SUSTAINABLE BUSINESS DEVELOPMENT PERSPECTIVES

Development of selected economic indicators in Slovakia due to COVID-19

Iveta Kufelová ¹ , Sylvia Bukovová ¹ , Monika Raková ¹

¹ University of Economics in Bratislava, Faculty of Business Management

https://doi.org/10.5817/CZ.MUNI.P280-0197-2022-14

Abstract

The development of the business environment in Slovakia in economic and financial terms is influenced by the consequences of the pandemic and the war in Ukraine. The economic damage caused by the coronavirus crisis would be significantly higher without in-time interventions and reactions by governments, central banks or regulatory authorities. Various forms of incentives and concessions in favor of businesses and households have significantly helped the shortfall in revenue and income to have only a limited effect on bankruptcies and rising unemployment, which would weaken the economy's potential for a long time. In this article, we analyze selected indicators of the Slovak economy with an impact on the development of the price level and subsequently predict the development of macroeconomic and financial indicators.

Keywords : economy, pandemic, economic indicators, real GDP in the V4 countries, development, macroeconomic scenarios.

1 Introduction

A Slovak economy is constantly looking for qualitative factors of economic growth. The Turbulent development of world trade, demographic change, the challenges of robotization and automation in industry and services and also the impact of climate change in year 2020 has been supplemented by COVID-19 pandemic. This new situation has brought science and research to the forefront as positive factors in the progress of civilization. COVID-19 restrictions highlighted the need, but also detect the possibilities and limitations of digital infrastructure across the economy and society.

2 Current State of the Solved Problem at Home and Abroad

While the 2009 economic depression has an economic origin in the form of a shock in global financial markets, the depression in 2020 had non-economic origin (pandemic protection limited some economic activities and also limited labor use). Pandemic restrictions on the workforce have brought a large shock to the supply side of economy. However, the second unused workforce meant limited household resources and resulting negative shock for the demand side of the economy as well.

The rate of decline in real GDP 4.8% was lower in Slovakia than average for the Euro area. As early as 2019, there was a slowdown in economic growth, which was more related to standard cyclical and structural changes – and had non connection with coming depression (Denník N, 2021).

Figure 1

Change in real GDP in the V4 countries and the Euro area on average

Source: Ministry of Finance of the Slovak Republic, 2022

The first case of a new coronavirus in Slovakia was confirmed on March 6, 2020. The pandemic restrictions to suppress it, also had significant consequences for Slovak economy. The government has also made several efforts to mitigate these adverse effects. As early as March, the government presented 13 measures to help companies and their employees in a situation of limited economic activity due to pandemic. The aim was, among other things, to negotiate with banks on the possibility of deferring loan repayments without an entry in the debtors register, securing short-term low-interest loans for companies in selected sectors, adjusting the possibility of depreciation of tax losses for longer periods or postponing the tax return deadline by three months for all companies. (TASR, 2020)

Restrictions against the spread of the new coronavirus led to a reduction in several economic activities. Society is limited to closing schools with compensation, and that leads to distance learning. Employees are forced to limit their presence in the workplace, and work has largely transformed into a home office in those professions that allowed it. Before all restrictions in Slovakia, home office was not widespread and this benefit can be considered typical for higher-income professions. In February 2020 in Slovakia, nine out of ten Slovaks never worked on home office. The possibility of at least occasional work from home was the sixth most requested benefit and the third most sought after non-financial benefit beyond the law.

3 Research Design

Global and Slovak scientific capacities agree that the current crisis will be the worst on a global scale since World War II. The consequences of preventing measures against a spreading pandemic will be enormous. Many industries do not have the ability to provide their goods and services without physical customer contact. The sectors are therefore affected asymmetrically. Hairdresser, beauticians and also doctors and nurses are at greatest risk of infection. The least risky professions are considered to the areas of mathematical or statistical specialists and also the professions of forests or logging. (Jankovič, 2020)

The aim of an article is the analysis of selected indicators of the Slovak economy, the impact of the coronavirus crisis on the development of wages and prices and the prediction of economic financial development for the current period.

Methods of analysis, synthesis, induction and deduction were used in the processing. Graphic and tabular methods are also part of the processed article. The data were obtained mainly from Internet sources.

4 Result of the Paper and Discussion

Developments in the economic sphere mainly affect the development of the pandemic situation. However, the second wave of coronavirus was significantly milder in terms of its impact on the economy. The first wave was a significant and especially very sharp shock to the economy. However, 2020 eventually ended with a smaller-than-expected economic downturn. Several important sectors have seen a relatively rapid recovery. The second pandemic wave, which hit in autumn and winter was much more massive from an epidemiological point of view, but its impact on economic development was much milder. The main difference compared to the first wave was the different impact on individual sectors. While some sectors were less affected, others faced almost the same deterioration as in the first wave. The second wave of the pandemic also had a milder impact on the financial sector. Compared to the first wave, banks approached lending more freely. After the tightening following the pandemic, credit standards returned to almost their pre-crisis level, especially in retail. Banks, despite uncertainty, have been supportive to finance corporate shortfalls. The flow of corporate loans hit the first wave only temporarily, in the second wave it was even slightly faster than before the crisis.

Figure 2

Development of the main economic indicators from 2008 to 2020

Source: Eurostat, 2022.

By closing a large part of the economy, the government was forced to take restrictions to partially reduce the negative effects of the lockdown. The First Aid project (later called First Aid plus, ++ etc.) was intended for employers and self-employed person, who had to close their services or reduce their activities based on a decision of the Public Health Office of the Slovak Republic. The aid was also intended for employers who retained jobs in the event of a break or reduction in their activities during a declared emergency.

