Skopje, 7 December 2020 

The National Bank Council held a regular session, discussing and adopting the latest Quarterly Report, which includes the most recent macroeconomic forecasts of the National Bank.

Unlike the April forecasts, the latest vintage of macroeconomic forecasts assumes longer-lasting and prolonged effects of the COVID-19 pandemic on both the global and domestic economies. According to current estimates, the consequences of the crisis will be felt in 2021, while full recovery and compensation of economic losses is expected in 2022. The macroeconomic scenario and the surrounding risks are largely conditioned by the development of the health crisis on a global scale, i.e. by the pandemic management and its consequences on the behavior and expectations of economic agents. For now, given that the coronavirus shock is of an uneconomic nature, it is not expected to have significant effects on the long-term potential for economic growth.

In this context, amid a less favorable external environment, as well as weaker performance in the first half of this year, the latest forecasts indicate economic contraction of 4.9% in 2020 and a gradual recovery of 3.9% and 3.6% in the next two years. This is a downward revision of the growth forecasts compared to April, due to the pandemic longevity and its impact on all points of economy. Economic recovery for 2021-2022 is not expected to be supported by domestic demand, in conditions of labor market stabilization, continuity of credit flows, increased confidence, as well as further fiscal support for consumption, and especially investment. Exports is also expected to stimulate growth, which is recovering relatively quickly, supported by rapid reactivation of global production chains, by foreign demand recovery in the coming period.

Inflation remains low and stable, yet higher than the April 2020 estimates. On average, inflation of 1.1% is expected for 2020, which is above the April estimates of about 0%. These deviations largely reflect the effects on the supply chain due to the pandemic, as well as its effects on the demand structure. The current forecasts for 2021 and 2022 remain unchanged, indicating an average inflation of 1.5% and 2%, amid gradual demand recovery and moderate rise of import prices. High uncertainty about the future dynamics of stock prices of primary commodities remains a major risk factor to the forecast.

Notwithstanding the shock caused by the pandemic, the external position of the economy is stable.  Analyzing the current account, deficit of 3.7% of GDP is expected for this year, which is a slight expansion compared to the previous year, driven by a smaller surplus in private transfers. Namely, the measures to contain infection and the restrictions on the international movement of people have led to a marked decline in remittances, partly mitigated by the diversion of foreign exchange inflows through the formal channels. For the period ahead, trade deficit is expected to slightly widen, given the exports recovery, as well as greater import pressures amid economic intensification. On the other hand, the normalization of the pandemic is expected to lead to a gradual increase in remittances. In such circumstances, the current account deficit is expected to remain moderate at 2.6% of GDP in 2021 and to decrease to 1.6% of GDP, on average, in the period ahead.  In terms of financing, given the unimpeded access to international financial markets, additional external borrowing is expected from both the public and private sectors, as well as an inflow of foreign investment. Over the forecast horizon, foreign reserves increased, with adequacy indicators still in the safe zone.

The credit activity of the banking system even in times of crisis is one of the important factors that support economic growth. In the first nine months of this year, credit flows were higher than expected, given the faster deposit growth and further relaxation of credit standards, as well as the National Bank measures from the beginning of the crisis aimed at easing monetary policy and enabling regulatory flexibility. At the end of 2020, credit support is expected to increase by 5.3% annually, and by the end of the forecast horizon this rate would accelerate to close to 8%. These forecasts are based on the expectations for further deposit growth, as the main source of financing, amid accelerated economic growth and additional foreign exchange inflows. There are expectations for improved bank risk perceptions, as well as greater propensity to borrow, amid expected normalization of flows.

Risks surrounding the forecasts are still assessed as markedly downward and are almost entirely related to the COVID-19 pandemic. The main downward risk is related to the potential reintroduction of restrictive measures to contain virus spread, in response to the current second wave of the pandemic, as well as any slower virus management than currently expected. On the other hand, faster progress in the coronavirus treatment and vaccine development are factors that instill optimism. If the coronavirus threat is overcome faster than expected, enhanced confidence could significantly boost global economy.

As emphasized in the Council meeting, the National Bank constantly monitors the current developments including the potential surrounding risks and stands ready to adjust policies and take timely measures, in accordance with its mandate.