While the COVID-19 pandemic does not discriminate according to nationality, its wider economic impact in Europe will vary greatly depending on how each country reacts to it, but also on how its labour market is built in the first place.

The shockwave of economic and social lockdowns is spreading across all sectors of European economies, and there is likely no reasonable analyst left in sight who would claim that the continent will avoid a recession this year.

What is still up for debate is how deep that recession will be in individual countries. France has already announced a GDP contraction of six per cent in the first three months of 2020, and Banque de France stated that every two weeks of lockdown translate into a 1.5 per cent loss for the country’s economy.

The euro area is predicted to contract by nine per cent in 2020, according to Goldman Sachs.

Estimates for Central and Eastern European (CEE) countries are far more favourable. ING expects the Hungarian economy to slow down by 3.2 per cent in 2020, while the Polish economy will shrink by 3.8 per cent according to Credit Agricole. Erste sees a GDP contraction of five per cent for Slovakia and 6.7 per cent for Czechia.

New reality

The labour market will follow suit. But what most CEE countries can fall back on is the fact that in recent years, unemployment was at record lows.

The social and economic blow of joblessness might not be as difficult to withstand as it could prove in Southern Europe, especially in countries where unemployment figures were in the double digits even before the pandemic arrived. Spain, Greece and even Italy still had not fully recovered from the financial crisis of 2008.

In Poland, which entered this new reality with a 5.5 per cent unemployment rate, the lowest since 1991, analysts often talk about the 10 per cent threshold and whether we will pass it or not.

Credit Agricole is pointing to June as the peak unemployment month this year, with the jobless rate reaching 9.4 per cent. Others, including Pekao and mBank, expect the unemployment rate to reach 13 per cent by the end of the year.

Hungary is also expected to more or less double its unemployment rate, which was at a low 3.5 per cent in February, and will rise to around seven or eight per cent according to ING. Slovakia might reach a similar rate, but from a higher point of 5.5 per cent in February.

Czechia seems to have the mildest unemployment increase forecasts in the region. Its current March unemployment of three per cent, the lowest March level since 1997, will rise to just 3.9 per cent in May and June according to the Ministry of Finance, while Erste is keeping its forecast for the whole year at three per cent.

“Poland, Czechia, Hungary and Germany have a similar point of entry into this crisis, with historically low unemployment rates,” says Andrzej Kubisiak, Deputy Director of the Polish Economic Institute, a public think tank.

“This has positive and negative aspects,” he adds. “It’s positive from a market point of view – it is obviously better to enter such a crisis with a low level of unemployment because even if it rises, the rate will still be manageable.”

“What is less positive is the fact that in recent years, many workers in those countries have gotten used to a favourable employee-employer relationship. This will change soon, and that change might be painful for some”, Kubisiak concludes.

Who will take the hardest hit?

But all jobs are not equal against pandemic cuts. While layoffs will likely happen in all parts of the economy, some sectors will certainly be more severely affected than others.

Analysts I talked to agree that those include the businesses that felt the direct hit of governments’ first restrictions on travel and going out – tourism, hotels, transport, restaurants and bars, arts and entertainment. While many restaurants are switching to takeout and delivery, not all can manage or afford to, and jobs are being cut either way.

Businesses that provide everyday services to people, such as hairdressers and beauticians, have also had to close their doors, and owners are wondering if their small companies will survive. Luckily, according to Andrzej Kubisiak, those are the types of businesses that are likely to get back on their feet pretty quickly.

“Demand for such services is mostly not dependent on the economic situation, which is related to what is often called the lipstick effect – consumers are more likely to spend money on such services even in harder times. There is no radical change in demand here”, he says.

Carmakers in a hurry to reopen

But the industry was also affected, especially manufacturers who depend highly on foreign demand and international supply chains, points out Róbert Chovanculiak, an analyst at the Slovak Institute of Economic and Social Studies.

The region’s labour market was particularly shaken up by shutdowns in major car factories, which happened across Europe and affected at least one million workers.

Czechia, Slovakia and Hungary, with factories for Volkswagen, PSA Peugeot Citroen, Kia, Hyundai, Skoda and Jaguar Land Rover, are hugely dependent on the car industry. In 2017, it employed almost 80,000 people in Slovakia and close to 200,000 in Czechia.

After shutting down or significantly limiting production in March, many of those factories are announcing they will reopen soon. Toyota’s plants in Poland, which employ over two thousand people, are set to restart operations on April 23.

