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2023/11/09 / Erste Group Research

CEE Special Report | To what extent is CEE resilient to German slowdown?

The German economy has stagnated for the last couple of quarters and has been facing structural challenges alongside cyclical fluctuations. The development of the CEE region is closely tied to the German performance. Although the share of exports to Germany declined over the last two decades, Germany remains the main trading partner of the region. Further, the share of gross value added embeded in German exports is twice as high as in final demand. Growth of German exports is thus particularly important for the prospects of industry in CEE. The growth of German exports and industrial output in CEE goes hand in hand, though divergence can be observed when looking at levels. Finally, as GDP growth in Germany and CEE is strongly correlated, we look at the response of the region to German slowdown. Czechia would be the most impacted country from any shock to German growth. Interestingly, Romania sees the second highest impact, but the shock recedes quickly. For Poland and Slovakia, the bottom point of the impact comes with a delay of one quarter.

Germany's economy has already been below-average compared with the other Eurozone countries since mid-2021. Germany's high dependence on manufacturing and global trade play a key role in this development. The economic model, which relied on cheap Russian gas imports and high-quality industrial exports, seems to have come to an end.

To quantify the relationships between CEE economies and Germany, we used a (Bayesian) Global Vector Autoregression Model (BGVAR), whose sole purpose is to model relations among complex entities. The responses to a -0.5% q/q shock to German GDP follow expectations. The ratio between exports and imports also reacts to a negative shock to German output. The most affected is Hungary, where we see a decline in the ratio by -0.15* as the German economy struggles. Czechia follows a similar path, albeit at a smaller magnitude from the beginning. Slovakia recovers quickly, while Romania, Poland and Croatia seem to be relatively unaffected.

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General information

AuthorErste Group Research
Product nameCEE Economies Special Report
Topic in focusFX, Macro/ Fixed income
Economy in focusCEE, Croatia, Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia, Slovenia
Currency in focusCroatian Kuna, Czech Koruna, Euro, Hungarian Forint, Polish Zloty, Romanian Leu, Serbian dinar
Sector in focus-


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