Post Covid-19, CEE could be set for a resurgence in outsourcing

Emerging Europe could be set for a resurgence in outsourcing to the region, both manufacturing and services, according to the Vienna Institute for International Economic Studies (wiiw).

Speaking during a webinar on May 6 to present wiiw’s latest economic forecasts for 23 countries in Eastern Europe, the Vienna Institute’s deputy director, Richard Grieveson, said that firms from countries such as Germany will in the post Covid-19 world not be as keen to invest in China and other parts of Asia.

“However, they will still be keen to find good value locations,” he said. “Put these two things together and it is good news for CEE, particularly the Visegrád countries [Czechia, Hungary, Poland, Slovakia] and Romania in manufacturing, and the Baltics for services. This will not happen next year, or perhaps the year after. But over the next decade we are likely to see a shift.”

The possible resurgence in outsourcing is one of few optimistic notes to emerge from wiiw’s report, which estimates that the economic downturn caused by the coronavirus will be worse than 2009 in the aftermath of the global financial crisis.

“There is no model, no template for this kind of crisis,” said Grieveson.

The Vienna Institute expects the region’s weighted average real GDP to decline by 6.1 per cent in 2020, compared with 5.6 per cent in 2009, making this the worst year for Eastern Europe since the early 1990s. The initial recovery of the region will then be much weaker: 2.8 per cent in 2021, compared with 4.4 per cent in 2010.

The Vienna Institute expects the biggest real GDP contractions in 2020 to be in Croatia (-11 per cent), Slovenia (-9.5 per cent), Slovakia (-9 per cent) and Montenegro (-8 per cent), reflecting these countries’ particularly heavy reliance on external trade and/or tourism.

The least severe contractions in 2020 will be in economies that are less reliant on external trade and tourism such as Kosovo (-4.4 per cent) or Moldova (-3 per cent), and/or are likely to use significant fiscal resources to counteract the downturn such as Poland (-4 per cent), Serbia (-4 per cent) and Kazakhstan (-3 per cent). Countries that have been able to lift lockdowns more quickly, such as the Czech Republic (-4.8 per cent), will also perform better than could otherwise have been expected.

The European Union’s spring 2020 economic forecast, also released on May 6, paints a similarly gloomy picture, predicting that the euro area economy will contract by a record 7.75 per cent in 2020 before recovering to grow by 6.25 per cent in 2021. So deep is the crisis caused by Covid-19 that it threatens the stability of the eurozone and risks exacerbating economic and social divisions within the EU.

The economy of the EU as a whole is forecast to contract by 7.5 per cent in 2020 and grow by around six per cent in 2021. Growth projections for the EU and euro area have been revised down by around nine percentage points compared to the autumn 2019 economic forecast.

Overall, next year’s rebound could leave the European economy about three per cent below the level implied by the EU’s autumn forecast. However, the outcome could be even worse: for example, another surge in infections could reduce GDP by an additional three percentage points, making the danger of a deeper and more protracted recession very real.

“At this stage, we can only tentatively map out the scale and gravity of the coronavirus shock to our economies,” said Valdis Dombrovskis, executive vice-president of the European Commission. “While the immediate fallout will be far more severe for the global economy than the financial crisis, the depth of the impact will depend on the evolution of the pandemic, our ability to safely restart economic activity and to rebound thereafter. This is a symmetric shock: all EU countries are affected and all are expected to have a recession this year. The EU and member states have already agreed on extraordinary measures to mitigate the impact. Our collective recovery will depend on continued strong and coordinated responses at EU and national level. We are stronger together.”

According to the EU’s projections, Poland is set to suffer the smallest fall in activity, with output falling 4.3 per cent, before rebounding by 4.1 per cent in 2021.

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