Slovenian economy to pay a high price in the fight against coronavirus

The Bank of Slovenia’s assessment is that the price to the Slovenian economy exacted by the outbreak of the coronavirus pandemic is very likely to exceed that of the last global financial crisis. In analysis entitled Impact of coronavirus on the Slovenian economy, we outlined three potential scenarios of future developments, and calculated their potential impact on the economy. We also highlight the major impact on the labour market, inflation, government debt and the banking system. All three scenarios assume that coronavirus will have a very large impact on the economy, dependent primarily on the duration of the measures to curb the spread of the virus and the pace of the recovery after the measures are relaxed.

We should reiterate that the scenarios were drawn up under the assumption of no fiscal or monetary policy measures being taken to limit the economic damage. A more detailed assessment of the measures that have been or will be taken by the government and by international institutions to mitigate the economic damage will be possible once the measures have been approved and enforced.

Since 4 March, when the first case of coronavirus infection was confirmed in Slovenia, the government has taken a series of measures to curb the spread of novel coronavirus and to flatten the epidemic curve, similarly to other countries. The actual epidemic and the vital measures to curb the spread of the virus are expected to have major consequences for the economy in Slovenia, as in other countries, which is being confirmed by a variety of conventional and unconventional indicators showing a significant decline in activity in Slovenia and around the world.

The Bank of Slovenia outlined three scenarios for the purpose of making its impact assessment; they differ in terms of the number of weeks of lockdown (six, ten or 14 weeks) and the pace of the recovery after relaxation of the measures to curb the spread of the virus. The scenarios predict that some of the major shocks will be drawn out over the months following the relaxation of the measures, while the scope of this transmission varies according to the different scenarios and activities.

According to the Bank of Slovenia, while the severity of the impact may worsen according to the exact scenario, the analysis shows that the price paid by the Slovenian economy because of the outbreak of novel coronavirus is likely to exceed that of the last global financial crisis. The year-on-year decline in GDP could range from 6% to 16% this year, according to our forecasts.

Private consumption will also decline, particularly in areas where direct contact between customers and service providers or vendors is a necessity, e.g. hotels and restaurants, transport, and arts and recreation. Under the expectation that a certain amount of consumption can be replaced by online purchases, this year’s decline under the different scenarios is forecast at between 2.4% and 9%, most notably in the second quarter.

There will also be a major impact on the labour market. The year-on-year fall in employment, absent any other measures, ranges from 1.8% to 4.7% under the different scenarios, while the unemployment rate could more than double. The ultimate impact on the labour market will be particularly dependent on the effectiveness of the proposed crisis mitigation measures, which could significantly reduce labour costs during the epidemic, thereby helping to preserve jobs.      

Prices may fall overall by up to approximately 1% in year-on-year terms, according to the different scenarios. Amid crashing oil prices, the main factor reducing inflation will be lower energy prices, while year-on-year food price inflation will increase further. With demand for personal care and recreation services, package holidays and accommodation, and transport all falling, core inflation will also decline significantly.

Government debt will also increase as the economy contracts. The decline in GDP alone will increase government debt to between 70% and 80% of GDP, according to our forecasts. The forecasts do not take account of any fiscal measures, which might increase the level of nominal debt, but could also slightly mitigate the decline in economic activity.

Relaunching the investment cycle will depend on the ability of firms and banks alike to survive the period of restrictions. An emergency measure in the form of the deferral of borrowers’ liabilities aims to ensure that firms are able to survive. Under the aforementioned scenarios, and with certain assumptions, the Bank of Slovenia’s assessment is that this measure could deprive banks of cashflows of between EUR 0.9 billion and EUR 1.6 billion. Under the most adverse scenario, where the coronavirus shock prompts all firms to request the deferral of repayments, the loss of cashflow could amount to EUR 2 billion. Even under this scenario the banks have sufficient liquid assets – the lost cashflow equates to 35% of primary liquidity – and, in the absence of corporate bankruptcies and the accompanying build-up of losses, they should be able to provide funds to the real sector for reigniting activity.

We should reiterate that the scenarios were drawn up under the assumption of no measures being taken to limit the economic damage. A more detailed assessment of the measures that have been or will be taken by the government and by international institutions to mitigate the economic damage will be possible once the measures have been adopted, and a plan for their implementation has been presented. In any case the current analysis shows that coordinated action by institutions at national level and by common European institutions is absolutely vital.

The full analysis is available here.