MKWith the progression of the coronavirus pandemic worldwide and the subsequent “closure” of world economies since the beginning of 2020, we are witnessing a drastic reduction in economic activity locally and globally. The decrease in economic developments in the first and second quarter of 2020 is observed in all economies and all economic parameters that are subject to this analysis.
The restrictive measures introduced by almost all countries in the world to prevent the spread of the coronavirus have had a negative impact on economic growth and international trade. EU countries experienced an average GDP decline of 14% in the second quarter of 2020, with Spain, France and Italy having the largest declines, with negative growth of 22.1%, 18.9% and 17.7%, respectively, for the second quarter of 2020 (Graph 1). During the same period, the US economy contracted by as much as 31.7%, and the UK GDP fell by 22%.
And the Western Balkan countries, whose largest trading partners are EU member states, have not been spared from the abrupt closure of international trade, the closure of local economies to curb the spread of the coronavirus, declining global demand and supply problems. Domestic production in Macedonia almost stagnated in the first quarter of the year, but already in the second quarter the decline in economic activity was 12.7% (see Chart 1), with which GDP growth in the first half of the year reached -6.4%.
Graph 1: Real GDP growth rates, quarterly data (in %)
Source: Eurostat, calendar and seasonally adjusted data, except data for Macedonia which are unadjusted both calendar and seasonally because of lack of availability of the data.
In general, the inflation rate in developed countries is declining (Chart 2). This is due to the fall on the supply and demand side, at the same time, with downward price pressures. Namely, the measures to close the economies due to the Coronavirus and travel restrictions led to an unprecedented decline in global oil demand (in the range of 15 to 20 million barrels per day in April), which caused a decline in oil prices on world markets, as well as reduced aggregate demand which resulted in low levels of inflation. In Macedonia, as before, prices are quite stable.
Graph 2: Inflation, quarterly data (in %)
Source: Eurostat
According to official and available data, the decline in economic activity has not affected the labor market (yet). Graph 3 shows the labor market developments in the first and second quarter of 2020. As can be seen, there are no sharp shifts in the labor market, and there is no clear trend in all countries. While in Spain and Macedonia the unemployment rate has risen, in Italy and France unemployment has fallen. This labor market resilience to the economic crisis is likely the result of government job-saving measures and monetary and fiscal packages implemented in the first and second quarters in all countries to mitigate the impact caused by the closing of the economies. These packages have probably been successful in preserving jobs, at least during this period of analysis. However, it is known that the labor market reacts with a certain time lag to the decline in economic activity, so it is possible that the unemployment situation will worsen in the next period (especially due to the expectations that the pandemic will last longer).
Graph 3: Unemployment rates, quarterly data (in %)
Source: Eurostat, State Statistical Office of North Macedonia and EU Commission quarterly reports[1]
As expected, employment growth is slowed down and even negative in most economies, both in the EU and in the countries in the region. While in the first quarter there is still positive employment growth even in the most affected economies (with the exception of Italy), the second quarter is characterized by a decrease in the number of employees in all countries for which data are available. Spain and Italy, which introduced the most restrictive measures to prevent the spread of the virus, faced the largest decline in the number of employees of 6.2% and 3.6%, respectively (Graph 4). In Macedonia, in the first quarter of 2020, the number of employees increased by 2.8%, but already in the second quarter there is a decline in employment.
Graph 4: Employment growth, quarterly data (in %)
Source: Eurostat, State Statistical Office of North Macedonia and EU Commission quarterly reports [2]
When it comes to developments in international trade, data from the World Trade Organization (WTO) and the UN have a negative outlook in the two consecutive quarters of 2020, with a decline of 5% in the first quarter of 2020 and a decline of 27% in the second quarter of 2020[3]. The WTO forecasts a decline in international trade of 13% to 27% throughout 2020 [4].
