COVID-19 is shaping the economy this year
Recession to be followed by a decent recovery
Slovakia's key concern this year is the COVID-19 pandemic. Social distancing measures closed off borders in mid-March (goods transport exempted) and significantly restricted demand and supply for several weeks/months. Given the temporary nature of the shock and the reopening of the economy that started in May, GDP should bounce back.
Yet, the speed of recovery remains contingent on a number of factors at home and abroad - as both domestic and foreign demand are affected. We updated our forecast and expect GDP to fall by 7.5% this year, followed by a skewed V-shaped recovery averaging 7.1% 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 - but its take-up needs to be scaled up. We expect unemployment rate to rise to 9.5%, amidst a decrease in employment and much weaker nominal wage growth (at 1.9%). The recovery next year should bring an improvement. 2021 unemployment rate may inch down to 8.5% and nominal wage growth could speed up to 2.5%.
Inflation should ease towards 2% and 1.1% in 2020-21, respectively. Government bond yields increased somewhat amidst COVID-19 -related uncertainty but ECB's substantial monetary loosening sent them to lower levels again, and will keep a lid on excessive increases for a while.
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 8.5% of GDP, before declining in the next few years. The new government that came into power in March has an uneasy task in front of them - mitigating the economic costs of the pandemic.