufacturing chains spread east, ever stronger bilateral trade flowsMerchandise goods trade, EUR bn per year

0

20

40

60

80

100

120

140

160

Exports Imports Exports Imports

2008 2018

UK Netherlands China France US V4

31Source: Eurostat.

Outsourcing of production has helped German industry remain competitive…

Gross value added in industry, % of total

10

12

14

16

18

20

22

24

26

28

Germany France Italy UK

32

Source: wiiw.

Note: PPP = purchasing power parity (i.e. adjusted for local costs). CEE average = simple average of 22 formerlycommunist countries in CEE (11 EU member states, 6 Western Balkans, 4 CIS and Ukraine).

…and helped to drive sustained convergence of the V4 economies (“win win”)

GDP per capita at PPP, Germany = 100

20

30

40

50

60

70

80

CZ HU PL SK CEE average

33

Notes: EU-14 (Western Europe); NMS 13 (New Member States) without the respective country.

Source: Eurostat COMEXT.

Strong orientation of auto exports towards EU (and Germany in particular)

Motor vehicle exports by destination, %

24

52

2313 14

26

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CZ HU PL RO SK SI

Extra_EUUSRussiaNMS 13EU14Germany

34Source: Eurostat.

Vacancy rates at historically high levels

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

2011

Q1

2011

Q2

2011

Q3

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2019

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2019

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2019

Q3

Czechia Germany Hungary Poland Slovakia

Job vacancy rate, total economy, %

35Source: Eurostat.

Vacancy rates

Job vacancy rate, manufacturing, %

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

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Czechia Germany Hungary Poland Slovakia

36Source: Eurostat.

Vacancy rates

Job vacancy rate, construction, %

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6,0

8,0

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12,0

14,0

16,0

18,0

2011

Q1

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2011

Q4

2012

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2012

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2018

Q4

2019

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Czechia Germany Hungary Poland Slovakia

37Source: Eurostat.

Labour markets

Unemployment rate, 15-64 year olds, %

0

2

4

6

8

10

12

14

16

18

20

Euroarea Czechia Germany Hungary Poland Slovakia

38

US losing faith in globalisation?