Incorporating and accounting for strategic risks will require a market-by-market approach in the long term
For a brief video overview of these events, please click here.
Under our base case, the Central Europe region’s growth is set to slow significantly, but it should avoid a broader recession throughout 2023, with many markets, such as Poland, Croatia, and Romania, still offering new business opportunities. While Central Europe will outperform Western Europe, the region is also facing several major risks stemming from a mix of internal and external market dynamics. Additionally, Russia’s invasion of Ukraine presents a clear security risk to the Central Europe region, which—should the war escalate beyond the borders of Ukraine—will put NATO into a direct confrontation with Russian President Vladimir Putin, which we have covered in our Global Events to Watch report. Multinationals should view the region as offering more resilient opportunities and approach it on a market-by-market basis to anticipate potential shocks and disruptions.
- Government-mandated gas rationing (35%): While warm weather and high gas inventories will likely soften the need for European governments to implement strict rationing measures in the winter of 2022/2023, ongoing supply issues and low LNG import capacity will continue to present significant issues during the winter of 2023. Additional risks to supply, such as disruptions to US exports or suspension of Russian LNG supplies, may prompt a period of acute gas shortages, which will require much more considerable government involvement in energy consumption and result in rationing that prioritizes households and essential services throughout 2023.
- Deeper recession in WEUR (35%): Central Europe’s high exposure to shocks in Western Europe means that a deeper recession in major developed markets, such as Germany, France, or the UK, will have a ripple effect on Central Europe economies and drive the region into a broad contraction. As such, risks to the Central Europe region are intrinsically linked to risks in the WEUR region, on which you can find more information here.
- Croatian tourism industry outperforms (30%): Croatia’s adoption of the euro and its price-competitiveness should make it an attractive tourist destination. Moreover, the tourism season will begin as inflation is moderating and after a particularly tough winter, which could encourage tourists to be less fiscally conservative with their holiday plans. For these reasons, we believe there is a 30% chance that Croatia’s tourism industry could perform more strongly than anticipated, boosting B2C demand. Travel and tourism accounted for nearly 25% of Croatian GDP in 2019, the last year before the pandemic. If tourism exports surge in Q3 2023, annual GDP could be boosted by as much as 0.5 percentage points next year.
- Hungary loses access to EU funding (30%): The European Commission (EC) has suspended Hungary’s access to both EU and national recovery funding until the government makes further progress on anti-corruption reforms. While we continue to expect the Hungarian government to finally implement many of the EC’s recommendations, albeit cosmetically, and to receive access to funding, risks remain acute, especially considering the country’s dire fiscal situation. Should funding be permanently suspended, the market will experience a sharper recession and a pronounced shock to demand across all customer segments, combined with significant depreciation of the HUF. Hungary’s sharper recession would weigh on its neighbors, such as Serbia, Croatia, and Romania, dampening their performances through existing trade channels.
- Poland loses access to EU funding (25%): While the event is similar to the one in Hungary, the impact on the region is likely to be much more substantial, given the market’s size and close integration with the broader European supply chain. Under our base case, the government is likely to introduce reforms to the judicial system to unlock EU funding, but a need to energize supporters in light of the upcoming elections in 2023 and a political miscalculation may result in a prolonged suspension of EU funding, which will limit the government’s ability to support the economy and lead to a sharp drop in public investments, which will translate into a broader economic shock.
- Increased refugee flows from Ukraine (25%): Under our base case, the Central Europe region—Poland especially—is set to see an increase in refugee flows from Ukraine, as the war between Russia and Ukraine continues to intensify. Should we see sharp intensification of the conflict, including much more aggressive strikes on residential areas in large Ukrainian cities, including in the Western parts of the country, refugee inflows to Central Europe may be much higher than anticipated. Additionally, Russia using non-conventional weapons, such nuclear, biological, or chemical weapons, could trigger widespread panic and drastically increase refugee outflows from Ukraine. While this is likely to increase the addressable consumption base and may have a positive statistical effect on B2C demand, it will also significantly increase fiscal pressures on some markets, such as Poland, Slovakia, and the Baltics, and require further budgetary amendments. The timing of the event is also crucial, because if this occurs during Q1 2023 or Q4 2024, the immediate pressures on CE governments will be much more pronounced in light of the uneasy energy situation.
- The ruling PiS party loses the Polish general elections (20%): The PiS is set to win the Autumn 2023 general elections, especially considering the inability of opposition parties to present a unified front. However, recent polls suggest that the PiS’s popularity has taken a hit, providing a political opening for the main opposition party, the Civic Platform, to potentially attempt to unify other parties and form a government that will displace the long-ruling populist government. A government led by the Civic Platform will likely attempt to mend relations with the EU, providing more policy predictability that should boost investor confidence and ensure long-term access to EU funding.
- Romanian coalition disintegrates (15%): Romania’s coalition has proved surprisingly stable given that the two primary coalition parties are not natural governing partners. However, the strain of the energy crisis and looming elections in 2024 could unleash tensions that have thus far failed to surface. At a probability of 15%, the disintegration of the coalition could shake business confidence temporarily. However, with polls putting both parties ahead, either would end up forming the next government alongside smaller, more ideologically aligned parties. This would result in a shift in policy, but not one that would substantially disrupt multinationals’ strategic plans.
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