Bottom was reached
With incoming data, we recently fine-tuned growth forecasts. Downward revision was most apparent in Croatia and Slovakia, while Czech and Hungarian GDP forecasts were marginally adjusted. Current risk for recovery path lies in global development and second wave.
As economies began to open up in May, activity is gradually coming back to pre-virus levels. CEE countries managed to close about 70% of the gap as of the beginning of June, according to our CEE Recovery Index. There is definitely still a long way to go, with risks to the downside stemming from depressed global demand or a second wave of the pandemic. On the other hand, a huge pile of EU funds, grants and loans (still unspent EU funds and the EU Recovery Plan) may turn into upside risks once economies restart their engines.
As far as the GDP structure is concerned, the shock is broad-based. Economic lockdown halted production in the second quarter and stopped consumption, particularly in the service sector. Due to the high level of uncertainty, both investment activity as well as private spending likely contracted in 2Q20. Household consumption may see more long-lasting negative effects, due to the negative labor market development. While sales of food products maintained solid growth dynamics (pre-stocking, substitution effect as restaurants were closed), sales of clothes and durable goods declined visibly. Consumer confidence will remain subdued as long as the uncertainty about the employment and financial situation persists.
Among CEE countries, unemployment has risen most visibly in Croatia and Slovakia so far. In other countries, we have seen rather marginal changes compared to the extent of the economic shock. There are a number of reasons behind such a development (long notice period, employment in services vs. industry, possibility of teleworking, migrant workers).