The Slovak economy is currently suffering mainly from:

• lack of components in industrial production, especially in car production,

• low vaccination coverage (5th lowest in the EU).

The Slovak export-oriented economy suffers from different and hardly predictable pandemic restrictions of countries, to which we export a significant part of our production. It is expected that most of the outages are likely to catch up with the economy later in the 2022. Low vaccinations cost Slovakia a lot of money. The lagging of vaccination, compared to Western Europe, has caused a drop out in short-term consumption, especially in the services sector, amounting to up to 1 Billion € total for the years 2021 and 2022.

Economic development in the autumn of 2021 significantly affected the faster growth of prices. The reason is that for the COVID-19 pandemic, global supplies of components and raw materials has been stuck, the rise of energy prices was also partly affected by the transition to green energy, which will cause not only the expected rise in food prices but also industrial goods. According to the National Bank of Slovakia predictions, price growth was expected to peak in the spring of 2022, with inflation expected to peak at the beginning of the 2022 at around 5 -6%. Wages of the population were also expected to increase in the coming years.

The crisis had a major impact also on the price development level. Initial inflationary pressures, which pushed up modest price increases in previous years, disappeared with the incoming global pandemic. Overall demand fluctuated, as demand has increased in areas such as food, while in other sectors, as a result of the restrictions mentioned above, effective demand fell to almost zero. The overall level thus increased by 1.9% on an annual average, when measuring the CPI, by 2.0% according to the HICP.

These factors can be described as important for the development of the price level (National Bank of Slovakia, 2021):

- a gradual slowdown in food prices,

- an absolute drop in oil prices,

- growth of regulated prices at the beginning of the year,

- fading base effect.

Figure 3

Year-on-year change in the price level in the categories of the consumer price index in 2020

Source: Macroeconomic database of the national bank of Slovakia, 2021

In 2020, the wage quota reached the highest value (49,7%) in the history of the Slovak Republic, despite the fact that the growth in the volume of employee remuneration slowed down significantly. But with the decline in total value added, even weak employee compensation growth was sufficient for the wage quota to increase by almost two percentage points year-on-year to a record level.

Table 1

Parameters of wage development and wage quota

Source: Eurostat, 2022

Analysis and prediction of macroeconomic and financial development

For the purposes of assessing the risks of the financial sector and estimating the effects of economic developments on the financial sector, two scenarios of economic development were used in the Financial Stability Report. While the baseline scenario envisages an economic downturn only in 2020, with a gradual economic recovery expected in 2021, the unfavorable economic scenario assumes a continued economic downturn in 2021 with a subsequent, only gradual recovery in economic growth in the coming years.

Table 2

Macroeconomic scenarios

Source: National Bank of Slovakia, 2021

The baseline scenario of economic development assumed that after the economic downturn in 2020, there would be a recovery in the next period. The economic recovery should be driven by both domestic and foreign demand. Successful elimination of the coronavirus spread and gradual end of anti-pandemic restrictions should ensure that the economy reaches its pre-crisis level by the end of 2021. The labor market situation will stabilize with some delay compared to economic developments, as a result of which the unemployment rate will continue to rise in 2021 and will not approach the 2020 levels until the end of the modeled horizon (i.e., 2023). (Frank & Morvay, 2021)

According to this scenario, wages were to maintain a stable year-on-year growth rate. As a result of this development, real household disposable income was expected to recover after last year, with a positive impact on household consumption.

The unfavorable scenario of economic development takes into account a longer and only gradual end to the ongoing crisis. This could happen, for example, in the case of slower and less successful vaccination, the occurrence of a new mutation or other waves of a pandemic, so it would not be possible to proceed with a gradual freeing of the restrictions. (Novák, 2021). As a result, the economy would decline in 2021 as well, then a subsequent recovery of the economic activity will be very slow. The economy would not reach its pre-crisis level by the end of the modeled horizon. The unfavorable situation would also be reflected in the labor market - while the unemployment rate would reach double-digit levels, at which it would remain until the end of the projected period. However, even relatively stable wage growth would not be able to prevent the decline in household disposable income in 2022 and 2023. It would only recover gradually at the end of the modeled horizon, as a result of which households would only gradually contribute to economic growth through their consumption. (National Bank of Slovakia, 2021)

However, the impact of the war in Ukraine is not taken into account when estimating economic developments in the Financial Stability Report.

5 Conclusion

The economic recovery will not be easy after two difficult years affected by the COVID-19 crisis. The war between Russia and Ukraine will not bring anything positive to our country. For several months now, we have been seeing an increase of oil prices on the world markets. EU sanctions against Russia largely predict rising prices for all goods and services. The financial sector, which has been one of the supporting pillars for the quick recovery of the economy over past two years, is now raising mortgage interest rates. Forecasting will therefore depend on ending the dramatic situation in Ukraine.

Acknowledgement

The article is an (partial) output of research project VEGA MŠ: Diffusion and consequences of green innovations in imperfect competition markets, VEGA 1/0646/20, doc. Ing. Nora Grisáková, PhD.

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Corresponding Authors

Iveta Kufelová, Ing., PhD.

University of Economics in Bratislava

Faculty of Business Management

Department of Business Economy

Dolnozemská cesta 1/b

852 35 Bratislava

Sylvia Bukovová, PhDr., Ing., PhD.

University of Economics in Bratislava

Faculty of Business Management

Department of Business Economy

Dolnozemská cesta 1/b

852 35 Bratislava

Monika Raková, Ing. PhD.

University of Economics in Bratislava

Faculty of Business Management

Department of Business Economy

Dolnozemská cesta 1/b

852 35 Bratislava