The 2021 Outlook for the CEE Economies. Will 2021 Really be Better than 2020?
Mehmet Burak Turgut | CASE Senior Economist
2020 in a Nutshell
As the International Monetary Fund (IMF) projections show, it is expected that the global economy shrunk significantly in 2020 with an estimated 4.4% negative GDP growth rate. The EU economy was not an exception as the economic activity almost halted and the real GDP fell at double-digit rates in the first half of 2020 and it is predicted to close 2020 with 7.4% negative real GDP growth as the recent European Commission forecasts show. The employment has also suffered from a continuous drop in economic activity with the unemployment rate in the EU set to hit 7.7% in 2020 that is one percentage point higher than in 2019.
Central and Eastern European (CEE) Countries
The downturn of economic activity in 2020 is expected to be slightly less pronounced in the CEE countries. The recent CASE projections show that the fall of annual real GDP in any CEE country will not reach the EU average. Czechia and Slovakia will suffer the most from the negative impact of the COVID-19 on the regional economy with an expected 6.8% contraction in GDP. Poland and Lithuania, on the other hand, are the two economies forecasted to decline at a relatively low pace with negative growth rates of 1.9% and 3.5%, respectively.
Sharp decline in the economic activity could also be observed on the labour markets as the unemployment rates are expected to range from 2.7% to 8.6%, the lowest in Czechia and the largest in Latvia and Lithuania. The measures undertaken by the Czech government, the pre-crisis tight labour market, and low share of temporary employment contracts are the main contributing factors to the lowest expected unemployment rates in Czechia.
The governments of CEE countries responded to the COVID-19 pandemic through various fiscal measures such as social security contributions, wage subsidies, increased loans guarantees for medium and large companies, additional loans from micro firms, increased unemployment benefits, interest rate subsidies, and public investment supports. These measures are expected to increase government expenditures by on average 4.8% y/y in 2020. Along with decreased tax revenues, elevated expenditures will likely lead to large gaps in government financing.
Poland in a Spotlight
The year 2020 is set to mark the worst performance of the Polish economy in nearly three decades. In response to the COVID-19 pandemic and restrictions imposed on the economic activity, Polish GDP went down by nearly 9% q/q in the second quarter of 2020 with respective 10.5% and 9% q/q decline in private consumption and fixed investment.
In the third quarter of 2020, with the ease of containment restrictions, the Polish economy sharply rebounded, and the GDP soared by 7.9% q/q. The surge in new infections and reintroduction of containment measures were expected to bring a halt to the recovery of the economy in the last quarter of 2020 with the expected annual real GDP growth at negative 3.5% and unemployment rate at 3.8% for 2020.
The increase in the unemployment rate following the pandemic did not go one-to-one with the decrease in the economic growth thanks to the emergency support measures. The main employment-related measures included subsidies for employee remuneration costs and social security contributions for companies that experienced sharp decline in their turnover.
As of March 2020, the Polish Parliament started adopting legislation packages titled ‘Anti-Crisis Shields’ that, as of January 2021, have already amounted to PLN 312 billion support in a form of credit guarantees, micro loans, and liquidity programs for the businesses. Coupled with the dropdown in economic activity, these measures are expected to significantly deteriorate Polish public finances. CASE projects that the budget balance will reach -9.2% of the GDP in 2020, which could be the largest deficit among the CEE countries. The budget deficit will also push up the public debt in Poland. As a result, the public debt-to-GDP ratio is expected to hit 58.4% in 2020 whereas in 2019 it stood at 45.7%.
Outlook for 2021
The 2021 GDP in real terms is projected to remain below the levels observed in 2019 with the full recovery of the CEE economies being expected no earlier than in 2022.
Among the CEE economies, the highest GDP growth in 2021 is projected for Slovakia — at 5.4% y/y. As Slovakia ranks first in terms of trade openness in the region, the anticipated restoring of international trade in 2021 is expected to support the recovery. In addition, the forecasted 10.9% y/y growth in fixed investment — the highest among the 9 CEE countries — will be the main engine of the 2021 growth in Slovakia.
Poland, Hungary, and Latvia are the other economies expected to grow at a fast pace of over 4% y/y in 2021. The rebound will mostly be driven by private consumption that is expected to increase by 5.7%, 4.5%, and 4.2% y/y in Latvia, Poland, and Hungary, respectively. On the other hand, the growth of fixed investment is anticipated to be relatively slow in these countries with a projected rate of around 3% y/y. The other factors that contribute to the GDP growth in Hungary and Latvia diverge. The anticipated recovery in international trade coupled with the recent depreciation in forint will support Hungary’s positive trade balance which will contribute the 2021 GDP growth. The opposite is, however, true for Latvia — an expected negative trade balance will constrain the GDP growth, while the projected positive growth in public consumption is expected to stimulate the 2021 recovery of the Latvian economy. In the case of Hungary, an expected cut in public spending will have negative impact on growth.
The growth rates of the other countries in the region are expected to fluctuate between 3% and 4% y/y. Estonia will lead this group with an estimated 3.7% y/y GDP growth, mostly driven by the prospect of the solid fixed investment performance expected to grow by 7.9% y/y in 2021. Although Czechia is expected to have the lowest unemployment rate in the region (3.5%), the anticipations of modest increases in private consumption (2.7% y/y) and fixed investment (3.2%) will help the country to have a 3.5.% y/y GDP growth in 2021.
Lithuania is forecasted to have the lowest GDP growth among the CEE countries in 2021 — at 3.1% y/y. Although the projections for private consumption and fixed investment are not the lowest in the region (3.0% and 7.0% y/y, respectively), the expected negative trade balance in 2021 will pull down the GDP growth rate. The Romanian economy will also follow a similar path with private consumption and fixed investment growth at 3.8% and 3.5% y/y, respectively, yet only 3.3% y/y GDP growth due to the expected negative trade balance and cuts in public consumption.
Poland in a Spotlight
The assumed easing of the COVID-19 restrictions not only in Poland but also in the rest of the EU is expected to help Polish economy to recover in 2021. The annual GDP growth for the years 2021 and 2022 is thus forecasted at 4.1% and 4.0%, respectively. These figures are approaching average annual growth rates enjoyed throughout 2014–2019 (i.e., 4.2%); hence, even in the short-term recovery, the Polish economy is expected to restore its pre-crisis growth trend levels.
Considering the current dynamics, it appears that the 2021–2022 economic rebound in Poland will be primarily fuelled by private consumption which is expected to increase by 4.5% y/y (supported by the build-up of savings and positive consumer moods). The government consumption, fixed investment, and trade balance are also expected to have a positive contribution to the growth in the next two years, albeit at a lower extent. The government consumption is forecasted to grow at a decreasing rate — 3.1% in 2021 and 2.8% in 2022, which, nonetheless, is set to be compensated by the increase in fixed investment — from a 7.4% decline in 2020 to a projected 3.3% and 6.5% growth in 2021 and 2022, respectively.
The forecasts for 2021 are made under the assumption of easing containment restrictions. Thus, for the positive forecasts to realise, it is crucial that the economies in the region succeed in containing infection rates and effectively implement national recovery strategies. In case of a high rate of active cases that would require an extension of the containment restrictions, economic activity risks to drop further which may once again pull down consumer and business confidence and exacerbate the pressure.
Among the other challenges for the Polish economy in 2021 are phasing-out of support measures that may put downside risk on unemployment, a generous social policy stance that would put pressure on public finances, as well as potential low interest rates and disputes with the European Commission that may stagnate private investment.
 Trade openness being measured as a sum of a country’s exports and imports as a share of that country’s GDP.