CEE Europe Macro View - Who will get hit if Germany slows down?
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22 Martie 2011 |
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According to Citi forecasts, the German economy is likely to slow substantially in the coming two years. In this report we try to assess how changes in German economic activity are likely to affect Central and Eastern Europe.
The relatively small size and high openness make Central European economies greatly dependent on developments in Germany, the region's biggest trading partner. However, there are some substantial differences between particular CEE countries. Exports to Germany are large for the Czech Republic and Hungary (more than 20% of GDP), while they are smallest in Poland and Romania (7-10% of GDP). This means the responsiveness of GDP growth in the CEE economies to changes in German growth can vary substantially depending on the country in question.
Our empirical analysis shows that the pace of GDP growth in Czech Republic or Hungary could fall by as much as 0.6-0.9% in response to a 1% slowdown in German economic growth. In turn, Poland and Romania seem least vulnerable as we estimate the reaction of their GDP growth to changes in German growth would be more moderate (0.2-0.3%).
There are significant differences in product structure of CEE exports and this could also have consequences for economic growth in particular economies. The Czech Republic and Hungary specialise in exporting intermediate and capital goods, whereas Poland has a relatively large share of consumer goods in its exports.
A slowdown in Germany in 2012 will probably negatively affect all CEE countries, with potentially the biggest negative impact being on the Czech Republic and Hungary, the two countries with large exposure to the German market. In turn, Poland would probably be in the best position among the Central European economies.
Taking this into account we expect GDP growth in 2011 to be highest in Poland (at least 4% YoY), followed by Slovakia (3.4%), Hungary (2.7%), Romania (2.0%) and Czech Republic (1.9%).
Small, open and dependent on Germany
The 2010 economic recovery in Central Europe was somewhat faster than had initially been expected. According to our estimates GDP growth in the CEE region[1] reached on average 2.0% – this was 0.2% higher than forecast at the beginning of 2010 (Figure 1). The exception was Romania which implemented a painful fiscal tightening programme in 2010 which resulted in output contracting (excluding Romania, the economic growth surprise in CEE amounted to as much as 1%). Although there may be several factors explaining such a strong performance of the region, one of them was probably the surprisingly robust growth in Germany (3.5% vs 1.8% initially expected).
CEE countries are small, open economies and this means that fluctuations in the economic growth rate of trading partners can have a substantial impact on their GDP growth rates. The share of total exports is particularly high in Czech Republic, Hungary and Slovakia where it fluctuates around 80% of GDP (Figure 2). Although dependence on exports is lower in Poland and Romania, it is still roughly in line with the average for EU economies. Germany remains the biggest market for CEE output, partly thanks to its size and partly thanks to geographical proximity which has allowed regional firms to become major suppliers for German industry. On average, around a quarter of total CEE exports go to Germany and only for Romania and Slovakia is the share lower at around 20%. This means that exports to Germany vary between 7% GDP (in case of Romania) and 24% GDP (for the Czech Republic).
The importance of the German market has been falling in recent years in all CEE countries, except for Romania. This was partly due to strengthening of trade links between CEE economies and larger trade flows within Central Europe as a consequence of EU enlargement (for evidence see Figure 25 to Figure 30). Additionally, the relatively stronger growth of emerging economies (particularly in Asia) led to a gradual reduction of the German share in total CEE exports. However, in our opinion the slow pace of this structural shift suggests the German market will maintain its dominant role for the foreseeable future (Figure 3). For example, even if the pace of change in the export market continues in the coming years, Germany is likely to remain the recipient of a sizeable amount of CEE exports in 2015 (20%).
