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News

Digital challengers on the next frontier: Perspective on the Czech Republic within Central and Eastern Europe

23.09.2022
Company: McKinsey & Company, Inc. Prague

In the Czech Republic, up to €37 billion by 2030 is at stake, primarily from ICT and e-commerce growth in an aspirational scenario.

 The digital economy has historically been a key growth driver for the ten Central and Eastern European (CEE) countries that we call Digital Challengers: Bulgaria, Croatia, the Czech Republic, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia (Exhibit 1). This trend has continued for the past five years (2017–21), during which the Digital Challengers’ digital economy has grown by €42 billion (+51 percent), with annual growth rates of 9 percent in 2017–19 and 13 percent in 2019–21. This outpaced the region’s annual growth in GDP, which was 4 percent in 2017–19 and 3 percent in 2019–21.

Exhibit 1

The three main components of the digital economy are digital commerce, ICT, and offline spending on digital.

In the five years 2017–21, Digital Challengers outperformed their European peers in two key areas. We cluster those European peers into two groups: Digital Frontrunners (Belgium, Denmark, Estonia, Finland, Ireland, Luxembourg, the Netherlands, Norway, and Sweden) and the Big 5 (France, Germany, Italy, Spain, and the United Kingdom). The two areas where Digital Challengers outperformed these two groups were growth of the digital economy (Digital Challengers, 10.9 percent; Digital Frontrunners, 7.0 percent; Big 5, 6.5 percent) and GDP growth (Digital Challengers, 3.6 percent; Digital Frontrunners, 2.8 percent; Big 5, 0.2 percent) (Exhibit 2).

The Czech Republic’s digital economy grew 10 percent annually in 2019–21, reaching a value of €18 billion in 2021, according to our estimates. Growth of the digital economy in 2019–21 accelerated relatively slowly compared to 2017–19, at 9 percent annually—which is also below the average growth seen in the cluster.

The share of digital economy was 8 % of Czech GDP in 2021 (or €1,693 EUR per capita). Going forward, a slower growth is likely expected, due to the broader economic context (e.g., higher exposure to manufacturing in GDP, already advanced Digital economy maturity).

Exhibit 2

 

Digital Challengers have lower GDP than the Big Five and Digital Frontrunners, but higher GDP growth.

This development confirms the trend outlined in our previous report, Digital Challengers in the next normal, namely that Digital Challengers are catching up with the leading European countries. Clearly, they have been successfully tapping into the growth potential identified in our 2018 report, The rise of Digital Challengers.

Digital commerce exceeded expectations during the COVID-19 pandemic and is likely to continue as a growth engine

Digital commerce in the Digital Challengers cluster grew by more than €21 billion in 2019–21, accounting for more than 80 percent of growth in the region’s digital economy in the period. Digital commerce outperformed predictions in both our business-as-usual and aspirational scenarios, reaching €68 billion in value in 2021 (Exhibit 3). The COVID-19 pandemic sped up the growth rate of digital commerce to 21 percent a year in 2019–21, as in-store shopping was halted by lockdowns across the region. This accelerated development of online channels by two to five years.

Exhibit 3

 

 

Growth of the digital economy was driven by digital commerce outperforming all predictions.
 

However, even before the boost provided by the COVID-19 pandemic, digital commerce in the region was on a strong growth trajectory, experiencing a 14 percent annual growth rate in 2017–19. Driving this expansion was GDP growth and greater levels of disposable income, combined with an increased level of digitization. As a result, Digital Challengers grew twice as fast in 2017–19 as the Big 5 and Digital Frontrunners, which each grew by just 7 percent.

Despite these advances, Digital Challengers are still behind the other clusters in terms of digital commerce penetration per capita, which was 16 percent in 2021, compared with 23 percent for Digital Frontrunners and 21 percent for the Big 5. Clearly, there is further growth potential among the Digital Challengers.

Among the Digital Challengers, digital commerce has the highest penetration in the Czech Republic (18%), Bulgaria (19%) and Lithuania (18%). With around 45 thousand e-shops in operation, the Czech Republic has the largest ratio of e-shops per capita in Europe.

The Digital Challengers could capture more than €200 billion in value by 2030

According to our updated analysis, the Digital Challengers’ digital economy could secure up to €206 billion in growth by 2030, fueled by the home goods and electronics sectors (€19 billion potential) and the apparel sector (€9 billion), with the highest compound annual growth rates (CAGRs) expected in activities (8 percent), apparel (7 percent), and groceries (7 percent). However, unlocking this potential will require an increased focus by governments and businesses on upgrading their information and communications technology (ICT). In our 2018 report, we developed an aspirational scenario for ICT growth of €42 billion in 2017–21, but the actual growth achieved by Digital Challengers in the period was ultimately only around €10 billion. In the Czech Republic €15 billion annually by 2030 is at stake primarily from ICT and e-commerce.

The digital economy also improves resilience in crises

Countries with a higher level of digitization on average experienced a less severe economic slowdown during the first waves of the COVID-19 pandemic: GDP growth declined 2.3 percent for Digital Frontrunners compared with a decline of 3.9 percent for Digital Challengers. Countries that invest in digitizing business and government operations and in promoting broad communications networks, data analytics, and digital fluency across their populations are better able to respond to crises and minimize their impact on their economy (Exhibit 4).

The Czech Republic suffered one of strongest economic slowdowns among the Digital Challengers, with real GDP growth at –1.3 percent in 2019–21, compared to 2.9 percent annually in the cluster as a whole.

Exhibit 4

 

We identified four core digital levers that helped build resilience to the challenges of COVID-19 during the pandemic.

https://www.mckinsey.com/cz/overview/digital-challengers-on-the-next-frontier-perspective-on-the-czech-republic-within-central-and-eastern-europeMore information here.

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