Governors Believe the Worst is Behind Us, We are Returning to Old Problems

In the introductory lecture, chief economist Vedran Šošić from the Croatian National Bank provided an overview of the effects of the pandemic on the economy, asserting that different countries and sectors of the economy were affected differently. Nevertheless, the economy has generally adapted relatively quickly to the changes, although problems exist on both the supply and demand sides, as well as in the labor market. It is not possible to clearly assess how long the problems caused by the pandemic will last, so the key question is when to start withdrawing fiscal support for the economy. He noted that it is unclear who exactly saved during the crisis, but it is likely that savings were pronounced among those with high incomes who will not significantly increase their consumption even after recovery. Residential real estate has maintained its price level despite expectations, unlike commercial properties, and these two factors make predicting recovery uncertain.

Unlike last year’s meeting of governors in Rovinj, which was marked by an atmosphere of uncertainty and pessimism, this one was characterized by a completely different atmosphere. All present governors generally expressed optimism regarding recovery and effectively concluded that it is slowly time for ‘exit strategies’ in terms of fiscal and monetary measures taken during the pandemic, or ‘returning to old problems,’ as stated by the governor of the Croatian National Bank Boris Vujčić.

Indeed, in addition to the optimistic mood, the governors agreed that the issue of economic growth increasingly depends less on fiscal and monetary policy and more on structural reforms. Similarly, most countries in the region, with the exception of Montenegro, generally avoided the worst-case scenario during the pandemic, although experiences understandably vary from country to country. For example, the impact on North Macedonia was severe, despite the solid state of the economy before the outbreak of the pandemic, but through good cooperation between fiscal and monetary policy (support for the economy amounted to seven percent of GDP), the worst was avoided, and now there is a gradual consideration of transitioning from horizontal to targeted measures. The key is to find a balance between prematurely and too late ending measures to avoid pulling the rug out from under the recovery too soon on one hand, and on the other, keeping unviable parts of the economy alive for too long with measures, explained Anita Angelovska Bezhoska, governor of the National Bank of North Macedonia.

Montenegro, which heavily relies on tourism, fared particularly poorly, entering the crisis unprepared due to weak competitiveness and insufficient liquidity. On the other hand, the financial system was in solid condition, which helped to cushion the blow.

– The Central Bank of Montenegro has adopted nine packages of measures, including a moratorium for all banks and clients, transferring the profits of banks from 2019 and 2020 into capital to strengthen the capitalization of banks, and reducing reserves for banks by two percent. This central bank will also slowly begin to withdraw crisis measures, said governor Radoje Žugić.

His colleague Senad Softić from the Central Bank of Bosnia and Herzegovina characterized the problems as less than expected, the economy fell by 4.5 percent and expressed an expectation of growth of 3.4 percent this year. As in other countries, industry and trade coped well with the crisis and adapted quickly, he stated, but the service sector and transport were severely affected. He also emphasized the importance of reforms, concluding that recovery came quite quickly, which justifies optimistic expectations for this and next year.

It seems that Slovenia fared the best among the represented countries, having already recorded growth in the first quarter of this year compared to the same period last year. For these reasons, the governor of the Bank of Slovenia Boštjan Vasle is extremely optimistic and expects further acceleration of recovery. He highlighted the timely and robust response of fiscal and monetary policy, which significantly mitigated the effects of the crisis, unlike the previous one.

Vujčić was equally optimistic, announcing an additional increase in the already very optimistic growth forecasts at the Croatian National Bank, currently at 5.9 percent. He believes that we are in a specific ‘V’ recovery in which some sectors such as trade, construction, and industry have already reached pre-crisis levels, while transport, hospitality, and tourism are still in trouble and need to recover. However, the first signals are very encouraging, he believes, especially regarding tourism, which then ties in with other problematic sectors. The season this year is expected to achieve 69 percent of last year’s revenue, he predicted, and his optimism is also based on good initial signals regarding moratoriums, as after their lifting, a very small percentage of clients requested further measures.

Furthermore, a relatively small number of jobs were lost at the peak of the crisis, and the labor market is returning to its usual problem of a lack of adequate labor force. Like his colleagues, he now sees the course and sustainability of recovery in reforms, not in the action of fiscal or monetary levers. ‘Green and digital is nice, but it will not solve structural problems,’ he noted. Regarding inflation, Vujčić believes that a bigger problem than its height is the emergence of inflation expectations, which can then become a self-fulfilling prophecy. No one can be sure about the movement of inflation, he added, because central banks are traditionally poor at predicting its direction, and moreover, a much larger question is how the transmission mechanism of monetary policy affects inflation. Since expansive policy has not achieved significant inflation in a decade, the governor warned, the question then is whether it can prevent it. That is why it is important to study and understand the transmission mechanism.

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