EU facing economic nightmare as Poland and Hungary ‘catch cold’ from German downturn

October 30th, 2019 (last updated)

EU facing economic nightmare as Poland and Hungary ‘catch cold’ from German downturn

Poland, Hungary, Slovakia and the Czech Republic have been making the most of low interest rates, high consumer spending and eurozone recovery in recent years but alarm bells started ringing when Germany started its slide towards recession.

Much of the region’s rapid economic growth since the 1990s comes down to reintegration with Germany whose carmakers, retailers, banks and manufacturers have taken advantage of a skilled but relatively cheap to set up thousands of plants and offices and help fill the order books of local firms.

This has led to the Visegrad Four — Poland, Hungary, Slovakia and the Czech Republic — sending up to 30 percent of their exports to Germany and the slowdown in the EU’s biggest economy is beginning to ripple through its supply chain.

Analysts say it takes several quarters for a German slowdown to hit central and eastern Europe and industry leaders are now feeling its impact.

Michal Krupinski, chief executive of Bank Pekao, Poland’s third-largest bank, said: “Three months ago we didn’t see the slowdown.

“But now you see it in the data, and when we talk to clients, they are also already seeing it: slower orders, stocks of unsold goods going up.”

Carmakers such as Volkswagen, Audi, Daimler and BMW have opened a network of plants across the region, turning it into one of the industry’s most important global hubs.

But analysts believe the motor industry’s vulnerability to global trade turbulance and the uncertainty surrounding Brexit mean it will be one for the main sectors from which Germany’s slowdown trickles toward the east and south.

Katarina Muchova, an economist at Slovenska Sporitelna in Bratislava, told the Financial Times: “If we look at the industrial figures this year, the German slowdown is the biggest factor in the slowdown in Slovakia.

“The car sector is the key one, but also those that supply it, such as metal-processing have been hit.”

To compound fears, labour shortages are also starting to have an impact on the region and the Visegrad economies are likely to get a smaller EU handout in the bloc’s next budget.

And the Germany slowdown has sparked a broader debate about how Central Europe’s economies can move beyond the model of providing cheap labour to foreign investors.

Mr Varga said: “We have to focus to avoid the middle income trap.

“The cheap labour force time is over, and we have to find a programme which can help and support the value added sectors in the country.”

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