Hoping for a Silver Lining

Economists and policy makers are still struggling to assess the scope of the global economic fallout that the coronavirus epidemic is leaving in its wake. Some analysts argue that central and eastern Europe, and consequently Hungary, could emerge from the economic malaise stronger than before.

The jury is still out as to the shape and speed of the recovery from the economic crisis triggered by the coronavirus pandemic but everyone is hoping that the magic V-shaped return will materialize. That would entail economic activity around the world returning to normal levels with a vigor similar to the decline experienced in recent months. Although some major economies are showing signs of returning to some sort of normalcy as restrictive measures are gradually lifted, talking about an economic recovery would undoubtedly be unfounded at this stage. Economic data to be published over the coming months will be vital for assessing the health of economies around the world, barring a new wave of lockdowns and restrictions in the face of the resurgence of the pandemic in certain countries.

Promising signs but …
The latest set of manufacturing industry data from the region gives reason for cautious optimism as the sector exhibited strong growth in June. Nevertheless, manufacturing is still far from reaching the pre-crisis levels and the confidence indices for the manufacturing industry in most central and eastern European countries are still predicting weak output, albeit not as weak as a few months ago. The Hungarian Purchasing Managers’ Index, published by MLBKT, jumped to 47 percent in June from 40.7 percent a month earlier, however, a reading below 50 percent still signals a contraction. May industrial output and retail sales data for CEE countries show an improvement compared to the previous months but an annual comparison reveals that the extent of the decline is still significant in almost all countries.
To further complicate matters, the decline in industrial output – typically the engine of economic growth in emerging economies – has been the steepest in the CEE, with Hungary, Romania and Slovakia booking the largest drops of close to 40 percent. As a result, a V-shaped recovery remains an aspiration at this point in time and a possible second wave of COVID-19 infections could shatter the current feeble economic revival.

A new global economic structure?
In addition to the immediate economic shock, however, the epidemic could trigger a more serious restructuring of the world economy, which could transform power relations. Economists argue that the recent trend of globalization could turn around, which would result in local and regional supply chains becoming more valuable vis-à-vis the Far East. The pandemic has shed light on the fragility of global supply chains and their unreliability in times of distress.
Analysts at Fitch Solutions highlighted that populist and nationalist voices in world politics may intensify in the aftermath of the pandemic, causing the previously unabated march of globalization to come to a halt or even reverse. The crisis may prompt multinational companies to simplify and shorten their supply chains, which would put the countries of the CEE region in a more competitive position. In turn, governments may also seek to develop and build local manufacturing capacities for medical supplies to ease their reliance on far-flung countries like China and may engage in a more pronounced stockpiling of basic food supplies. According to Fitch Solutions, the manufacturing industry may also start to break away from China, albeit at a much slower pace. As a first step, companies may try to find a supplier outside China to diversify their sources. Analysts warn, however, that this may come at a high price as inflation could rise in the wake of restructuring supply chains.
A recent note by experts at the London School of Economics also stressed that the COVID-19 pandemic may actually strengthen the CEE region in relative economic terms. Although the immediate shock of COVID-19 will no doubt be harsh and even devastating, several factors point to the potential for a relatively speedy and sustainable recovery, according to the note. Firstly, the CEE region, with its decent public debt situation, is able to afford a powerful fiscal stimulus which lessens the fear of long-term destabilization. Secondly, the ECB’s strong monetary stimulus increases the monetary space the region’s central banks can use without immediate risks to inflation and exchange rate volatility. Thirdly, close economic links to the EU’s economic powerhouse, Germany, can help when the expected on-shoring of production from China takes place. The CEE region may actually take over some of the manufacturing from Asian production centers in the future. “At this point, most professional forecasts imply that a recession in the CEE region will be relatively shallow and the forthcoming recovery will be faster than elsewhere in Europe. If this is so, it would be a tragic waste of an opportunity for Poland, and the CEE region in general, to turn to more nationalism and deliberately marginalize themselves in the European Union, instead of taking a more prominent role in leading it,” the authors note.