Recovery affected by the second wave of infections
Yet strong third quarter should compensate for a weaker year-end
The COVID-19 pandemic has been the defining factor in economic performance, affecting both domestic and foreign demand. Following a grim 2Q20 that saw a historic decline in GDP, 3Q20 brought a skyrocketing recovery. Yet, restrictive measures linked to the rising number of infections are set to dampen the recovery towards the year-end. Restrictions should primarily affect the service sector throughout the winter of 2020/21. Industry should continue to fare relatively well as it remains virtually untouched by European restrictions and solid economic conditions of East Asia provide a helping hand to external demand.
We marginally adjusted our GDP forecast to -6.2% this year, as the better than-expected 3Q20 performance is likely to mitigate the full year figure. GDP may increase by 6% and 4.5% in 2021-22, respectively, aided by new EU funds and Next Generation EU grants.Labour market is showing signs of resilience as government measures to protect jobs have mitigated the negative impact. Unemployment rate may increase to 6.7% and 7.1% on average in 2020-21, respectively, before decreasing more visibly in 2022.
Inflation should ease to 0.9% in 2021, before averaging 1.9% in 2022. ECB's loose monetary policy sent government bond yields visibly lower, and will keep a lid on increases for a while.The ECB is effectively easing the burden on public finances and preventing risk premia from soaring excessively. Thus, we expect only small movements in the 10-year government bond yield which may end the year at -0.4% before rising a bit throughout 2021.
Fiscal expansion is underway – government measures are aimed at avoiding liquidity/demand issues spilling into longer-term problems. We may see the 2020 fiscal deficit rising to 9% of GDP, with the debt-to-GDP ratio exceeding the 60% mark. Our forecast for next year’s deficit stands at 6% of GDP. Once the storm has been weathered, fiscal consolidation should follow. Moreover, the upcoming years bring an opportunity to use sizeable EU funds with no or very small impact on the state budget to invest into sustainable and higher value- added growth.
The pandemic has caused some rifts in the coalition as they try to agree on the right mix of measures to combat it. Yet, we don't expect any significant disagreements that would endanger the coalition. The government is currently working on the Next Generation EU reform proposal that will be submitted to the European Commission. This poses a great opportunity for the economy to move towards sustainable and higher-value-added growth.