VW Scandal to Curb Czech, Hungarian GDP Growth, BofA Says

  • Worst-case scenario would see growth dented by 1-1.5ppt
  • Bank expects much smaller effect on Poland and Romania

The Czech and Hungarian economies will probably be the hardest-hit by the Volkswagen AG emissions scandal among eastern European nations, according to Bank of America Corp.

In a worst-case scenario, the fallout from the German company’s admission it was lying about its diesel engines’ emissions may shave between 1 and 1.5 percentage points off Czech and Hungarian economic growth and current accounts, BofA analysts led by London-based Mai Doan said. The impact on growth in Poland and Romania will be less than 0.5 percentage point, they wrote in a report to clients on Wednesday.

Exports of goods including cars and car parts to Germany and other euro area nations have helped revive the economies of the European Union’s post-communist members. The scandal at VW, which produces engines in Hungary and owns the biggest Czech carmaker Skoda Auto AS, threatens to hit the group’s sales globally.

"The importance of the auto industry and the strong linkages to German
producers put central and eastern Europe in an exceptionally vulnerable position to the Volkswagen fallout,” the Bank of America analysts said. “The Czech Republic and Hungary are likely to be affected the most.”

The Hungarian central bank is the most likely to react to the scandal’s potential drag on economic growth by easing monetary conditions, according to the analysts.

In Russia, VW accounted for about 5 percent of domestic car production last year, limiting the direct impact on the economy from any decline in production, Bank of America wrote. The scandal may curb demand for the country’s oil products as Europeans reduce diesel consumption and move into more environmentally-friendly sources of energy, the report said.

“Russia could suffer more from potential structural changes in European fuel demand in the near future,” the analysts said. “This could add headwinds to European Union oil and gas demand, potentially undermining Russia’s long-term potential economic growth.”

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