Recovery hinges on immunization process
Pandemic-induced restrictions weighed on domestic demand in 2020, resulting in a 4.5% y/y contraction. Private consumption fell 5.6% y/y, shaving 4.1pp from the headline GDP, while the investment drop shaved another 3.7pp off the top. Hefty government support helped cushion the fall, as public spending rose 10.1% y/y. Both exports and imports fell close to 11% y/y, but their net contribution was positive, adding roughly 2.2pp to the growth.
We expect that the bounce-back in private consumption and intensified public and private investments will drive the recovery this year. Growth is expected to average around 4% in the next two years. The net external performance will likely turn negative, as exports remain highly dependent on German automotive manufacturing chains, while imports are set to rise, due to the projected recovery in domestic demand.
After averaging 1.2% y/y in 2020, CPI is showing a moderate upward trend, rising to 2.7% y/y in April. The rise stems from rising pressures in global commodity prices, notably oil and food prices, additionally pronounced given the low base. The temporary mismatch between global demand and supply will lead to some pass-through to inflation. We expect CPI to average 2.2% this year, before easing slightly to 2% y/y in 2022.
The CB has continued with its expansionary monetary policy, reducing the key rate by an additional 0.25pp to 1.25% at its March meeting. The cut enabled a further drop of interest rates to historical lows.
After winning another four-year term as the party leader of SDSM in March, PM Zoran Zaev now faces more challenging tasks – leading the economy out of the deepest contraction in modern history while finding a way to end the bilateral dispute with Bulgaria that is blocking the country’s EU accession talks.