Czech Republic, Slovakia, Poland and Germany: Sectorial impact of Covid-19 in 2020

Introduction

The entire world has been turned upside down by the global Covid-19 pandemic, a crisis that is unique given that it did not start with a drop in demand or production. There were three aspects to tackle simultaneously: a collapse in demand, disruption to production and disruption to the supply chain. As a result, the annual global GDP fell by 3.3% in 2020 compared to 2019 (WEO April 2021) while world trade fell by 5% annually on average in 2020.

The sectorial impact of Covid-19 in Czech Republic, Slovakia, Poland and Germany in 2020

The impact of the crisis on the various sectors of these countries indicate both differences and similarities. For all four countries under review, namely the Czech Republic, Poland, Slovakia and Germany, the automotive sector was hit hard, although there are significant differences between countries. According to the European Automobile Manufacturers’ Association, average sales during 2020 in Germany and the Czech Republic were 19% lower than in 2019 (which was already lower than in 2018). In Poland and Slovakia, the drop was more significant (23% and 25% respectively), demonstrating that while production was mothballed, demand was also shut down, mainly due to the very strict lockdown and uncertainty around the development of the pandemic.

It goes without saying that another sector that has suffered greatly from the lockdown measures is tourism. According to data from Fitch Solutions, international tourist arrivals fell by 69% in Germany, 64% in the Czech Republic and 50% in Poland and Slovakia, and these decreases can be accounted for by the closure of borders alongside a loss of income for many. Consequently, this had a strong impact on the financial income of companies in the sector, even though the impact was minor in macroeconomic terms given the small size of the sector in relation to the economy – 2.8% of GDP in the Czech Republic, 2.6% in Slovakia and 1.2% in Poland (OECD figures for 2018, 2017 and 2015).

Another sector severely hit was Transport and Logistics. In Germany, air transportation suffered a loss of sales equal to 45% last year. The water transportation sector, key for moving goods from the German industrial area, was also affected, reporting a drop of about 17% nationally last year. However, the impact witnessed in these two areas was less severe in the three other countries, although land transportation (road and rail) seems to have been affected equally in all four countries, with a drop between 6% and 10% in real sales. It is worth noting the difference in terms of transported products, with trade in pharma and ICT products having remained stable throughout last year. With regard to the positive impact that an expansion in e-commerce could have brought, it seems that the sector has not benefitted specifically, as this would have required a change of fleet for most companies.

Ultimately, the pharmaceutical sector seems to have shown the best performance in all four countries observed. Furthermore, domestic production in all four countries increased, which makes sense as the global health crisis increases the demand for medicine.

What should we expect from these sectors in 2021?

All sectors should see growth in 2021, given the low levels reached in 2020. Unsurprisingly, the automotive sector is expected to be the best performer of 2021 in Germany, the Czech Republic, Poland and Slovakia, given its very low starting point. However, it will most likely take several years – at least in the Czech Republic, Poland and Slovakia – to reach pre-crisis production levels. Currently, the biggest risk to the outlook for the automotive sector is the difficulty of supplying semiconductors, a challenge on a global scale that is slowing production or even temporarily immobilising it in some countries. This is a source of concern given the importance of the automotive sector to the economies of the Czech Republic, Poland and Slovakia.

Tourism, transport, and machinery and equipment should also bounce back significantly in these countries. That said, the fortunes of the tourism sector depend largely on the evolution of the vaccination rollout programme and the pandemic itself. Any further delays in the EU vaccination programme will inevitably delay the reopening of the economy, and thus have an impact on tourism. Given its relative success in 2020, annual growth for the pharmaceutical sector should be low in 2021, and could even turn negative.

What are the main risks to the outlook for these sectors?

The automotive sector faces several risks. The first of these is Brexit, because although it has already occurred, signs of its impact are still in the early stages. That is to say, supply chains are not yet established given all the red tape and other procedures that must be fulfilled to allow for the smooth flow of trade between the blocks. The second risk is CO2 emissions targets, which put additional pressure on car manufacturers in Europe and which should require significant financial resources. The third risk – connected to the previous point – is the end of the internal combustion engine automobile and the rise of electrical vehicles sales, leading to high investments. And last but not least, is the current disruption to the supply chain of semiconductors, which poses a significant downside risk to global production in the first half of 2021.

The main risk for the pharmaceutical sector would be that politicians, after having had a growing influence on this sector during the crisis, continue in this way, by trying to influence prices, for example. In addition, austerity programmes – which are highly likely after a crisis – could also lead to government cuts in the healthcare sector and in the reimbursement of medicines in certain countries. Moreover, nationalist policies are also a rising threat for the sector.

Another element that may put the short-term outlook at risk is the evolution of vaccination campaigns in Europe. While the rollout in Europe has fallen behind, delaying the return to normal by as much time as this takes to resolve, the emergence of certain variants could prolong the duration of the pandemic, reduce the efficacy of vaccines and thus deepen the impact of the virus on economic activity. This would greatly affect the tourism sector, which is unlikely to reach pre-pandemic levels before 2023 at the earliest, and also, indirectly, the hospitality sector (hotels, restaurants, etc.).

One consequence of delaying the vaccine rollout is that the economic recovery might be weaker than currently projected, further jobs may be lost and more companies might default. It should be highlighted that, to date, a large wave of defaults has been avoided thanks to the substantial support measures provided by the authorities (estimated at 27.8% of GDP in Germany, 5.4% in Poland, 4.4% in Slovakia and 15.4% in the Czech Republic according to the IMF in April 2021).

Analyst: Matthieu Depreter – m.depreter@credendo.com