The impacts of the Covid-19 pandemic in the Czech Republic’s main trading partner countries

(author: Soňa Benecká)

The Covid-19 pandemic has fundamentally affected all European economies, most of all the Italian and Spanish ones (see Chart 1). These two countries, along with Germany, France and Slovakia, rank among the Czech Republic’s largest trading partners and proxy for external demand for the purposes of the forecast. This box therefore focuses on them. In just a few days in early March, Italy saw a dramatic rise in infections and the virus spread to other EU states. Most countries responded by introducing social distancing measures and travel restrictions to slow the spread of the pandemic as much as possible. Spain and Slovakia brought in restrictions less than a week after Italy, while Germany did not clamp down until 20 March, when the number of cases was already high relative to other countries. In most of these countries, the numbers of new cases peaked in late March/early April (see Chart 2). In France, the reversal was less pronounced and the growth in the number of cases may stay high for longer. Given this trend, it can be assumed that most countries will reach the overall peak of the pandemic (as measured by the number of active cases) by May.

Chart 1 (BOX) Numbers of active cases in the Czech Republic's largest trading partner countries in the euro area
The Covid-19 pandemic has hit Italy and Spain particularly hard, while in Slovakia the pandemic has been very limited
(number of active cases per million inhabitants)

Chart 2 (BOX) Numbers of new cases in the Czech Republic's largest trading partner countries in the euro area
The numbers of new cases have peaked in most countries, but growth in infections remains high in some countries
(numbers of new cases per million inhabitants)

Note: The one-off fluctuation to negative values for Spain reflects a change in the methodology for the time series.

The sharp rise in the number of cases and deaths led to the introduction of a range of quarantine measures. Social contact has been restricted the most in Italy and Spain, where social life has virtually ground to a halt and economic activity has frozen. In Italy the situation is expected to last at least until the end of April, while Spain has already started easing the restrictions in some sectors (construction and manufacturing). By contrast, other countries have introduced more moderate restrictive measures. Shops and restaurants are closed, but tourism has also suffered. Moreover, many car manufacturers and their suppliers have shut down production in Europe. Germany started to lift its restrictions in late April (when small shops were reopened), while France is not expected to do so until May. The Slovak government has announced a four-step plan for gradually relaxing its restrictions, with full lifting planned for early June.

The expected economic consequences depend on the assumptions made about the course of the pandemic and the government measures. The impacts of the pandemic on each economy can be estimated on the basis of an analysis of gross value added by sector. Restrictions had been in force in all the economies under review for 2–4 weeks at the end of Q1 and will remain in effect until at least either the end of April or mid-May. Although some of them may be softened before the end of Q2, the recovery in the sectors concerned will be gradual. The size of the downturn in each sector was selected on the basis of available estimates of the expected duration and effectiveness of the restrictive measures in each country.

The analysis reveals that the measures have had a sizeable impact on services, which play a less important role than goods in Czech exports. As the restrictions were most pronounced in Spain and Italy (a complete halt of the economy with the exception of essential sectors), the downturn will have affected virtually every sector of their economies already in 2020 Q1 (see Chart 3). The forecast assumes that the structure of the contraction will be similar in Q2. Wholesale and retail trade, transport, and hotels and restaurants will therefore be hit hard, as will many services, while demand for goods in the economies under review will decline slightly less. Demand for Czech exports from the Czech Republic’s main trading partner countries is thus expected to decline less than proportionately to the contraction in their economic activity.

Chart 3 (BOX) Contributions of sectors to the expected decline in gross value added in 2020 Q1
In the Czech Republic's trading partner countries, the pandemic has hit services hardest
(contributions in percentage points to quarter-on-quarter decline in gross value added)