Adverse impact of the coronavirus pandemic on the Slovak corporate economy

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The first case of coronavirus in Slovakia was recorded on 6 March 2020. It was concerns about the potential growth of cases and overburdening of the healthcare system in Slovakia that led to the introduction of a series of large-scale anti-pandemic measures throughout most of 2020. Based on the time of adoption, the anti-pandemic measures adopted in the Slovak Republic can be divided into two groups:

  • measures taken during the first wave of the pandemic;
  • measures taken during the second wave of the pandemic.

Most of the anti-pandemic measures taken in the first and second waves of the pandemic were of a nationwide nature. They have been adopted for industries where, by the nature of the business, people naturally come together. These are mainly in the sectors of accommodation, catering and other services, where we can include education, health, social assistance, etc. The trade sector, especially retail trade, has also been severely constrained.

During the second wave of the pandemic, the full-scale anti-pandemic measures adopted in the first wave of the pandemic were complemented and imposed to reduce the activity and/or increase the costs of all businesses, regardless of their size or sectoral affiliation. The measures taken during the second wave of the pandemic have again affected businesses operating in the other services sector.

In order to compensate for all the anti-pandemic measures that have caused a significant drop in revenues in several sectors, the State has introduced several forms of support.

These included, for example, measures to support employment and help entrepreneurs with income shortfalls, help with rent subsidies, deferral of payments (insurance premiums, taxes, leasing, loans), and the introduction of pandemic inability to work and caring for a family member for employees. In addition, some segments of the economy have been supported through separate support schemes.

All of the above are reflected in a decline in the GDP in 2020. The decline in the GDP in the first quarter of 2020 was 11% compared to the previous quarter. The Slovak economy recorded its worst result in the second quarter of 2020. The economic recovery occurs as late as in the third quarter of 2020 as a result of the massive easing measures either in Slovakia (internal demand) or abroad. Looking at the fourth quarter of 2020, we see that the economy, despite the restrictive measures in place at the time, achieved moderate growth (0.10%).

Among the selected key sectors, the decline in 2020 due to the impact of anti-pandemic measures can also be seen in terms of industrial production. However, some reduction in performance in the Slovak industry had already occurred before the coronavirus crisis, in the second half of the previous year – 2019. Comparing the two waves of coronavirus and similar measures, it is clear that the Slovak industry experienced a more challenging first wave. The second wave of the pandemic did not have such a significant impact on industrial production.

The decline in gross fixed capital formation was evident in the first quarter of 2020 – probably again due to the anti-pandemic measures that started to take effect in the last month of that quarter. Levels of gross fixed capital formation lagged behind the previous period throughout 2020. The largest decrease (almost 15%) was recorded in the second quarter of 2020 compared to the same period of the previous year.

During the first wave of the pandemic, we also recorded changes in other important macroeconomic indicators. According to the ECB, average inflation in the euro area will fell from 1.2% in 2019 to 0.3% in 2020.

In Slovakia, the inflation rate fell from 2.4% to 1.8% between March and July 2020.

The pandemic has had a significant impact on employment. There was a decrease in the number of employed from 2,552.3 to 2,504.5 thousand, a decrease of 1.8% of the employed population. The largest declines in employment were recorded in the business services sector (down 14.4%, with the largest declines in administrative and support services) and other services (down 12.1%). The trade, accommodation and food services (4.2% each), manufacturing (4.1%) and agriculture (3.7%) sectors also recorded significant declines in the number of people employed. According to data from the Statistical Office of the SR, the unemployment rate in Slovakia increased quarter-on-quarter from 6% (in Q1 2020) to 6.6% (in Q2 2020) during the first wave of the pandemic.

Almost all analysed macroeconomic and microeconomic indicators showed a negative development trend – gross output, value added, profit, the number of employees of non-financial corporations as well as the number of established business entities recorded a decline in aggregate value. Surprisingly, the number of defunct business entities declined.

In our analysis, we found that the biggest impact of the first wave was on large businesses in particular, with small and medium-sized enterprises even seeing their profits rise in the second quarter of 2020.

