Central Europe is bouncing back strongly from the pandemic-induced recession and Poland, Hungary and Slovakia have already surpassed their end 2019 GDP levels, showed second quarter figures released over the past few weeks.
Western Europe’s recovery has boosted industrial export demand and investment, while the lifting of COVID-19 restrictions has boosted domestic demand and the service sector. Meanwhile, fiscal spending remains loose as special pandemic government spending measures are only gradually being wound down.
Economic growth speeded up in all the Visegrad countries in q/q terms, and the y/y increases compared to the low base in 2Q2019 were eye-popping: Hungary’s GDP soared by 17.7% y/y, Poland’s by 10.7% and Slovakia’s by 10.2%, with Czechia, which has yet to reach 4Q2019 levels, bringing up the rear with a still impressive 7.8%.
“The continued strong performance in most of the region’s economies means that recoveries in CEE remain near the front of the EM pack and ahead of most other European economies,” said Capital Economics in a research note published on August 17.
A return to lockdowns in response to a further wave of infections in the autumn would obviously change the picture, though vaccination rates are slowly increasing and should provide some protection.
“We expect the recovery to remain strong in the second half of this year, although low vaccine coverage clouds the outlook in some economies,” it added, pointing to Bulgaria and Romania, rather than Central Europe.
Capital Economics said the relative speed of reopening lay behind the different growth rates, with Hungary able to relax its COVID-19 measures earlier because of its fast vaccine rollout.
Capital Economics said that Czechia remains a clear outlier, with GDP still around 5% below where it was prior to the pandemic, because the severity of its past lockdowns has weighed on overall activity.
Czechia has also been hit by the global supply bottlenecks, which have restricted manufacturing growth.
"The preliminary GDP figures for 2Q21 thus showed that problems in supply and demand chains are indeed a strong brake on the industrially-oriented Czech economy and that Czech households have not yet rushed into spending," said Miroslav Novak, an analyst at Akcenta.
Central Europe is also ahead of Western Europe in the way central banks have begun tightening monetary policy in response to the economic recovery. The strong growth in the region already prompted the Hungarian and Czech central banks to raise rates twice this summer, most recently in July and August, with analysts pencilling in further rate rises before the end of the year. The Polish central bank is still holding out, though some analysts are predicting it will buckle before the end of the year.