Gergely Szakacs and Jason Hovet

PRAGUE, Reuters – Russia’s invading Ukraine has triggered fears of a sharper economic slowdown and raised hopes for renewed growth in the central European car sector this year.

Conflict in Ukraine has made it more difficult to supply problems and also pushed up the prices of materials such as nickel or palladium. These will add pressure to the global automotive sector. Supply chains are also being affected by the rising cost of energy.

It will feel especially bad in central Europe where this sector is an essential part of the economy. Some disruptions have already been seen since Russia invaded Ukraine, Feb. 24, 2017.

Volkswagen (DE) temporarily suspended production in two Polish plants.

Skoda Auto is another VW unit and the Czech Republic’s largest exporter. It has also stopped producing the electric ENYAQiV model.

The Czech auto industry accounts for about 25% of the country’s industrial output. This means that production interruptions could cause serious damage. Hungary’s car sector is responsible for 28% industrial exports.

Deutsche Bank Christian Wietoska (DE) strategy estimated that in a March 11, 11th note, every week of production disruptions caused by the coronavirus pandemic 2020 at factories in China, it would subtract around 0.1% from the gross domestic product of Hungary and the Czech Republic. It was more than the difference in Poland or Romania.

Jiri Plansky, economist from Erste Group Bank Czech, stated that fresh interruptions could affect Czech car production for at least the second quarter.

He said that the Czech economy could face some difficulties in the coming year, with the majority of its economic activity being concentrated in the auto sector.

While the economies in the region experienced a robust recovery in 2021 they have been hit by headwinds from rising inflation which is cooling their growth.

DOWNWARD REVISIONS

Analysts say it is difficult to forecast the impact of the entire conflict on the auto sector. However, there are signs that the conflict will have a negative effect on economies. The disruption in industrial production and higher inflation are likely to dampen consumer spending and decrease investment by companies.

Czech Radio reported that Jiri Russell, the Czech National Bank governor stated on March 9th that there was “undoubtedly,” a slowdown. In the past, the bank had forecasted a 3.3% increase in GDP this year, compared to 3.3% in 2021.

Barnabas Virag (Hungarian central bank deputy governor) said that the Ukraine war poses downside risks to Hungary’s economic growth.

After two poor years in central Europe’s automobile sector and factory shut downs in 2020, the latest shock is now. Since last year, global shortages of chip technology have hampered production, with the Czech industry producing as many as 300,000.

AutoSAP Czech Industries Association stated that this week, three-quarters of Czech businesses have reported having difficulty finding materials and components because of the conflict in Ukraine.

The company had forecast growth in the previous year. However, Zdenek Pezl, AutoSAP’s executive director, stated that reaching 2021 production levels 1.1million cars will be possible.

“The effect will be enormous,” he said to Reuters. “It’s amazing that these companies have survived the hurricane of the previous two years. It is now uncertain what the future holds.

Romanian economy minister set up an economic task force in preparation for possible fallouts in key industrial segments like the automotive sector that is experiencing supply problems.

Peter Virovacz from ING Budapest said that although Hungarian production declines could be as low as half those in 2020, recovery will be slower.

He said that “the car sector won’t be in a place to boost economic growth as much we would see without the war.”