Analysts: GDP Decline Could Be Even Greater, Data is Incomplete

The State Bureau of Statistics has published the first estimate of GDP for the second quarter of this year, indicating a significant contraction of the economy. The real annual rate of decline was 15.1% caused by a sharp drop in all components except for government consumption, which was the only component to record growth during the observed period, mitigating negative trends, write RBA analysts. 

The seasonally adjusted quarterly GDP compared to the previous period shows a negative rate of change of 14.9%, and compared to the same quarter in 2019, it is real lower by 15.1%. The double-digit decline in the economy is a direct consequence of the implementation of measures to curb the spread of the coronavirus pandemic and is the highest since quarterly GDP estimates began in 1995.

Already in the second half of March, the partial to complete suspension of economic activities in response to curbing the COVID-19 pandemic, along with extremely high uncertainty, led to a significant deterioration in the confidence index of manufacturers and consumers, with simultaneously high rates of decline in almost all sectors, from retail to various industrial activities. Additionally, the regime for crossing internal borders of the European Union was complicated, which, along with the complete and/or partial closure of most European borders, implied a sharp decline in the export and import of goods and services during the second quarter.

In such conditions, the largest component of GDP, household consumption, recorded a decline of 14%, gross investments in fixed capital 14.7%, while the export of goods and services in the second quarter of 2020 was real lower by 40.6% and 28.1%, respectively. The only component of GDP on the expenditure side that recorded growth was government consumption, but even that had a significantly modest growth dynamic of 0.7%.

According to the production method, the real decline in gross added value from March to June 2020 compared to the same period in 2019 was 11.9%. The decline in GAV was expectedly influenced by a sharp drop in real added value in the wholesale and retail trade, transportation and storage, accommodation, food preparation and serving (-33.7%), as well as in the manufacturing industry (-9.3%), as indicated by high-frequency indicators.

Although at a slower pace, the decline in these sectors certainly continued during the summer months, and this, in addition to physical indicators in tourism, is confirmed by the data on retail trade published today, which recorded a real annual decline of 6.7% in July.

It should be noted that the SBS emphasized in its statement that the circumstances related to the COVID-19 pandemic have affected the availability and reliability of data and information (especially in service activities), which could lead to potentially larger revisions of quarterly GDP.

The estimate of a real decline of 8.5% for the entire year of 2020 was already exposed to negative risks, and the latest announcement confirms that the decline in 2020 will be significantly higher. The largest contribution to the decline for the entire year of 2020 will come from personal consumption, due to rising unemployment, falling employment, and decreasing disposable income, while investments will be significantly reduced or postponed under the influence of extremely high uncertainty. Due to the lack of demand, the export of services (tourism), as well as significantly lower import prices of energy, the decline in imports will mitigate the sharp decline in the export of goods and services. The only component of GDP that could contribute positively to GDP at the annual level is government consumption.

On the supply side, we expect a sharp decline in accommodation services and food preparation and serving, manufacturing industry, trade, and financial activities.

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