New Economic Outlook for Slovakia Martin Grešš

ISSN: 2560-1601

Vol. 30, No. 2 (SK)

June 2020

Slovakia economy briefing: New economic outlook for Slovakia Martin Grešš

1052 Budapest Petőfi Sándor utca 11.

+36 1 5858 690 Kiadó: Kína-KKE Intézet Nonprofit Kft. office@china-cee.eu Szerkesztésért felelős személy: Chen Xin

Kiadásért felelős személy: Huang Ping china-cee.eu 2017/01

New economic outlook for Slovakia

Overview Coronavirus pandemic has crippled the world economy, disrupted the global supply chains and negatively affected also regional blocks and the economies of their individual member states including the European Union and the economy of Slovakia. Negative effects on the GDP development in the world is presented in figure 1 with the latest available data for first quarter of 2020 with the slump in GDP of -2.99% in comparison with previous quarter. We note the slump that is deeper than the negative change during the financial crisis in 2008 and 2009, or more precisely in the fourth quarter of 2008 (-1.14%) and the first quarter of 2009 (-1.39%).

Figure 1 Percentage change in world GDP, quarter-on-quarter

Source: OECD (2020).

As already mentioned in previous weekly briefings regarding the economic situation in Slovakia (April and May 2020), the current coronavirus pandemic has already negatively affected the economy of Slovakia in the first quarter of 2020, especially since the first cases appeared and countermeasures to fight the pandemic were introduced together with the emergency state in March 2020. After rather slight increases in the number of affected people, since April the countermeasures began to ease with the end of emergency state in mid-June and

1 almost all the measures eliminated with the one, probably most important, still in place – using face masks in the interior. In this briefing, we present the current outlook for the Slovak economy after the coronavirus outbreak in the first half of 2020 for the second half-year of 2020 and following years where available. We focus on the forecast based on the data and put forth by the National Bank of Slovakia (NBS) – central bank of Slovakia. However, we note, based on the OECD (2020), that the economic outlook in current situation is exceptionally uncertain and with the easing of health emergencies and confinement measures together with restarting of economic activities may lead to recovery to be hesitant and interrupted by another coronavirus outbreak if targeted containment measures are not put in place or prove ineffective. On the other hand, OECD (2020) reminds that the “governments and monetary authorities reacted remarkably quickly to the crisis, reducing the spread of the virus and preventing an even larger economic and financial collapse. Emergency measures expanded hospital and other healthcare capacities, helped to preserve the incomes of workers and companies despite the shutdown, and guaranteed private debt on a large scale in some countries.” Monetary policies have been eased in many countries (with programs such as cut in the interest rates and enhanced asset purchase programs). Also fiscal policies have been relaxed to support the economies resulting in new challenges for national governments such as increase in the state budget deficit, increase in the public debt to significantly high levels, and interest rates reduced to historically low levels of zero percent or even less.

Economic outlook for Slovakia1 In June 2020, the NBS introduced new middle-term prediction regarding the outlook of the Slovak economy for upcoming months of 2020. Based on the NBS (2020b), regarding the new developments after three months of the coronavirus outbreak in Slovakia, there are three major changes in comparison to previous outlook by the NBS. These three most important changes are:

• The figures for the first quarter of this year are slightly worse than was expected. • The recovery from this year’s economic downturn caused by the coronavirus in the first quarter is expected to be slower. While at the end of April the Slovak economy was expected to reach the pre-crisis levels at the end of 2021, in the end of June, the Slovak

1 Data in this part are taken from NBS (2020a).

economy is expected to reach its pre-crisis levels of 2019 economic growth probably no sooner than in the first half of 2022. • The lasting consequences of the crisis will be probably more pronounced. The NBS assumes that at the end of 2022, the Slovak economy should still be 6 percent smaller in comparison to the scenario with no coronavirus outbreak.

