Adverse scenario becomes reality
Adverse scenario is gradually becoming reality, as lockdowns are prolonged and production breaks are likely to last longer. The current shock is broad-based, with spillover effects across sectors. Recent developments (such as PMI drops in Euroozne) have deprived us of optimism and we revise our CEE8 growth forecast down to -4.7% this year. All CEE countries are expected to slip into recession. The least severe is expected in Serbia (-2.3%). Poland and Hungary should contract roughly 4%, Romania and SLovakia around 5%. Czech and Slovenian GDP growth is set to drop 6.7% while Croatian 7.5%.
The closure of the service sector for at least month and a half will halt consumption growth in such categories as restaurants, hotels and culture. Further, income loss resulting from layoffs and lower compensations from government-sponsored schemes compared to regular wages are likely to limit household spending on durable goods and clothing for the rest of the year. The rising unemployment rate will bring consumer confidence down. The high level of uncertainty is negative for investment activity. Production breaks across Europe and disruption in supply chains will impact export growth. The shape of recovery (V, U or L shaped) will depend not only on containing the virus within the country, but also domestic and global measures protecting business structures and labor markets, restoring both domestic and foreign demand in the aftermath of the pandemic.
Most of the governments responded to the crisis with a variety of measures. The fiscal packages focus on the introduction of ‘Kurzarbeit’, tax relief as well as loans and guarantees for firms. The proposed solutions, such as compensation for employees (introduced in Czechia, Croatia, Poland, Slovakia and Romania), should mitigate some of the negative labor market effects. deficits are to rise sharply alongside public debt-to-GDP ratios. The expected extent of the slowdown will lower tax revenues (including social contributions), while the introduced direct measures will boost expenditures on top of automatic stabilizers. Given the extraordinary situation, however, escape clauses will be triggered, so countries will not be constrained by fiscal rules in letting their deficits increase this year. Central banks also responded to the coronavirus threats to the economies with interest rate cuts and QE programs