East EU Heads Toward Worst Economic Slump Since Communism

(Bloomberg) --

Damage from the coronavirus dented the European Union’s fastest-growing region in the first quarter, with most of the bloc’s eastern members tumbling toward the worst recession since the fall of the Iron Curtain.

While the countries stretching from the Baltic to the Black Sea averted the record downturns suffered by big western European states, the shutdown of factories, shops and services hammered company profits and drove unemployment higher.

Economic growth slowed on an annual basis less than expected in Poland and halved in Hungary from the end of 2019, data showed on Friday. The Czech and Slovak economies shrank, while Romania and Bulgaria remained outliers, with both quarterly and annual expansions despite expectations of a looming drop from April to June.

The region contracted by 1.1% on aggregate from the previous quarter, the worst drop since 2010, according to Capital Economics. That was still better than the record 3.8% first quarter decline in the euro-area, the top export destination for the EU’s eastern members.

“Hungary and Poland escaped more lightly, but there’s little encouragement from the more modest falls in GDP as strong activity figures for January and February helped to partially offset a collapse in activity in March,” said Liam Peach, emerging Europe economist for Capital Economics. “The figures for Q2 will be much worse.”

Output at Skoda Auto, the largest Czech company and a key gauge of the country’s manufacturing health, dropped by more than 100,000 cars during a month-long shutdown, according to board member Klaus-Dieter Schurmann. Total car deliveries fell by about a quarter from a year earlier in the first three months.

“We’re feeling a very strong economic impact of the coronavirus pandemic and the necessary measures adopted to suppress it,” Schurmann said.

Forecasts for the looming recession in the EU’s former communist members evoke memories of the region’s painful transformation more than three decades ago. At their worst, cumulative GDP contractions ranged from about 13% in Poland and then-Czechoslovakia to a quarter of output in Bulgaria and Romania and as much as 40% in Baltic states.

“The recovery is unlikely to be as quick and easy as originally assumed,” the Czech central bank said in the minutes from it’s May 7 interest-rate meeting, published on Friday.

Still, as lockdown measures are being lifted across the continent, officials are sounding more frequent forecasts of a recovery that won’t be delayed beyond 2020.

Skoda’s rival Dacia Renault Romania is already seeing a recovery in orders in Germany, France and the U.K., according to Chief Executive Officer Christophe Dridi.

“The probability of avoiding the recession is significantly high” for Romania, said Andrei Radulescu, an economist at Banca Transilvania, the country’s largest lender. “In our scenario the Romanian economy would increase by an average annual pace above 2.5% during 2020-2022.”

Eastern EU economies will probably continue outpacing western Europe after the pandemic subsides, as they’re still in catch-up phase, according to Beata Javorcik, the EBRD’s chief economist. They also reacted faster than countries including France, Spain and the U.K., which has led to significantly fewer deaths from the virus.

“Containment measures implemented in March have hit the region’s economies hard,” Morgan Stanley economist Georgi Deyanov said in a note. “We currently expect GDP to bottom out in the third quarter but the risks are that we will see a slow-paced and protracted recovery over the next couple of years.”

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