Looking at the sectoral changes during the first wave of the pandemic, it is evident from the analysed indicators that only the trade sector saw an increase in the values of all analysed indicators except for the number of business entities newly established during the second quarter of 2020 (compared to the first quarter).

The third quarter of 2020 marked a slight recovery for businesses in Slovakia. Apart from the unemployment rate, which also increased during July–September 2020 (from 6.6% to 7.2%), the values in the other indicators developed positively. The GDP increased year-on-year, reaching 99.6% of the previous year’s GDP, while the value of all key GDP components also increased. Inflation increased from 0.9% to 1.5% and the number of people employed in the Slovak economy increased by a total of 24.9 thousand.

Broken down by sector, growth in the value of the gross output, value added and profit indicator was recorded in all sectors except business services during the third quarter of 2020. These recorded a decrease in value during the months July–September 2020 in all analysed indicators. The number of employees in enterprises by sector classification developed differently.

The second wave of the pandemic, which started to spread massively in Slovakia at the beginning of September 2020, did not have such a significant impact on the corporate economy as the first wave; it mainly affected selected sectors of the economy (such as the aforementioned restaurants, transport, retail, etc.). The decline in macroeconomic indicators was not so dramatic, mainly because there was no massive decline in industry and industrial production.

Despite the onset of the second wave of the COVID-19 disease, Slovakia’s GDP by the end of 2020 was above the level of 2019 and the first quarter of 2021 was 0.8 p.p. higher than the GDP produced in the previous year. With the exception of household final consumption, which recorded a slight decline in both late 2020 and early 2021, the other components of GDP recorded increases in each quarter. Inflation also stabilised at 1.6% by the end of 2020, falling briefly to 0.7% in January 2021, but rising through the first half of 2021 to reach 2% in May. Employment in Slovakia grew by 0.4% in the last quarter compared to the previous quarter and there was a slight decline in employment of 1.5% at the beginning of 2021. The largest decline in the number of employees in the Slovak economy at the end of 2020 and in the first quarter of 2021 was recorded in the accommodation and catering sector, where, after a slight increase in the number of employees in Q3 2020, the number of employees fell by 6.1% and even by 21% at the beginning of 2021. In the other services sector, the most significant quarter-on-quarter decline was recorded in arts, entertainment and recreation, where the number of employees decreased by 2.4% in Q4 and even by 15.6% in Q1 2021.  The number of employees in administrative and support services fell by 2.1% quarter-on-quarter at the end of 2020, and the quarter-on-quarter decline increased further to 7.3% at the beginning of the year. Among the other sectors, the transport sector recorded a negative development of employment (a quarter-on-quarter decline of 2.4% in Q4 and 3.2% in Q1 2021) and the industry sector, where the number of employees fell by 2.7% only in Q1 2021 compared to the previous quarter. The unemployment rate stood at 7% in October–December 2020 and remained at this level in early 2021.

Despite the second wave of the pandemic, indicators assessing the state of the corporate economy developed mostly favourably in the second half of 2020. Micro enterprises recorded quarter-on-quarter growth in gross output, value added, the number of employees and the number of business entities created in the fourth quarter, but their profits declined. For small enterprises, there was a quarter-on-quarter decline in all assessed indicators except gross output, which increased quarter-on-quarter. The evolution of the indicators of medium-sized and large enterprises followed a similar pattern. Both medium-sized and large enterprises were accompanied by a quarter-on-quarter increase in gross output, value added, but a decline in profits. Only the headcount indicator showed a different trend – while large enterprises employed more in the fourth quarter than in the third quarter, small enterprises employed fewer.

As the results of the analysis showed, the first wave of the pandemic had the most pronounced impact on industrial, accommodation and catering, transport and other services businesses. Large industrial enterprises have been more affected.

Micro and small enterprises have been much slower to recover from the effects of the first wave of the pandemic. With the easing of the measures, the economic situation of business entities improved and already in the third quarter of 2020 there was a significant increase in gross output, value added and profits, but the number of employees continued to decline slowly. The arrival of the second wave of the pandemic has again contributed to the deterioration of economic performance.

The effects of the second wave have been felt mainly in the sectors that have faced restrictions most and less so in industry. Accommodation, catering, transport and other services remain the hardest hit sectors.