The Slovak economy is heading for a recession followed by a strong recovery (Q&As)
Národná banka Slovenska
Why scenarios and not a standard forecast?
- Exceptional situations require unconventional approaches. Národná banka Slovenska (NBS) is presenting the results of its considerations in a way that reflects the uncertainty surrounding the future situation.
- The uncertainty about future developments, including about the spread of the coronavirus and its impact on the economy, is huge.
- Exceptional times bring dramatic changes in the behaviour of people, firms and financial markets.
- The Slovak Government is taking emergency measures. These will work for some time, with their effect and repercussions being different in a crisis situation than in normal circumstances.
- The procedures usually used for projections are based on ex post data, but under the current conditions, these cannot provide meaningful results.
Is there any point in designing scenarios in these circumstances?
- Without doubt, yes. It is important to explain the nature and gravity of the situation in a clear and comprehensive way to both professionals and the general public. Such communication will help individuals, families, businesses, and public officials make better, more strategic decisions.
What can we expect this year and next?
- An economic contraction this year is unavoidable.
- What matters now is how long and deep the recession will be.
- According to the latest NBS scenarios, Slovakia’s economy will contract this year by between 1.4% and 9.4%.
- It is estimated that the number of employed people at the end of 2020 will be between around 75,000 and 130,000 fewer compared with the end of 2019.
- Unless the Government adopts further support measures, these economic headwinds could cause a sharp rise in the country’s debt ratio.
- These measures will not be cheap and will further impair the debt ratio; nevertheless, they are one of the key preconditions for the economy’s fast return to growth.
- Based on monitoring of current developments in Slovakia’s trading partners and in financial markets, we estimate that the recession will be in the higher half of the estimated range of severity.
Where did the numbers used in the NBS scenarios come from?
- The differences between the scenarios lie mainly in the assumptions for developments in Slovakia’s trading partners.
- For Slovakia, as an open and export-oriented economy, it is very important to have smoothly functioning international supplier relations in industry. At present, however, these are disrupted.
- It remains to be seen how long this situation will persist.
- The scenarios differ in terms of the degree and duration of the supply-chain disruptions they envisage.
- Regarding domestic sources of decline, we expect the exceptional situation in the Slovak services sector to last for two months. This will be reflected in consumption slumps in certain areas during this period.
- Naturally, people’s consumption will also be affected by declines in income and employment stemming from the drop in export-oriented production.
Could the future situation be better than envisaged, or are the risks to the outlook entirely on the downside?
- The situation is very uncertain, but we must take a sober look at what’s in store for us. Therefore, in presenting how NBS sees the situation, we are now providing three different scenarios of potential developments, rather than detailed projections with specific mean values.
- Were the coronavirus to surprise us by rapidly receding – for example due to everyday measures or to successful research efforts – the economy could begin recovering sooner than expected. In that case, we could end up with a modest contraction of around 2-3%.
- The events of recent weeks have taught us to be cautious. We have seen, for example, how inconceivable scenarios of border closures are now a reality.
Are you not afraid that people will panic when they see the bad news?
- People know what two plus two equals. They follow events here and in the rest of the world. Nevertheless, they do not have access to all the information that NBS has at its disposal. So, of course, they do not have a complete picture.
- NBS has access to large volumes of data and expertise, which it uses to assess the situation and model future scenarios. NBS puts figures and developments into context.
- It is important to know, for example, that we also expect a solid economic recovery to begin at the end of this year and to gain momentum in 2021. Next year is expected to see labour, production and consumption regain the ground lost during this year’s crisis. This light at the end of the tunnel is an important source of reassurance.
Will production and consumption in Slovakia reach the pre-crisis level?
- We expect the economy to reach its pre-crisis level as soon as next year.
Won’t this crisis have a permanent impact on the economy?
- There will probably be some permanent consequences, not only for Slovakia, but across the world.
- If the crisis hadn’t happened, the world economy would have probably continued to gain momentum not only this year, but also in subsequent years.
- Even if the governments’ measures were very effective, some projects are unlikely to survive; business links and employment relations will be disrupted and transformed, with some possibly not renewing at all.
- This is something that every economy must reckon on. According to our calculations, these effects are expected to be contained, which is good news.
- Prolonged consequences and a ravaging of the economy’s functioning such as that caused by the 2009 financial crisis is not something we envisage.
The Government’s priorities in this situation? What should priority be given to?
- The first priorities are healthcare capacities and measures to contain the spread of the contagion.
- The economic losses resulting from these measures should be seen as investment in people, in the avoidance of avoidable deaths. Now is not the time to be counting losses, but to be focusing on solutions.
- It is also important that we now adopt measures to ensure that people and firms do not have to take drastic actions as a result of a temporary drop in income.
- People must not be impoverished because they need to repay loans and mortgages.
- Supportive solutions must be found for firms, so that they don’t have to lay off essential staff.
- It is vital for future growth that firms don’t shelve existing investment commitments because their sources of external financing have dried up and they are having to cover income losses with their own savings.
- The speed of the return to pre-crisis production levels, as well as the extent of long-term losses, depends on the effectiveness of the measures taken.
What specifically is NBS doing to ensure the crisis is as painless as possible?
- Národná banka Slovenska has adopted exceptional measures to ensure that payment systems and the supply of cash to banks run smoothly in all circumstances.
- Together with other Eurosystem central banks, NBS has taken essential and strategic steps to help calm financial markets. Easing stress in this way is essential for better managing the crisis period.
- These steps should ensure that banks and other financial institutions continue to ‘grease’ the economy by lending to households, firms and governments under terms that would apply in (relatively) normal circumstances, as if there were no virus crisis.
- This will help keep economic sentiment grounded and deter people, firms and banks from taking drastic emergency measures with permanent consequences.
- It is also the case, however, that governments can do the most to ensure that this period is as painless and short as possible.
Will the NBS scenarios be updated?
- NBS plans to update the scenarios.
- We are receiving new and relevant data on a daily basis. If new information comes in and, on that basis, we deem it necessary to significantly shift or reduce our impact intervals, we will produce new materials.
- We expect to be back to publishing a standard forecast in June of this year.
National Bank of Slovakia
Imricha Karvasa 1, 813 25 Bratislava, Slovak Republic
Tel.: +421-2-5787 2142, +421-2-5865 2142, +421-2-5787 2169, +421-2-5865 2169
Reproduction is permitted provided that the source is acknowledged.