Analysis-Ukraine war turns the post-COVID car revival in Central Europe on its head

© . FILE PHOTO: A worker moves auto parts on a production line at the Volkswagen factory in Wolfsburg, Germany, March 1, 2019. REUTERS/Fabian Bimmer/ By Jason Hovet and Gergely Szakacs PRAGUE () – Russia’s invasion of Ukraine sparks hope for renewed growth in the auto industry in central Europe this year after the pandemic, fueling the risk of sharper economic slowdowns. The conflict in Ukraine has exacerbated supply problems and is also pushing up prices for materials such as nickel or palladium, which will put more pressure on the global automotive sector. The rise in energy costs also seeps into supply chains. The pain will be felt especially hard in Central Europe, where the sector plays an important role and there have been some disruptions since Russia invaded Ukraine on February 24. Volkswagen (DE:) has temporarily halted production at two plants in Poland. Another VW unit, Skoda Auto, the Czech Republic’s largest exporter, has halted production of its ENYAQ iV electric model, warning that production of other models would also be endangered due to the unavailability of key wiring harnesses from Ukraine. Production stoppages will take their toll as the Czech car industry accounts for about a quarter of industrial production and exports. In Hungary, the automotive sector accounts for 28% of industrial exports. Deutsche Bank (DE:) strategist Christian Wietoska estimated in a March 11 note that every week of complete disruptions to car production — something we saw when factories closed at the start of the coronavirus pandemic in 2020 — deducted about 0.1 percentage point. of gross domestic product in the Czech Republic or Hungary, more than in Poland or Romania. New interruptions could limit production of Czech cars at least into the second quarter, said Jiri Polansky, an economist at the Czech unit of Erste Group Bank. “This year could be difficult for the Czech economy, at least the first half of it, and the automotive sector will be one of the most negative,” he said. The region’s economies posted a strong recovery in 2021, but faced headwinds this year as high inflation began to cool growth. DOWNWARD REVIEWS While analysts say forecasts of the overall impact on the auto sector are still difficult to estimate with high uncertainties, there are signs that the conflict will hurt economies as industrial production is impacted and even higher inflation impacts consumer spending or dampens business investment. The governor of the Czech National Bank, Jiri Rusnok, told Czech radio on March 9 that there would be “undoubtedly” a delay. The bank previously forecast a GDP increase of 3% this year, compared to 3.3% in 2021. Hungary’s deputy governor Barnabas Virag said this week that the war in Ukraine poses downside risks to economic growth. brought with it. The latest shock comes after two lean years for the auto sector in central Europe, first with factory closures in 2020. Global chip shortages have hampered production since last year, causing the Czech sector to produce up to 300,000 fewer cars than planned last year. Czech trade association AutoSAP said this week that a third of Czech companies are already reporting a lack of materials or components as a result of the conflict in Ukraine. It had previously forecast a return to growth for this year, but AutoSAP director Zdenek Petzl said it would be a success to reach a production level of 1.1 million cars in 2021. “The impact will be huge,” he told . “It’s amazing that companies have survived the storm of the past two years. But now the question is what will happen.” In Romania, the economy minister has set up a task force to prepare for the impact in key industrial segments, such as the automotive sector, which is facing supply problems for some parts. Peter Virovacz, an economist at ING in Budapest, said Hungary’s production decline may be half that of 2020, but the recovery would be much slower. “The auto sector will not be able to boost economic growth to the extent that we would have seen it without the war,” he said.

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