Skopje, 5 May 2020
Today, the National Bank Council has held a regular meeting and discussed and adopted the latest Quarterly Report with the latest macroeconomic forecasts for the period of three years.
The Council has also concluded that the macroeconomic forecast context has changed due to the COVID-19 pandemic. Given the necessary measures taken to prevent the virus spread, for 2020, there are expectations for significant reduction of the global demand, falling prices of primary commodities on the world market, temporary disruption of the global and regional supply chains, behavioral change of the households, tightening of the global financial conditions and investors’ risk aversion. Although the shock is of non-economic nature and therefore not expected to have a significant effect towards the long-term potential growth of the economies, its effects are expected to be pronounced in the short term, making 2020 to experience the largest global recession since the Great Depression. The Macedonian economy will be fully affected through the channel of unfavorable global environment, but as in all other economies, measures for coping with the virus will also have temporary unfavorable effect. The latest forecasts suggest that the COVID-19 shock will be short-term and the main impact will be felt in the second quarter, followed by gradual normalization.
Amid reduced global demand and pronounced uncertainty, the growth forecasts of the Macedonian economy have been significantly revised compared to October last year. For 2020, a GDP decline of -3.5% is forecast, followed by recovery of 4.7% for the next year (in October, growth forecasts of 3.8% and 4%, respectively). Regarding the growth structure, a decrease is expected in both domestic and export demand. In 2021, when the economic environment will go back to the normal, the economy is expected to recover, supported by all sources of growth. For 2022, the assessment for the annual growth rate of the domestic economy remains at 4%, embedded in the October scenario. Given the high openness of our economy, if the decline in foreign demand is higher than the forecasts in the baseline scenario, the economic activity may be lower by 2.3 percentage points.
With regard to the future trajectory of prices in the domestic economy, the latest forecasts point to stable prices in 2020 and absence of inflationary pressures. Amid inflation movements below expectations, as well as significant downwards revisions in import prices due to the pandemic shock, energy in particular, the assessments indicate inflation of about 0% for 2020 which is significantly downward revision compared to October forecasts of 1.5%. For 2021, the inflation is expected to be 1.5% and in 2022 to stabilize at around 2%.
Analyzing the external sector, the current account deficit is expected to remain moderate, and in 2020, it is expected to moderately increase to 3.2% of the GDP. The moderate deficit increase is mainly due to the assessments for reduced remittances and lower surplus in services. With the gradual stabilization of the flows, the current deficit will decline, to an average of 1.6% of GDP in the period 2021-2022 (same as in the October forecasts). According to the current estimates for the forecasts horizon, the current transaction deficit will be fully financed from the financial account flows, mainly from the external government borrowing and foreign direct investments, thus increasing the foreign reserves and their maintenance at appropriate level.
Given the changes to the environment and less favorable risk perceptions this year, temporarily greater restraint from borrowing is expected. Hence, despite the solid growth in the first quarter of the year, the landing activity is expected to slow down temporarily by the end of the year. Considering the National Bank measures aimed at maintaining credit cycle of the commercial banks and supporting affected sectors through favorable loans from the Development Bank, the annual credit growth is expected to remain at about 3%. With the normalization, stabilization of expectations and favorable capital and liquidity position of the banks, the credit activity is expected to grow rapidly in the next two years, averaging 6.5% in the period 2021-2022. In line with the estimates for contracted economic activity in 2020, and given the solid performance of total deposits in the financial system in the first quarter of the year, total deposits are expected to grow in 2020 at a rate of about 2.3% and over the next two years, their growth is expected to accelerate to about 7%, with estimates for normalization of the economic growth and further maintenance of the high propensity for bank saving.
Currently, the risks arising from the health crisis are significantly downward. They refer to the possible protraction of the corona crisis and extension of the health protection measures over the second half of the year, the possible emergence of a second wave of the coronavirus and reactivation of the protection strategies, as well as the changes in the behavior of the economic agents in terms of their consumption and investment decisions, which would lead to long-term disruption of production and demand chains. These risks relate to the global environment and domestic economy. On the other hand, the formalization of our country’s membership in the NATO Alliance, as well as the European Commission decision to start negotiations for EU membership, which took place in March this year, remain a positive risk for the forecast, in mid-term in particular.
As emphasized in the Council meeting, the National Bank has been monitoring the developments as well as the potential risks to the Macedonian economy from the surrounding, in order to respond appropriately by policy adjustment and taking additional measures if necessary.