Navigating External Shocks: CEE Economic Activity and Global Trade Dynamics
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In line with the dynamics of the EU, CEE economic activity is currently moderating across the board, with exports being a transmission channel. And while some countries are suffering more due to the drop in purchasing power (like Hungary with the biggest real wage growth drop since the 2008-2009 global financial crisis), the modest pick-up in global trade is providing some support, as is the scope for further recovery.
Trends in the Czech Republic and Hungary stand out - already showing signs of a pick-up on the net export side. But the direct contribution of net exports to GDP performance is usually low in the region. In general, a pick-up in foreign trade should normally be supportive of economic growth through domestic production and consumption, if a country’s export sector is based more on domestic value-added and less on imports. That means good trade figures with low real impacts.
Integration into global chains
It is probably worth sharing the experience of Hungary as, among our group, its value added has the highest level of integration into the global chains. Despite the significant pick-up in car and EV battery manufacturing, one of the country’s key industries, this comes with a caveat. In Hungary, the motor vehicles sector has an almost 65% share of foreign value-added in the export content.
This means that for every €100 of exports in car manufacturing, Hungary needs €65 of imports as well. Unfortunately, the latest figure for this trade-in-value-added data is based on 2018 input-output tables. Since then, the machinery sector in Hungary has seen a revolution with the boost in the manufacture of batteries and accumulators.
Machinery is yet another sector with a high share of foreign value-added. The 2018 figures show a 60% share of imported content in this sector, but with a recent focus shift in this sector, we think this import share could now be around 70-75%. The bottom line is that the crown jewels in export activity are heavily dependent on imports, thus generating a relatively low share of domestic value-added. As a summary on foreign trade, the CEE region contains big, rather closed economies like Poland or Turkey, while Romania looks more mid-ground. But export activity itself will not tell us much about the full picture when it comes to a positive global trade shock.
A positive global shock – even if it comes from China’s reopening and easing supply chain pressure – will not be able to boost economic activity if the foreign value-added share is high within exports. Of course, sometimes quantity can beat quality, especially if there is a boom in the capacity of the export-driven manufacturing sector. Yet this might only prove a shortterm victory that does not necessarily translate into a sustainable growth profile in the long term.
For longer-term improvements, countries would need to focus on investments that are able to make the local SME sector a sound contributor as Tier1/Tier2 suppliers.
Or an alternative would be just to lure in FDI where the product itself is less input-intensive or a country adopts that part of the production line that contains higher value added (like R&D and innovation or marketing, logistics, post-sales services). Looking across the economies, Hungary is extremely exposed to external demand, thus the normalisation is somewhat counterbalancing the drop in domestic demand.
The same applies to the Czech Republic, where trade appears to be one of the few engines of growth. As we discuss in a recent article, Poland is looking at the benefits of potential nearshoring trends.
Being the least open economy in the CE4 space, Romania has suffered the least from the downturn in world trade but should also benefit less when the trade recovery happens. As for the nearshoring process, to the extent it will gain relevance, Romania is unlikely to be among the first to benefit. For an economy like Turkey, the growing need for macro rebalancing means a policy shift is expected following the elections.
While the post-election macro adjustment is likely to include conventional monetary tightening, the Central Bank of Turkey (CBT) has already allowed an increase in the pace of Turkish lira depreciation since the presidential runoff. Lira depreciation could increase investment costs required for capacity expansion or hike the cost of intermediate goods if the dependency on imports is quite high. Certainly, the economy has shifted to an import-intensive production and export structure over time. Yet, the import dependency ratio varies across the sectors: as
(1) sectors using imported inputs at the lowest rate are composed of labour-intensive industries; whereas
(2) capital-intensive sectors have a higher import dependency. Thus, labour-intensive sectors will be beneficiaries of TRY depreciation.
CEE real exports versus GDP growth, 2020 and cumulative 2021-22
