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Spring Forecast of Economic Trends 2021: Economic activity expected to start recovering in the second quarter; acceleration of recovery in the second half of the year

After last year’s sharp contraction of economic activity, we forecast 4.6% GDP growth for this year. Assuming an improvement in the epidemiological situation and a gradual increase in vaccination coverage, the recovery should start in the second quarter and accelerate in the second half of the year – these are also the assumptions of the central forecasts for main trading partners. Particularly because of better prospects in the international environment and a smaller negative impact of the epidemic on the export-oriented part of the economy and construction during the second wave, the forecast is somewhat higher than projected in the Winter Forecast (4.3%). Economic recovery will remain differentiated across sectors. We expect further growth in manufacturing and construction, as well as in related service activities. Similarly, we also expect relatively strong growth in investment, especially in infrastructure and housing. With a gradual opening of service activities, private consumption will also start picking up in the spring, reflecting growth in disposable income, but also a release of accumulated savings and hence a gradual decline in the household saving rate. Growth in external trade will continue as well, particularly for goods and gradually also for most segments of services. The slowest and longest recovery is expected in tourism-related services. With the easing of epidemiological conditions, employment will continue to recover gradually this year, while unemployment will remain similar to that last year in the year as a whole. We expect government measures continuing to mitigate the negative impact of the coronavirus crisis on the labour market, particularly in the first half of 2021, and being lifted only gradually. In the next two years, economic recovery is expected to continue: in 2022, GDP growth will be similar to this year (4.4%), while in 2023, it will be 3.3%. Employment growth will continue to strengthen amid the expected further economic recovery, but the annual average number of unemployed in 2023 will remain higher than in 2019. Epidemiological conditions remain uncertain. This is the greatest risk to the forecast, which will be highly dependent on the progress of the epidemic and the implementation of the vaccination strategies in Slovenia and other countries. Among the risks to the forecast, which are somewhat more balanced than last year, negative risks still predominate. A gradual and well-planned lifting of measures to mitigate the consequences of the epidemic and a transition to their development component within the National Recovery and Resilience Plan and the Multi-annual Financial Framework 2021–2027 will also play an important role. These are the key findings of the Spring Forecast of Economic Trends of the Institute of Macroeconomic Analysis and Development (IMAD).

In our Spring Forecast, which was prepared in the first half of March, we expect 4.6% GDP growth this year. “Developments in the second half of last year showed that business and consumers are increasingly adapting to the new situation. This, together with better prospects globally and a smaller negative impact of the epidemic on the export-oriented part of the economy and construction in the second wave, is reflected in a somewhat higher forecast for 2021 than predicted in December last year,” explained Maja Bednaš, Director of IMAD. At the level of overall economic activity, no noticeable recovery is yet expected in the first quarter, mainly due to the retention of restrictions on activity in some service activities. In the second quarter, given the expected improvement in the epidemiological situation, a recovery is also expected in this segment, which will have a positive impact on growth in private consumption and overall economic activity. Assuming that, with increased vaccination coverage and thus better containment of the epidemic, containment measures will ease even more in the second half of the year, the economic recovery should accelerate by the end of the year. Support from fiscal policy measures at the national and EU levels will continue to play a crucial role, together with monetary policy measures of the ECB. 

Figure 1: Economic growth (in %)

 Column chart showing economic growth

Economic recovery and its pace will remain uneven across sectors. According to the available high-frequency data and confidence indicators, the positive developments in activities integrated in international trade, which started at the second half of last year, continue in the first months of this year. With somewhat better prospects in the international environment, we thus expect further growth in exports and imports, particularly of goods, and gradually, most segments of services. Manufacturing, construction and services related to these sectors will also continue to grow this year and mostly reach pre-crisis levels of 2019. Capacity utilisation in manufacturing, which was already above the long-term average at the beginning of the year, and improved export expectations of companies indicate a gradual strengthening of their investment activity. However, infrastructure investment in particular is expected to increase strongly. Housing investment will also strengthen further. Services, which were more affected by the epidemic, will only start to recover this year and would mostly reach pre-epidemic levels by 2023. After last year’s deep fall, private consumption will also be picking up in the spring with a gradual opening of service activities, reflecting growth in disposable income, but also a release of accumulated savings and hence a gradual decline in the household saving rate. The latter is nevertheless likely to remain significantly higher than in 2019. Household consumption will also be favourably affected by the expected further redemption of tourism vouchers. 

In the next two years, economic recovery will continue. In 2022, growth should be similar to this year (4.4%), economic activity reaching the pre-crisis level of 2019, also as some measures to mitigate the consequences of the epidemic will remain in place this year. However, we expect that, particularly in 2022, certain containment measures will continue to apply, which will limit a full recovery of certain service activities (e.g. travel). After two years of relatively strong growth, we project 3.3% GDP growth for 2023.

The adoption of intervention measures to preserve jobs significantly mitigated the deterioration in labour market conditions last year. “With the easing of epidemiological conditions, employment will continue to recover gradually this year, while unemployment will remain similar to last year in the year as a whole. It will be crucial that government measures, particularly in the first half of 2021, will continue to mitigate the negative impact of the coronavirus crisis on the labour market and will be lifted only gradually,” Maja Bednaš stressed. In the next two years, employment growth will continue to strengthen amid further economic recovery, but the annual average number of unemployed will remain higher than in 2019. 

Figure 2: Basic and alternative scenarios of the Spring forecast
Visualization of basic and alternative scenarios of the Spring forecast

The greatest risk to the realisation of the forecast remains associated with the epidemiological situation in Slovenia and its most important trading partners. Prolonged persistence of tight epidemiological conditions, possible more stringent containment measures due to new waves of infections, also as a consequence of new and more infectious coronavirus mutations or slower progress in vaccination, and thus further major closures of economies will remain the main downside risk to the stable recovery. This would further hamper particularly service activities and, in the event of further major business closures, the consequences would also be felt in industry. A premature withdrawal of measures to mitigate the consequences of the epidemic could, in deteriorated economic conditions, also lead to increased unemployment, a higher number of bankruptcies and more companies facing difficulties in pursuing their activities. All of this would also be reflected in a slower recovery. “However, in the event of a more rapid permanent improvement in epidemiological conditions or faster wide-spread availability of a vaccine or medicine, activity could also recover more rapidly than predicted. The speed and efficiency of absorption of resources from the new multi-annual financial framework and the Recovery and Resilience Facility in Slovenia and our main trading partners and their targeted use to address key development challenges will also be crucial,” Maja Bednaš emphasised.


 

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