The COVID-19 pandemic was unquestionably the dominant topic in 2020, and not just for the economy. Massive, repeated measures to contain the spread of the virus had a dramatic effect on growth. The International Monetary Fund (IMF) estimates that global GDP dropped sharply by -3.5% in 2020.
The COVID-19 pandemic also affected, and continues to affect Central and Eastern Europe. Consumption and investment decreased significantly in 2020, and foreign trade recorded an overall drop in the double-digit range. Domestic and cross-border demand also suffered considerably, especially in the 2nd quarter of 2020. Although the plunge in economic output due to containment measures in the spring of 2020 was unprecedented, the subsequent recovery was just as unique in terms of scale.
The large share of industrial production and exports in Central and Eastern Europe was the main reason for the sharp decline in the spring. Containment measures imposed later in the year against the COVID-19 pandemic had a significantly smaller effect, with industrial production in particular proving to be highly resistant during the second wave of infections. This was primarily because foreign demand remained stable and global value chains were not disrupted again.
According to preliminary estimates by Erste Group analysts, the Serbian economy recorded the smallest economic downturn (real GDP in 2020: -1.0%). This positive result was due to the imposition of relatively short-term containment measures and massive political support aimed at dampening the effects of the crisis. Croatia, which is highly dependent on tourism, was at the other end of the scale, recording the largest drop in GDP in the region (real GDP in 2020: -8.5%). Austria was also one of the weaker countries in terms of growth due to the effects on tourism (real GDP in 2020: -7.2%). Overall, Central and Eastern Europe is expected to show a sharp -4.5% decline in growth in 2020.
Even though unemployment rates rose in the region, they remain moderate compared to many Western European markets. Government programmes and robust use of short-time work helped in this case. The simultaneous increase in expenditures and drop in revenues naturally left their mark on government budgets. Regional currencies also weakened during the year. The Hungarian forint, in particular, came close to its historic lows. In spite of the currency effects, inflation was not affected, which gave regional central banks leeway to provide support. Hungary, Serbia and Romania reduced their interest rates and other countries may follow. The most dramatic interest rate reduction was undoubtedly the 200 basis point reduction by the Czech National Bank.