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COVID-19 scenario: A strong economic downturn this year; the depth of the GDP decline and the dynamics of the recovery once the crisis is over are crucially dependent on the extent and duration of the coronavirus spread and economic policy measures

The spread of the coronavirus epidemic and the emergency health protection measures are strongly affecting economic activity, which is set to shrink significantly this year. The depth of the GDP decline and the dynamics of the recovery after the end of the crisis situation are and will be crucially dependent on the extent and duration of the coronavirus spread and the time of the introduction and the scope and content of economic policy measures. The COVID-19 scenario drawn up by the Institute of Macroeconomic Analysis and Development for the needs of medium-term budgetary planning predicts an approximately 8% decline in GDP in 2020, taking into account economic policy measures for alleviating the consequences of the epidemic and assuming a gradual recovery of the economy, which should start in June. As the spread of the coronavirus epidemic and its containment are a great unknown at this time, uncertainty remains and there is a risk that the period of severely paralysed economic activity will last longer than assumed and that the decline in GDP will be larger and more permanent. In the event of an extension or tightening of the strict containment measures, which are significantly hampering economic activity, the negative impacts will be more profound and far-reaching. In this case, GDP could fall by as much as 15% (or more) this year.

The COVID-19 pandemic, in combination with strict health protection and containment measures, represents a significant negative shock for economic activity in Slovenia, other European countries and globally. Since the release of IMAD’s Spring Forecast 2020, the prospects for economic growth in main trading partners have deteriorated strongly. They are also accompanied by very high uncertainty. The most recent estimates are that the world economy has already entered a recession, which will be at least as serious as in 2009, and that the recovery will critically depend on the further spread and duration of the pandemic and the extent of economic policy intervention. The emergency protection measures adopted in Slovenia and other countries thus far have led to a shutdown of non-essential service activities and hampered activity in industry and other service activities. 

The government adopted a range of measures to alleviate the negative consequences for the economy and the population. Important measures to limit the negative impacts have also been (and will be) taken by the ECB and the European Commission. “The measures will not prevent this year’s decline in real GDP, but they are essential to mitigate the epidemic’s negative consequences for businesses and households due to a sharp and sudden loss of income. This will allow a faster rebound in economic activity once the epidemic ends. It is therefore essential that the measures aimed at bridging liquidity problems in the economy and supporting those who have remained without income are adopted quickly”, Maja Bednaš, Director of IMAD, commented.  

The spread of the coronavirus epidemic and the emergency health protection measures are strongly affecting economic activity. The depth of the GDP decline and the dynamics of the recovery after the end of the crisis situation are and will be crucially dependent on the extent and duration of the coronavirus spread and the time of the introduction and the scope and content of economic policy measures.

 

The COVID-19 scenario, made by IMAD for the needs of the preparation of the Framework for Drawing up Budgets of the General Government Sector (Article 6 of the Fiscal Rule Act (ZFisP)) and the Stability programme 2020, predicts that GDP will decline by around 8% in 2020, before recovering (only) partly in 2021. The scenario assumes that the strict containment measures will mostly remain in force until mid-year and takes into account the economic policy measures formulated thus far. Assuming that the strict measures are lifted, the situation would gradually stabilise and the economy could begin to recover in the second half of the year. However, Maja Bednaš stresses that “The scenario was made in circumstances of high uncertainty and rapidly changing conditions and may change in just a few weeks if the situation tightens”.  

The decline in GDP in 2020 will arise from a decline in value added in a number of activities, given the significant contraction in activity over the duration of protection measures. According to the scenario, in 2020 value added will decline the most in transportation, accommodation, catering and personal services. A sharp fall is also expected for the manufacturing sector. Owing to the negative impacts from the international environment and foreign and domestic containment measures, coupled with high uncertainty, we can expect a significant decline in exports, imports and investment this year. Private consumption is also set to be lower than last year (a larger fall in disposable income is likely to be prevented by government support measures), while government consumption will strengthen temporarily in crisis conditions. The tightened economic conditions will also have an impact on the labour market, where the negative consequences will be mitigated, though not completely prevented, by intervention measures. 

How the coronavirus epidemic will spread and when it will be contained in Slovenia and abroad is not known at present. Epidemiologists point out that the pandemic may return in several waves after a temporary slowdown and that a more permanent stabilisation of the situation can only be expected after the development and general introduction of an appropriate vaccine. “There is a significant risk that the period of severely paralysed economic activity will last longer than assumed in the scenario and that the decline in GDP will be larger and more permanent. The beginning of the economic recovery will crucially depend on the extent of the epidemic and the speed of the introduction and the scope and content of economic policy measures at home and abroad”, Maja Bednaš added. 

IMAD is monitoring the situation and measures for alleviating the economic impact of the coronavirus epidemic in Slovenia and main trading partners. We will provide a full and comprehensive update of the forecast after the expiry of protection measures, as stipulated in Article 11 of the Act Determining Intervention Measures in Public Finance adopted on 20 March 2020.