New coronavirus shakes the economy
COVID-19 is this year's big game-changer
Slovakia's key concern at the moment is the new coronavirus COVID-19. Social distancing measures have closed off borders (goods transport exempted) and have significantly restricted demand and supply for the coming weeks/months. Several industrial plants have been temporarily closed and numerous services have come to a halt. However, given the temporary nature of the shock, the economy should bounce back fairly quickly.
Yet given the fluidity of the situation and uncertainty associated with it, the precise extent of the COVID-19 impact is difficult to predict. We expect GDP to clock in two quarters of negative growth in the first half of 2020, followed by a V-shaped recovery in the second half. Our full-year forecast sees GDP decreasing by 1% this year before rebounding to a positive 3.5% in 2021.
Labour market will also be affected by the COVID-19 countermeasures. The extent of the labour market damage depends inter alia on the speed and size of fiscal policy response which may mitigate it. We expect unemployment rate to rise to 6.5%, amidst a decrease in employment and weaker nominal wage growth (at 3.6%). The recovery next year should bring an improvement – unemployment rate may inch down to 6.3% and nominal wage growth could speed up to 4%.
Inflation should ease towards 2.3% and 2% in 2020-21, respectively. Government bond yields have increased somewhat amidst COVID-19 -related uncertainty but ECB's and Fed's substantial monetary loosening will keep a lid on further increases. The current situation is calling for a strong fiscal response to support the economy and we may see this year's fiscal deficit rising close to 4% of GDP, before declining in the next few years.
Parliamentary elections brought a decisive victory of the opposition party OLANO. OLANO - a politically mixed though more towards the centre-right, pro-EU, pro-NATO party - gained 25% of votes, defeating the long-ruling SMER-Social Democracy. Igor Matovic, leader of OLANO, will be the new Prime Minister in a four-party government with a constitutional majority. The new coalition is a mix of centre-left to centre-right parties. All parties are strongly anti-corruption and want to focus on better processes in appointing prosecutors, judiciary reforms, as well as improving healthcare and education.