The automotive sector remains a concern for CEE economies

We have already emphasised the risk associated with weak industrial performance in our December issue. Since then, another set of weak industrial figures has been published in several CEE countries. Czech industrial production fell by 0.3% month-on-month and by 2.7% year-on-year in November – finishing both below our estimate (-2.5%) and market expectations (-1%). Hungary's industrial production in November was 1.6% below October's level. The sector's performance has fallen in seven of the last nine months, meaning that the downward trend of more than two years has not been broken. Furthermore, seasonally adjusted Polish figures showed a month-on-month industrial decline of 2.8%.

The main problem continues to be weaker external demand reflecting both cyclical weakness in global investment activity and structural problems of the neighbouring German economy as confirmed, for example, by the latest set of PMIs. In Poland, Hungary and the Czech Republic, recent months have also revealed production declines in the regionally-important automotive segment (see figure CEE 1).

From a long-term perspective, the Czech automotive segment seems to be still in relatively good shape reporting levels of production significantly above 2019 levels, relatively low demand obstacles (see figure CEE 2) and high capacity utilisation (see figure CEE3). For now, the tight financial balances of Czech auto suppliers have not led to major production disruptions. The situation can worsen as the uncertainty complicates investment plans of suppliers to transform from combustion engines to EV/BEV production. Additionally, the funds available for investment and restructuring in the automotive segment could be reduced by European fines on combustion engine producers (which is the case for the whole CEE region).

Meanwhile the Hungarian automotive output might be boosted by new large production capacity, like BMW or BYD. On the contrary, the Hungarian producers might be hit more by the tariffs on car exports to the US. As our simple input-output model shows, the sensitivity of Hungarian automotive to US demand is approximately twice as large in comparison with the Czech Republic and Poland.

From a GDP perspective, the uncertainty in the automotive sector remains a major challenge, especially for the Czech Republic, where the share of the automotive sector on value added is approximately 4.5% and after including associated production, the share increases to more than 7%. In Hungary, it is close to 3%, while in Poland the impact of the automotive sector on the overall economy remains rather low (with a share of approximately 1.5%). Most recent industrial and automotive data represent a risk, mainly to our Czech GDP outlook, where we assume a slight acceleration in the economic recovery in the quarters ahead.