Central and Eastern European’s labour markets: a limited impact from the pandemic
The Central and Eastern European (CEE) economies were negatively affected by another wave of the pandemic by the end 2020, which led to another tightening of lockdown measures. This time, the government restrictions have not been as stringent as in the spring, according to the Oxford Stringency Index. Nevertheless, their negative impact on the economies will be notable, also as a result of the depletion of companies’ financial reserves in the first wave. Services are again the most affected sector, while industry is in much better shape than in early 2020. With the exception of Bulgaria, industrial output has already recovered to pre-crisis levels in the CEE economies.
The so-called Kurzarbeit programmes remain in place across the region, though their implementation was affected by the deteriorating epidemic situation in all CEE countries at the end of the year. Therefore, it is no surprise to see a decline in demand for labour across the region, which is reflected in redundancies and job vacancies. The unemployment rate is not in double digits in any of the CEE countries, and with the exception of Bulgaria, the unemployment rate remains well below the levels observed at the end of 2008 (figure CEE1). From February, when the pandemic was just beginning to be a topic, until November, the unemployment rate rose the most in Bulgaria (+1.3 pp) and Slovakia (+1.1 pp), while in Poland, the unemployment rate remained almost unchanged. In Hungary, the harmonised unemployment rate increased by one percentage point, and in the Czech Republic, by only six tenths.
However, there has been a much more significant increase in the unemployment of young people under the age of 25, which is already in double digits in all participating countries, with the exception of the Czech Republic. It turns out that, similarly to the time of the Global Financial Crisis, the negative situation is affecting youth employment with much greater force. It is mainly due to slower job creation and the reluctance of employers to hire inexperienced workers.
There are, of course, several reasons for the different reactions in the labour markets across the region. In the first place, it is the overall economic development in a given country. Poland, whose labour market has been the least affected, has also been the least affected by last year’s economic downturn. According to available data for the first three quarters, the Polish economy dropped by only 2.1% compared to Q4 2019. In contrast, in Bulgaria, the economic downturn has been almost three times as high. Hungary and the Czech Republic recorded a cumulative decline in GDP of more than 5%. However, the unemployment rate rose only slightly. The reason is the more favourable situation in industry, which plays an important role in both economies. Last but not least, the situation in Slovakia is specific - although the economy experienced the fastest recovery in the third quarter, the situation on the local labour market has not yet stabilised. This is the result of the long-term structural problems, i.e. regional differences between the dynamic western part of the country and other regions.
Just as there has been no dramatic rise in the unemployment rate, the situation on the demand side of the labour market has not changed significantly so far. Although the vacancy rate has fallen in all regional economies over the last year, it remains close to 1% in most countries, 2% in Hungary and even 5.5% in the Czech Republic at the end of Q3 2020, significantly higher than the unemployment rate itself (figure CEE2). In the Czech Republic, the metric remained above 5% even in the sector most affected by lockdowns (trade, accommodation and catering), which further confirms the fact that the Czech Republic remains the country with the tightest labour market in the EU. The fact that job vacancies are not disappearing can also be attributed to the fact that the pandemic-induced crisis represents an opportunity for some sectors and industries. This is evident in the IT, telecommunications, e-commerce (especially e-shops) and related businesses, including transport and postal services, respectively.
Although the pandemic has had a more significant impact on the economic performance in the short term than the financial crisis after 2008, the implications for the labour market are, unlike in previous experiences, limited. In addition to the structural factors mentioned above, another key factor is the lagged dynamics of the labour market. We believe that only at the turn of the year, will it become clear how much the companies were under pressure to lay off. The December EC survey suggests that there may not be a dramatic increase in unemployment even in the most affected services this time.
Furthermore, the start of the vaccination campaigns in the region offer some additional reason for optimism. Coupled with the ongoing government support and more favourable conditions in the financial markets, including the banking sector (high liquidity, low interest rates, credit moratoria, non-existent credit crunch), the CEE economies are expected to see a rebound in 2021. This should help stabilise the situation on the labour market and bring the unemployment rate gradually to pre-crisis levels.
The NBP: a new regional currency manipulator?
The Polish Central Bank (NBP) has recently come to attention as it has embarked on foreign exchange interventions against its own currency. According to its December’s statistics, the NBP added around EUR 4 billion to its foreign exchange reserves, resulting in the weakening of the Polish zloty by 2%.
Officially, the NBP is not satisfied with the current Polish zloty exchange rate because it could harm the recovery of the economy amid the challenging Covid-19 times. Thus, Polish central bankers, like their CNB’s counterparts during 2013–2016, chose to step in and artificially weaken the domestic currency. The reasoning of such a step was a perceived risk of very low inflation, which cannot be averted simply by further rate cuts as the official rates has effectively reached the zero-lower-bound. Recall the NBP main rate has been at 0.1% since spring 2020, leaving the central bank with limited or no room to reduce rates further if it wants to avoid negative territory (as it has always claimed).
The current situation of the NBP is different from that of the CNB in autumn 2013. The reason for this is not just the ongoing pandemic. Other factors are also in play. First, the Polish economy is facing a deflationary environment that would justify actions to depreciate the exchange rate of the domestic currency in order to gain a competitive edge over its trading partners. Second, the Polish zloty was unlikely to be too strong before the FX interventions as documented by the fact that Poland achieved a record high current account surplus in 2020. Third, since the spring of 2020, the NBP has been pursuing an aggressively expansionary policy by purchasing Polish government bonds, supporting the government to finance a sizable pandemic-induced budget deficit. In addition, the Polish-style of quantitative easing further relaxes monetary conditions as it decreases the market interest rates and indirectly generates a weaker zloty.
So, what to expect next from the NBP given that the Polish zloty has now almost fully erased the currency depreciation triggered by the December FX interventions? The NBP Governor Glapinsky has indicated that further interest rate cuts can come only if the central bank, for example, due to the second wave of the pandemic, will have to revise the inflation outlook downward. In this context, it is not likely that the NBP main policy rate will be cut to zero immediately (and the January rate-setting meeting just confirmed this view) as the second wave in Poland has not yet come in full strength. Additionally, the next inflation report is not expected to be on the table until the beginning of March. On the other hand, if the zloty strengthens further (e.g. the EUR/PLN moves below 4.50), the central bank is likely to intervene in the foreign exchange market with a new round of interventions, hoping that market participants will avoid testing its persistence. If that is not the case, the NBP’s FX reserves may inflate to an elevated level and the central bank may be forced to take further unconventional easing measures.