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Economic Mirror: A sharp fall in economic growth and a deep recession in 2020

The consequences of dealing with the COVID-19 epidemic are being felt in the entire euro area – a decline in economic activity, historically low indicators of confidence and expectations, forecasts of a deep recession in 2020. In this uncertain situation, the pace of recovery will to a great extent depend on epidemiological conditions and economic policy measures at various levels. Since March, the epidemic and the urgent measures to contain its spread have also had a severe impact on economic activity in Slovenia, which has contracted particularly in individual more exposed sectors (trade, transportation, tourism, accommodation and food service activities). In the second quarter, the decline in activity is expected to deepen. Following a steep fall in April, economic sentiment improved somewhat in May, but confidence in all sectors and among consumers remains at record lows. With the adoption of containment measures, labour market conditions started to deteriorate noticeably in March. After a rapid rise, growth in the number of unemployed slowed down and only came to a halt only in recent weeks. By the end of May, the number of unemployed had risen to 90,415, which is 25.6% more than a year earlier.

Economic activity in the euro area declined significantly in the first quarter and international institutions project a deep recession in the euro area economy for this year. Under the impact of the spread of the COVID-19 epidemic, GDP declined by 3.3% year on year in the first quarter. Economic activity in main trading partners, which has already been easing since the middle of last year, contracted sharply in March due to the measures to contain the epidemic spread. International institutions (IMF, EC) have already projected a decline in GDP for this year since April; the ECB’s latest forecasts show that this year the euro area economy will contract by 8.7%, while unemployment will rise to 9.8%. All euro area countries will experience a recession, but the decline in GDP this year and then the pace of recovery in 2021 will not be uniform across countries. The pace of recovery will depend on epidemiological conditions and economic policy measures implemented by individual countries, the EC and the ECB. 

Figure 1: International institutions forecast a deep recession in the euro area economy in 2020 and a recovery in 2021.

The spread of the COVID-19 epidemic and the urgent measures taken to protect health have had a significant impact on economic activity in Slovenia from March onwards. The March decline in short-term indicators of economic activity was pronounced – in some activities it was larger than at the peak of the economic and financial crisis in 2009. Increased uncertainty and the closure of all non-essential service activities led to a marked fall in activity in trade, transportation and tourism-related activities (accommodation and foods service activities) in March. The decline in foreign demand, interrupted supply chains and the shutdown of production in some companies in Slovenia also contributed to a decline in manufacturing production. 

Figure 2: A sharp fall in activity in most sectors in Slovenia in March.

In the second quarter, we expect a further, even stronger decline in activity. According to the latest SURS data, goods exports to EU countries dropped sharply in April (by around 40% year on year). Imports declined even more. A further steep fall in turnover is expected in accommodation and food service activities, also under the impact of the plunge in tourist arrivals, which already started in March. A marked fall in economic activity is also indicated by electricity consumption in Slovenia, which was almost one fifth lower year on year in April. Electricity consumption was also considerably lower in the EU. Economic sentiment improved somewhat in May, following a steep fall in April, but confidence in all sectors and among consumers remains at record lows.

Labour market conditions started to deteriorate with the adoption of containment measures in the second half of March, but the deterioration has moderated in recent weeks. In March, the year-on-year growth in the number of employed persons came to a halt. The number of registered unemployed persons started to rise rapidly in the middle of March. The sectors with the largest inflow are accommodation and food service activities, trade and manufacturing. By the end of May, the number of unemployed persons had risen to 90,415, which is 25.6% more than one year earlier.

Figure 3: At the beginning of June, the number of registered unemployed fell slightly but was a fifth higher than at the end of February.

Consumer prices were 1.2% lower year on year in May. This was attributable mainly to lower prices of energy, oil products in particular due to record low prices of oil on world markets, but also to lower prices of electricity as a result of the Slovenian government’s intervention measure. Owing to increased demand, growth in prices of food (particularly fresh fruit and meat) strengthened further. Growth in prices of services strengthened somewhat in May after easing in previous months.