Slovakia - Economic update April 2019
External environment causes a cool down
Similar to the Czech economy, Slovakia is feeling the global and
European economic slowdown too. Growth is gradually decelerating,
although detailed figures still suggest that the Slovak economy is in
good shape. In Q4 2018, economic growth slowed to 3.6% from 4.6% yoy.
The main cause for this growth deceleration was the negative
contribution of net exports. Export growth continued to slow down,
while import growth remained strong thanks to strong domestic demand
supported by higher wages and job creation (figure SK). At the same
time, higher imports were also associated with investment activities
(e.g. the construction of a new car manufacturing factory). In
particular, exports outside the euro area performed weakly.
Figure SK - Strong import growth results in negative net exports contribution to Q4 2018 GDP growth (% change year-on-year)
On the supply side, economic growth was driven particularly by the manufacturing industry, notably car manufacturing. This was noticeable in the export performance too. Car exports continued to be strong, despite the general export growth slowdown, notably because of the launch of new models.
The economic slowdown at the end of 2018 as well as the detailed GDP structure necessitated another downward revision of the Slovak National Bank’s (NBS) growth rate estimates. GDP growth was revised to 3.5% for 2019, which roughly corresponds to our economic scenario. The NBS justified its revision based on the recent developments in the European car industry as well as recent developments in the external environment. The extended Brexit uncertainty and the global economic deceleration triggered a more cautious assessment of the near future.
Favourable labour market
Favourable labour market developments continue to support the economy. Towards the end of 2018, the employment rate increased by 1.9 % yoy, accelerating from the 1.4% reported in Q3 2018. As a consequence of job creation, the unemployment rate dropped to a new historic low of 5.8% in February. At the same time, the vacancy rate as well as the number of employed foreigners are at historic highs. Real wage growth accelerated from 3.3% in Q3 2018 to 3.5% yoy in Q4 2018. This was supported by inflation falling below 2% at the end of the year. All of this supports household consumption, which accelerated to 3.4% yoy in the last quarter of 2018. Households mainly increased their spending on housing and food. However, other spending, such as holidays, culture, furniture and services increased as well.
Government consumption accelerated too, particularly due to higher self-administration expenses in relation to local elections at the end of 2018. After a sharp drop in the preceding quarter, investment provided a pleasant surprise. The strong investment growth of 9% yoy can be attributed particularly to the investment activities of the public sector. This means primarily investments in infrastructure, enhanced by an increased use of EU funds. In the private sector, mainly investments in car manufacturing increased in relation to the completion of the construction of a new Jaguar plant.
Gradual inflation growth
Through the beginning of the year, Slovak inflation has been
gradually accelerating. In February, it reached 2.3% yoy from 1.9% yoy
at the end of 2018. For the time being, inflation has been most
influenced by cost factors. The jump is mainly caused by higher food
and fuel prices, supported by oil price increases as well as food
commodity price increases in the global market. We expect the
inflationary pressures to continue in the first half of 2019, and then
calm down in the second half of the year due to base effects.
ARDAL took advantage of the financial market situation
The Slovak Debt and Liquidity Management Agency (ARDAL) took advantage of the favourable situation in the financial markets and decided to extend its offer at the longer end of the yield curve with a new benchmark. At the beginning of April, bonds to the amount of EUR 1 billion were sold through syndicated sales. The new benchmark bonds mature in 11 years. In the sale, the spread was 21 points above interest swaps, or 1 basis point below the current interpolated curve. The total demand was five times higher than the supply. This signals a strong appetite among international investors for bonds from the Central and Eastern Europe region since mid-2018. The current yield to maturity of 0.78% represents a spread of roughly 72 basis points above the German bund level.