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2020/09/11 / Erste Group Research

Strong recovery thus far points to a milder fall of GDP this year

Labour market feeling restricted impact of the pandemic

The COVID-19 pandemic has rocked the economy, affecting both domestic and foreign demand. Social distancing measures closed off borders in mid-March (goods transport exempted) and significantly restricted demand and supply for several weeks. Ever since the lifting of restrictions that commenced in mid-May, the recovery has been underway and should no major drawbacks occur (esp. regarding restrictive measures linked to the rising number of infections), it is expected to continue in the second half of 2020.

Thus, GDP should experience a milder fall this year than previously expected – it is likely to be closer to -6.3% (rather than our previous forecast of -7.5%); followed by a 6% increase in 2021. The economy should grow briskly after the pandemic, aiding convergence, especially as EU funds and Next Generation EU grants may provide a notable fiscal boost (reflected in our 2022 forecast). Labour market has been hit, though state measures to protect jobs have mitigated the impact. Unemployment rate may increase to 7.1% and 7.4% on average in 2020-21, respectively.

Inflation is likely to ease towards 2% and 1.1% on average in 2020-21, respectively, as domestic price pressures are gradually easing in line with the cooler economic environment and lower energy prices. ECB's substantial monetary loosening sent government bond yields visibly lower.Given that the ECB policy will keep a lid on excessive increases for a while, we expect only small movements in the 10-year government bond yield.

Fiscal expansion is underway due to COVID-19 – government measures are aimed at avoiding liquidity/demand issues spilling into longer-term problems. We may see this year's fiscal deficit rising to 8.5% of GDP. Once the storm has been weathered, fiscal consolidation should follow and reign in the deficits to much lower levels in the upcoming years. Moreover, the following 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 government is currently preparing reform proposals that will be submitted to the European Commission in light of the planned Next Generation EU recovery programme. These will likely be aimed at reaching sustainable and higher-value-added growth.

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General information

AuthorErste Group Research
Product nameCEE Country Macro Outlook
Topic in focusFX, Macro/ Fixed income
Economy in focusSlovakia
Currency in focusEuro
Sector in focus-


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