Data for the 27 EU member states on international trade developments in the past two quarters of 2020 show a slowdown in trade in goods and services. Namely, international trade in the first quarter of 2020 in the EU-27 decreased by 3% compared to the same quarter of 2019, while the decline in the second quarter was much higher, 22.4% compared to the same quarter last year. The overall negative growth of international trade for the 27 EU member states for the first half of 2020 is -12.7%.
The reduced global demand, especially among the largest trading partners, had a negative impact on Macedonia’s exports. Thus, in the first half of 2020, there was a decline in exports of 22.2% at the aggregate level. The biggest decline is in the trade with our largest trade partner Germany, where there was a decrease in exports of 32% for the period January – June 2020. These figures are in line with Germany’s international trade data, which saw a 10% drop in total imports.
Additionally, trade between Macedonia and Greece and Serbia, as our major trading partners, also recorded a negative trend, with exports to Greece declining by 2.5%, while exports to Serbia decreased by 15% in January – June 2020, compared to the same period in 2019.
What next?
We are all already aware that the health and economic crisis will last longer than initially expected. Hence, all international economic organizations have revised and reduced their projections for global economic growth.
The International Monetary Fund (IMF) has revised its global economic growth projection to -4.9%, down 1.9 percentage points from its April 2020 projection.
The decline is due to the greater negative impact of the coronavirus on economic activity in the first half of 2020 than expected, and the recovery is projected to be more gradual than previously predicted. In 2021, global growth is projected at 5.4%. Overall, this would leave global GDP growth in 2021 about 6 percentage points lower than in the projections made before COVID-19 from January 2020.[5]
According to European Commission forecasts, the EU economy will shrink by about 8.3% in 2020 before recovering with an annual growth rate of around 6% next year. These projections are slightly lower than in the spring forecast and indicate an incomplete recovery of the economy and as a result, the growth projection at the end of 2021 is expected to be about 2% lower than before the crisis.[6]
As for the Macedonian economy, the projections of the National Bank for 2020 predict a reduction in GDP of -3.5% and expected growth of 4.7% next year.[7] The European Commission (EC) has similar projections for growth of the Macedonian economy, predicting a contraction of the Macedonian economy by 3.9% in 2020, and an expected recovery of growth by 4% in 2021. The main remarks of the projection are the high probability of downward revision of growth due to the unpredictability of the pandemic situation, or the potential prolonged disruption of the supply chains that will worsen the export parameters after 2020. Also, a larger decline in remittances could worsen the situation given the large share they have in the growth of the Macedonian economy.[8]
Recently, the IMF made a downward revision of the growth of the Macedonian GDP in 2020, which is projected to decline by 5.5% compared to the projection of -4% in the April report on the World Economic Outlook.[9] [10] According to the same projections, in 2021 a rapid recovery of the economy and growth of 7% is planned. With further prolongation of the crisis, other downward revisions of the GDP projections are expected, both for Macedonia and for the overall world economy.
[1] https://ec.europa.eu/info/publications/eu-candidate-countries-potential-candidates-economic-quarterly-cceq-2d-quarter-2020_en
[2] https://ec.europa.eu/info/publications/eu-candidate-countries-potential-candidates-economic-quarterly-cceq-2d-quarter-2020_en
[3] https://unctad.org/en/PublicationsLibrary/ditcmisc2020d2_en.pdf
[4] https://www.wto.org/english/news_e/pres20_e/pr855_e.htm#fntext-1
[5] https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020
[6] https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts/economic-forecasts/summer-2020-economic-forecast-deeper-recession-wider-divergences_en
[7] https://www.nbrm.mk/ns-newsarticle-soopstenie-552020.nspx
[8] https://ec.europa.eu/economy_finance/forecasts/2020/spring/ecfin_forecast_spring_2020_mk_en.pdf
[9] https://kapital.mk/mmf-veli-ke-imame-ushte-podlaboka-retsesija-od-5-5-godinava/
[10] https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/MKD