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Energy costs batter Eastern European economies, but trade realignments promise future prosperity

The European Bank for Reconstruction and Development (EBRD) has warned that Russia’s attack on Ukraine will slow growth across Eastern Europe this year, causing energy prices, borrowing costs and inflation to remain elevated while deterring foreign investment.

Manufacturing-dependent Hungary and Latvia are expected to see especially deep contractions, while Poland’s growth is forecast to be only 1 percentage point, down from 4.8% in 2022. Energy-intensive factories across the region faced reduced competitiveness as input costs remain elevated, leading the EBRD to expect markedly lower foreign direct investment in 2023.

Despite the short term hit to growth, conflict-related disruption is sowing the seeds for a trade and logistics boom in the region. Research from logistics giant Maersk and media firm Reuters shows the majority of European manufacturers and retailers are changing their sourcing strategies and increasingly considering countries such as Poland, Romania and the Czech Republicfor manufacturing. The report also found that Western Europe’s labor shortages make the relative demographic stability of Eastern European countries especially attractive.

Confirming the trend, new data from the German Eastern Business Association showed that German trade with Central and Eastern Europe climbed to a new high of $597 billion in 2022. The figures highlight a reorientation of European trade relations, with a decline in exports to Russia being offset by double-digit increases to other markets in Central and Eastern Europe.

Bottom Line: Manufacturing dependent economies in Eastern Europe will struggle as their national economic model struggled to wean off of cheap Russian gas. However, the conflict makes their stable and central location, demographics, and relatively advanced infrastructure attractive for European firms seeking new eastern hubs for trade, logistics, and production.

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