Some others, including Toyota in Czechia, will reopen on 4 May. Volkswagen’s Audi factory in Hungary reopened its engine production in a limited capacity on 14 April, but the main car making plant remains closed.

“The car factory shutdowns were a huge blow to many subcontractors whose existence is tied to the car industry. I hear that some workers moved on to jobs in other industries, which are currently still working in full or slightly limited capacity, such as the food industry,” says Andrzej Kubisiak.

Péter Virovácz, ING’s Senior Economist for Hungary, states that car manufacturers are the crown jewels of Hungarian manufacturing. He points out that car companies have a lot of cash, and therefore could afford to send people home on paid leaves.

“Even despite the temporary shutdown, labour wasn’t laid-off and workers got paid in the meantime. So the most important impact from the shutdowns is coming via the production and export channel. However, previously production was happening in three shifts, while the re-opening means only one shift. So it was scaled down significantly”, Virovácz adds.

Not everyone loses

Who will be the first to get back on their feet when it comes to the labour market?

“That is the million-dollar question,” says Róbert Chovanculiak. “I would say that local services which people will use and need in everyday life will recover more quickly than big corporations which will have to wait for a recovery in the global economy.”

Andrzej Kubisiak seems to agree and specifies that white-collar jobs in marketing and communications, some legal services as well as consulting might be difficult to rebuild quickly.

“Companies will be looking to cut costs where they can do it without layoffs. This means shedding outside services that are not crucial to their functioning. Those industries have previously found it difficult to get back on their feet after a crisis, not because they were immediately closed down, but because the demand for their services dried up.”

There are also businesses not affected by the pandemic at all, or even thriving thanks to increased demand. The pharmaceutical industry will be a clear winner because of the increased demand for many types of products. But there are others.

“Digitalisation and delivery services have become of crucial importance in the current social distancing mode,” adds Katarína Muchová, a macroeconomic and fixed-income analyst at Slovenská sporiteľňa, owned by Erste Group.

“Retail stores and service providers that were able to move their business online or deliver their products to the customers, are in a much better position than those that could not or failed to do it”, Muchová adds.

In Poland, logistics and delivery companies are hiring more workers to meet the increased demand for their services, which is causing slight package delivery delays compared to pre-pandemic times.

The food industry also seems to be doing well, with supermarket chains as well as manufacturers looking for new employees while grocery stores remain open. Analysts mention the construction industry as another sector withstanding the crisis relatively undisturbed.

National race to recovery

We are now at a point where most European economies are tentatively loosening their coronavirus-related restrictions after about a month of lockdowns. Unless the disease strikes back with full force, there is hope that the recovery might not be extremely painful as a whole.

While V4 countries are showing significant similarities in how their economies are dealing with the pandemic, their recovery might follow slightly different paths.

“Poland is the biggest market out of the four, but what’s important here is the structure of the labour market”, according to Kubisiak from the Polish Economic Institute.

“Countries like Czechia and Hungary are very dependent on manufacturing, and plant shutdowns have a big impact on the economy. Poland is more diversified; we have a strong service sector that constitutes a larger part of the economy.”

Michal Palenik from the Slovak Institute of Employment points out that Slovakia has a lower share of employment in smaller companies, which might also influence the speed of recovery.

Hungary, on the other hand, is expecting the smallest drop in GDP. “A lot of forecasters, including ING & IMF, are seeing Hungary coping better with this crisis than other CEE countries” according to ING’s Péter Virovácz.

“The recovery next year should bring an improvement,” says Katarína Muchová. The unemployment rate may inch down to 7.3 per cent, but it will take a couple of years until it reaches pre-COVID-19 levels.”

A couple of years sound like a long way to go, especially to those who have already lost their jobs or are at risk of becoming unemployed. That means governments cannot hold back with their measures for protecting jobs, which might prove more difficult in the long term to those that were carefree with their spending in recent years.

The V4 governments have been happy to boast about strong economic indicators. The rest of 2020 will show us whose house was really in order, and who was just dressing up their windows.

 

This article is part of the #DemocraCE project. A Polish version will soon be available on 300Gospodarka.pl.

Journalist, Deputy Editor-in-Chief of 300gospodarka.pl. Based in Warsaw.


Eastern European Futures

In 2009, the European Union and six of its Eastern neighbours launched the Eastern Partnership (EaP) with the stated aim of building a common area of shared democracy, prosperity, stability and increased cooperation. A decade on, however, progress has been mixed.

Visegrad Insight is published by the Res Publica Foundation. This special edition has been prepared in cooperation with the German Marshall Fund of the United States and supported by the International Visegrad Fund.

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