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Even if the coronavirus disease 2019 (COVID-19) virus pandemic
does not trigger further country-wide restrictions, optimism
regarding the short-term outlook for the Central and Eastern
European (CEE) region is diminishing, as countries face shortages
and delays along the supply chain.
The logistics crunch has contributed to a surge in producer
prices, further affected by rising energy and transportation costs,
as well as a shortage of skilled labour.
The shortages are becoming more widespread across sectors with
the most broad-based shortages felt in motor vehicle manufacturing,
computer and electronics, as well as rubber and plastics.
IHS Markit's vulnerability index shows that Hungary, Slovenia,
Estonia, and Czechia are facing higher supply-side constraints than
other countries.
Although supply-side constraints pose a negative risk for
short-term manufacturing growth, automation and reshoring provide
opportunities for CEE countries over the medium to long term as
they find a new role amid pandemic-induced structural changes in
supply chains.
Supply-side constraints and labour shortages are rising
on many fronts
Amid strong foreign demand, European Commission surveys indicate
that new industrial orders continued to rise in most Central
European countries during the third quarter, remaining at
historically high levels in much of the region (see Chart 1).
Nevertheless, a recovery of new industrial orders does not
automatically translate to a strong rebound in manufacturing
production. Indeed, production is likely to be limited over the
short term owing to rising supply-side constraints.
During the course of 2021, shortages and delays along the supply
chain have already been notable in regard to microchips and
semiconductors used in car manufacturing and electronics. Globally,
the automotive sector has been hit the hardest, resulting in
temporary shutdowns at car plants since April. Other goods that
have been affected include metals, rubber, plastics, lumber, and
paper.
Third-quarter industrial surveys indicate that many countries in
the region have been facing high shortages of materials and
equipment as well as labour (see Chart 2), with Romania being the
main exception. Skilled labour shortages are not a new phenomenon
in Central Europe, and compared with historical levels, shortages
of labour in the industrial sector have increased less than
shortages of material and equipment, which have reached historical
highs in a number of countries.
When comparing the average for the 11 EU member states from
Central Europe (CE11) versus the European Union as a whole, there
are some noticeable differences. Material and equipment shortages
tend to be less pronounced in Central Europe, while labour
shortages present a bigger problem than in the rest of the EU (see
Chart 3). This pattern is similar in the services and construction
sectors, and labour shortages are especially pronounced in the
latter, putting at risk the planned investments associated with the
Recovery and Resilience Facility (RRF). In countries with staff
shortages, companies can take steps to try to ease the problem by
raising labour productivity through automation and digitalisation,
attracting skilled workers from abroad, and/or investing in
training and education for younger employees.
Higher producer prices could limit
production
The logistics crunch has contributed to a surge in industrial
producer prices across Central Europe, further affected by labour
shortages (which are driving up salaries), rising energy costs
(impacted by surging natural gas prices), high industrial capacity
utilisation levels, and an overstressed transportation system.
Manufacturing price pressures have been boosted mainly by
intermediate goods, although the prices of consumer durables have
also experienced rapid growth in some countries (see Chart 4). By
sector, the rise in manufacturing prices has been driven mainly by
high price increases for wood and wood products, petroleum,
chemicals, rubber and plastics, basic metals, and electrical
equipment.
Producer price pressures are expected to remain elevated at
least until early 2022, and the decreasing supply and the rising
price of natural gas is expected to have a particularly negative
impact on energy-intensive manufacturing sectors such as chemicals
and basic metals. In a worst-case scenario, the continent could
face blackouts that force businesses and factories to shut
down.
IHS Markit's supply-side constraint vulnerability
index
Given the pressures that companies are facing, IHS Markit
analysts have downgraded our short-term GDP growth outlook for
Europe in the October forecast round. The third-quarter industrial
surveys from Central Europe indicate that the shortages of material
and equipment have been highly uneven across sector and country,
signaling significant variations in vulnerability, even within a
single industry. Nevertheless, a slowdown starting in the fourth
quarter of 2021 is now expected across the continent.
In an effort to quantify the impact, IHS Markit has devised a
supply-side constraint vulnerability index that ranks CE11
countries in terms of their shortage of material and equipment in
significant industries, overall capacity utilisation levels, labour
shortages, material shortages in construction sectors, and the
strength of growth in producer prices. According to these metrics,
Hungary, Slovenia, Estonia, and Czechia appear to be most
vulnerable, while Croatia, Romania, Bulgaria, and Latvia are less
vulnerable than others (see Chart 5).
When the disruptions will be resolved remains an open question,
although variants by industry are likely. The optimistic view is
that labour and input shortages will gradually ease as demand in
western economies continues to rebound from the COVID-19 virus
recession. However, uncertainty remains as to how the stability of
global supply chains and the handling of the pandemic will develop,
especially in China, Europe, and the United States. Even if the
disruptions are resolved quickly, the surge in shipping costs could
have a significantly negative effect for small businesses that rely
on imported goods, as they tend to have less clout in negotiating
fees and space with global shipping lines. Many will struggle to
absorb the higher costs, triggering potential layoffs and
bankruptcies.
Automation and reshoring provide
opportunities
While supply chains have been vulnerable to factory closures and
disruptions in transportation, the combination of high shipping
costs, long lead times, and rising trade restrictions are
triggering a new approach to sourcing decisions. In an effort to
reduce reliance on imports from China, EU countries are striving to
build a secure and independent supply chain for the key minerals
used in electric vehicles (EVs), wind turbines, and aircraft
engines.
The EU's 'Fit for 55' plan represents a source of optimism over
the medium term, with the potential to encourage faster automation
and reshoring of production. The plan aims to reduce net greenhouse
gas emissions by at least 55% by 2030 compared with 1990 levels,
making Europe the first climate-neutral continent by 2050. The
programme's initiatives include decarbonising energy production,
effectively banning sales of new internal combustion engine cars by
2035, renovating buildings to improve efficiency, and strengthening
public transport. The plan is also expected to impose tough
conditions on maritime shipping and aviation.
All of these changes will potentially escalate the need for
production to be closer to the market, meaning that infrastructure
needs to be integrated locally. Increased reshoring is expected
over the medium to long term, with European businesses shifting
supply chains closer to home, including CEE countries. Indeed, the
CEE region's favourable geographical position and lower labour
costs compared with Western Europe would play to its advantage, as
countries adapt to the pandemic-induced structural changes in
supply chains.
Posted 18 October 2021 by Sharon Fisher, Director, Global Economics, S&P Global Market Intelligence and