Macro: COVID and Economic Update Slovakia: Temporary setback given 2nd wave, deficit spending to continue

COVID-19 development: The pandemic situation became worse again. With raising numbers of infected people, a kind of lockdown during Christmas holidays was approved.
Growth outlook: In Q3 2020, economic activity increased by surprisingly high 11.7% qoq what means an annual decrease by only 2.4%. The main driver was a strong rebound in industrial production. Unfortunately, the strong 2nd corona wave will cause another GDP decrease. We estimate 2% qoq fall of GDP in Q4 2020 and stagnation in Q1 2021. The start of vaccination in April or so should bring relief and persistent strong rebound in activity. In 2021 we expect average GDP to increase by 5%. Furthermore, the winter lockdown in consumer services should increase the unemployment rate again. However, the opening of services in spring 2021 should help to slowly decrease the unemployment rate towards 6.4% by the end of 2021.
Inflation outlook: CPI inflation continued its downward trend, but the renewed GDP recovery ahead should gradually bring headline inflation back to annual average of 1.2%.
Fiscal policy: Public budget deficit, finally, should reach as much as 9.7% of GDP in 2020 and it should remain elevated at 6.4% of GDP given the lack of any consolidation plans. Nevertheless, the Slovak Debt management agency had no problems with financing 2020s elevated financing needs and ECB QE will continue supporting 2021 issuance activity and likely preserve tight spreads vis-á-vis Bunds.