There is a number of reasons for these changes, especially for longer than expected recovery of the Slovak economy. Based on the most current information, we note that the vaccination or even the medicine for the Covid-19 virus is not to be expected soon. Even though according to EMA (2020), EMA’s human medicines committee recommended granting a conditional marketing authorization to Veklury (remdesivir) for the treatment of COVID-19 in adults and adolescents from 12 years of age with pneumonia who require supplemental oxygen rendering remdesivir the first medicine against COVID-19 to be recommended for authorization in the EU. Besides the effective vaccination/medicine and the uncertainty of their invention, the people all over the world will continue to live in greater uncertainty than before the coronavirus outbreak affecting their behavior on both sides of market fundamentals – as consumers on the demand side and as investors on the supply side as well. Also, we may expect introduction of old and new coronavirus countermeasures, even though in more subtle forms, in case of rising in the numbers of the infected or second wave of the outbreak. One of the most important thing, as mentioned in the introduction, is the disruption of global value chains and trade relations which may prove extremely negative for the development of the Slovak economy which belongs to one of the most opened economies in the world. Because of this fact, even though the strict countermeasures taken by the old and new Slovak government in March this year together with the opening up, easing the measures and helping the economy through fiscal and monetary policies, it may still not be enough in case there is another wave of the coronavirus outbreak later this year (may be expected in the fall with the weather propitious to virus widespread in the population). Also new and more complex problems may arise in the financial sector, despite the help from the EU and the Slovak government, affecting the willingness and ability of the banks to finance loans, mortgages, investment. Another problem may arise in the public finance sector. The gap between budget revenues and expenditures is expected to widen to more than EUR 8 billion with public debt exceeding the 60 percent of the GDP. Again, we identify several reasons for this situation: 1. Less taxes flow into the treasury, 2. People working and shopping less with companies having lower profits, 3. Government measures to help the economy, directly affecting the budget of EUR 2 billion (NBS, 2020b).

The forecast for this year expects both, employment and the economy as a whole, to be roughly at the level of 2017 by the end of this year. Regarding the loss in the number of jobs is expected to reach 70 thousand jobs. However, based on the effectiveness of government measures, we may expect this number to rise. The NBS expects the loss in jobs at 100 thousand in case of a combination of several negative factors. In case of wages, the situation may be bifurcated depending on the sector one works in. There is a strong possibility that the wages in the private sector will fall rather sharply in the following month of this year. There are two reasons for this: 1. Many people worked fewer hours in the beginning of this year and 2. The bonus rewards should be lower. On the other hand, as the economy begins to recover, the hours worked, and thus wages, should grow relatively quickly. People working in the public sector will not feel the crisis so much thanks to the approved wage adjustments. Since the public sector is smaller than the private sector, wages in the economy as a whole will fall. Regarding prices, in 2020 prices are expected to continue to increase because of the food prices. Many operations that survive the crisis are unlikely to be in a position to cut prices due to their fixed costs and liabilities.

Conclusion Slovak economy will be hit quite hard with the current coronavirus crisis in 2020 with expected recovery sometimes in 2022. However, we note this recovery will be possible only in case vaccination or medicine for Covid-19 will be discovered and the economy will not be hit by future waves of the disease. Decreasing world trade and the disruption in the global value chains will hit directly and negatively the export-dependent Slovak automotive sector and also other sectors of the economy. Therefore it is of great significance the situation with coronavirus not only in the Slovak economy, but also in Slovak major trading partners like Germany, Czechia and others. In case of new wave, the GDP will probably fall by 11% with hard recovery caused by heightened uncertainty and high unemployment. On the other hand, implemented fiscal measures may cushion the impact of this downturn to some extent, which is, however, hard to predict.

References:

1. EMA. (2020). First COVID-19 treatment recommended for EU authorization. Available on-line: https://www.ema.europa.eu/en/news/first-covid-19-treatment-recommended-eu- authorisation. 2. NBS. (2020a). Strednodobá predikcia. Available on-line: https://www.nbs.sk/sk/publikacie/strednodoba-predikcia. 3. NBS. (2020b). Strednodobá predikcia P2Q 2020. Available on-line: https://www.nbs.sk/sk/informacie-pre-media/tlacove-spravy/spravy-vseobecne/detail-tlacovej- spravy/_strednodoba-predikcia-p2q-2020-otazky-a-odpovede. 4. OECD. (2020). OECD Economic Outlook, Volume 2020 Issue 1, No. 107, OECD Publishing, Paris. Available on-line: https://doi.org/10.1787/0d1d1e2e-en.