New coronavirus shakes the economy - UPDATE
COVID-19 is this year's big game-changer
Slovakia's key concern at the moment is COVID-19, the disease caused by the new coronavirus. Social distancing measures have closed off borders (goods transport exempted) and have significantly restricted demand and supply for the coming weeks/months. Given the temporary nature of the shock, the economy should bounce back but the speed of recovery remains uncertain.
We updated our forecast and expect GDP to fall by 5% this year, followed by a skewed V-shaped recovery starting in the latter half of 2020 before rebounding to a positive 4.5% in 2021. Labour market will be affected this year, followed by an improvement in 2021.
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 7.8%, amidst a decrease in employment and weaker nominal wage growth (at 3.3%). The recovery next year should bring an improvement – unemployment rate may inch down to 7.3% and nominal wage growth could speed up to 3.5%.
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 to at least 7.5% of GDP, before declining in the next few years.
Parliamentary elections brought a decisive victory of the opposition party OLANO (politically mixed though more towards the centre-right, pro-EU, pro-NATO party) that gained 25% of votes, defeating the long-ruling SMER-Social Democracy. Igor Matovic, leader of OLANO, became 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 improving the judiciary, healthcare and education. Yet, the key issue for healthcare and the economy will now be COVID-19.