Recession Looms for North Macedonia as Country Responds to COVID-19

Skopje: North Macedonia is expected to enter a recession in 2020, with the country forecast to experience negative growth as it continues to grapple with the economic impacts of the COVID-19 (Coronavirus) pandemic.

Growth in the country for 2020 is forecast to be between -1.4 and -3.2 percent, according to the World Bank’s latest Regular Economic Report (RER) – which uses a baseline scenario and a downside scenario in the face of high uncertainty brought on by the pandemic. The baseline scenario assumes that the outbreak in Europe begins to slow soon enough, such that containment measures can be lifted by the end of June and a gradual recovery can begin in the second half of 2020. The downside scenario assumes the outbreak lingers and containment measures can only be lifted at end of August, with a recovery of economic activity only in final quarter of 2020.

The Western Balkans region is expected to enter a recession in 2020, with all six countries forecast to experience negative growth as they continue to grapple with the economic impacts of the COVID-19 (Coronavirus) pandemic. Regional growth in the Western Balkans is forecast to be between -3 and -5.6 percent.

“The magnitude of the recession depends on the duration of the pandemic in Europe. While the economic impact of the ongoing pandemic in the region is difficult to forecast, there is little doubt that this pandemic is wreaking havoc on lives around the region – taxing health care systems, paralyzing economic activity, and undermining the wellbeing of people,” says Linda Van Gelder, World Bank Country Director for the Western Balkans.

“Over the medium-term, growth is expected to rebound strongly in the region, as economic activity gradually returns to normal, but this also depends on the length and intensity of the current crisis, as well as what steps policymakers take to address this pandemic.”

Real GDP Growth, Two Scenarios for 2020Image
The recession in North Macedonia, like all the countries in the Western Balkans, will be driven by a significant drop in both domestic and foreign demand during the pandemic. Manufacturing, along with, tourism, trade, and real estate are the worst affected, with these areas facing a contraction of as much as 11.5 percent in the second quarter. Travel restrictions and social distancing measures may also have a particularly protracted impact on services, which account for around 50 percent of total employment in the country. Remittances are also projected to decline, as diaspora workers lose their jobs in destination country or are left with lower income.

The main risk for all countries in Western Balkans is that a prolonged pandemic, as well as a deeper recession in the European Union, could make the unfolding economic crisis difficult to handle.

According to the report, quick, bold, and carefully designed mitigation measures can limit the social and economic impact of this crisis but they need to take into account country conditions and uncertainty about how long the crisis will last. North Macedonia has already committed around 2 percent of total GDP to support households and businesses during the emergency, but more will be needed as the pandemic continues to slow economic activity around the country. NATO membership plans and the launch of the EU accession negotiations, announced on March 25, should boost both reforms and investor confidence, paving the way for a faster economic rebound once the crisis is over.

The announced short-term measures are necessary and aligned with the policy responses of EU countries. However, more people in the Western Balkans rely on self-employment, part-time work, and incomes from informal activities. These groups are vulnerable to the crisis but difficult to support through conventional measures. Until mid-2020, North Macedonia should remain focused on addressing the pandemic by securing medical supplies and staffing, introducing containment measures to slow the spread of the virus, and reduce the peak load on health systems. Simultaneously, the country should strive for fiscal stability, provide access to finance, and protect people and businesses.

According to the report, additional support – fine-tuned to the local context – may be necessary to support all vulnerable groups in the country. Given the uncertain length of this crisis, policymakers in North Macedonia and elsewhere face a policy dilemma: using all available fiscal space to mitigate the immediate impact can backfire if the crisis endures. Policy responses should therefore be calibrated to mitigate the immediate effects, adjust to new realities that may emerge, and to leave space to prepare the economy for a recovery.

The report focuses on the macroeconomic impact of COVID-19 in the Western Balkan countries, setting the stage for additional analysis. A series of Regular Economic Report notes, looking at the impact on specific economic areas, social sectors, and on poverty and income distribution in the region, will be be published in a follow-up e-launch in May.

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