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Autumn forecast 2020: The decline in GDP as a consequence of sharp contraction of activity in Q2 will be deep this year, but smaller than projected in the summer; next year growth, pace of recovery uncertain and dependent on the epidemiological situation

In the Autumn Forecast, IMAD predicts a 6.7% decline in GDP for this year. The forecasts for Slovenia’s main trading partners for this year have improved somewhat since June. With the recovery of economic activity and, in particular, with the agreement at the EU level on the financial package for faster recovery of the EU economy, confidence indicators also improved significantly in the period from May to July. This will be reflected in a somewhat smaller annual decline in GDP than expected in the Summer Forecast, despite a renewed minor fall in some indicators in recent weeks. The sharp decline in the second quarter will thus be followed by an increase in activity, but as the virus is still present and some restrictions remain in place, the recovery will be gradual and its pace uneven across sectors. Uncertainty associated with the epidemiological situation remains high. A possible uncontrolled spread of the virus and thus the possibility of a new major closure of certain activities could lead to a deeper fall in GDP and, in particular, to a slower and prolonged recovery. However, if the spread of the virus is effectively and permanently contained or a vaccine or a medicine is made widely available soon, activity could recover more rapidly than predicted.

Economic activity in the euro area is recovering after a pronounced, almost 9%, decline in the first half of the year (almost 15% in the second quarter) but is still significantly below the pre-epidemic level in most sectors. The forecast takes into account the available data on current economic developments, the adopted economic policy measures and international institutions’ latest forecasts for Slovenia’s trading partners (published by 8 September). In their baseline scenarios for containing the spread of the coronavirus, international institutions mainly expect a gradual and uneven recovery across euro area countries, with a faster rebound in those with a larger share of industrial activities. The continued presence of the virus will be reflected in the retention of some containment measures, which will have a larger negative impact on services, particularly tourism, meaning that especially in these activities no rapid return to pre-epidemic levels can be expected. Many indicators of economic activity for the third quarter already indicate a continuation of the recovery after a significant decline in April. However, with high uncertainty due to the worsening epidemiological picture in many trading partners, growth momentum has been weakening in recent weeks, meaning that we can expect further fluctuations in economic activity. 

In the Autumn Forecast made in the first half of September, IMAD predicts a 6.7% decline in GDP in 2020; it will be followed by a recovery in the next two years, but economic activity will not reach the pre-epidemic level until 2022. “The forecasts for Slovenia’s main trading partners for this year have improved somewhat since June. With the recovery of economic activity and, in particular, with the agreement at the EU level on the financial package for faster recovery of the EU economy, confidence indicators also improved significantly in the period from May to July. Despite a renewed minor fall in some indicators in August, this will be reflected in a somewhat smaller annual decline in GDP than predicted in the Summer Forecast,” explained Maja Bednaš, Director of IMAD, adding: “The comprehensive measures adopted by the government have significantly mitigated even more negative consequences for the economy, as without the measures GDP would fall by at least three percentage points more according to IMAD estimates.”

This year’s GDP decline will be attributable to a fall in value added in many sectors, which will be a consequence of a significant contraction of activity in the first half of the year, particularly in the second quarter. Following the containment of the epidemic and the easing of the most stringent protection measures, economic activity has started to recover, but as the virus is still present and some restrictions in Slovenia and trading partners remain in place, the recovery will be gradual and its pace uneven across sectors. This year, value added is set to fall most sharply in accommodation and food service activities, arts, entertainment and recreation activities, personal service activities, and transportation. A slightly smaller, but still significant, fall is also expected in manufacturing and construction. Owing to negative external impacts and containment measures both at home and abroad, we expect a significant decline in exports and imports this year. With high uncertainty affecting investment decisions, investment will also contract substantially, particularly investment in machinery and equipment. Due to limited movement and supply during the lockdown, coupled with increased uncertainty and precautionary saving, private consumption will also drop more strongly, although disposable income will remain similar to that last year due to the government’s support measures. Government consumption will strengthen temporarily in the crisis conditions. Assuming that the coronavirus is contained in a way that does not require any new major shutdowns of activity, the gradual recovery is expected to continue in the next two years, albeit at different speeds across activities. 

The tightened economic conditions are also affecting the labour market. A significant year-on-year decline in employment and an increase in registered unemployment were seen particularly in April. With a gradual lifting of containment measures, the resumption of most activities and the adoption of intervention legislation aimed at maintaining employment, the situation had stabilised markedly by the middle of the year. “The adoption of intervention measures to preserve jobs and their extension have significantly mitigated the deterioration in labour market conditions, so that the fall in employment and the increase in unemployment will be smaller this year than would otherwise be the case given the significant decline in GDP,“ Maja Bednaš emphasised. Without the further extension of measures, the average number of unemployed would again be higher year on year in the last quarter of this year. Assuming a gradual recovery of the economy, labour market conditions will improve gradually in the course of next year. 

Downside and upside risks to growth are strongly related to epidemiological conditions


Visualization of slower recovery due to deterioration in epidemiological conditions and faster recovery due to long-term Covid-19 containment.

 

Uncertainty and the risks of an even sharper decline in GDP, associated with uncertain epidemiological conditions and a possible reinstatement of more stringent containment measures, remain high. Slovenia and its main trading partners have witnessed an increase in the number of infections in recent weeks, which individual countries are addressing by stepping up containment measures. A possible uncontrolled spread of the virus and thus the possibility of a new major closure of certain activities could again severely hamper business operations in service sectors and industry. “If this were to happen this year, the decline in GDP could even be two percentage points deeper than predicted, while bankruptcies and increased unemployment would also contribute to slower and longer recovery in the coming years,” Maja Bednaš pointed out. However, if the spread of the virus is effectively and permanently contained, or a vaccine or a medicine is developed and made widely available soon, activity could recover more rapidly than predicted in the baseline scenario.

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