Slovakia - Economic update March 2019

Slovak GDP growth decelerated from 4.6% yoy in Q3 2018 to 3.6% yoy in Q4 2018 according to preliminary data from the Statistical Office. This deceleration is in line with the recent deceleration in the euro area. We expect that the results in Q4 2018 were influenced by weaker household consumption, as is indicated by a gradual worsening of the monthly retail trade figures. Rising imports may have also negatively affected the previously positive contribution of net exports to GDP growth.

The central bank and ministry of finance revised their growth forecasts downwards to 4.2% yoy and 4.0% yoy respectively for the year 2019. We expect even somewhat weaker growth (3.7% yoy), as we expect a more negative effect on Slovakia from the economic slowdown in the euro area, and in Germany in particular. However, Slovakia should be, to some extent, protected by the start of production in the new Jaguar-Land Rover plant (in NR region) in 2019. The effect of this new export-oriented plant has been very limited so far (production started at the end of 2018). The automotive industry was the main engine of growth in 2018 thanks to the implementation of new car model production and increases in market share. This extraordinary positive development will probably not be repeated this year. Economic sentiment indicators stopped their gradual decline at the beginning of 2019, which is a positive sign though. Sentiment improved in the manufacturing sector. However, due to deceleration in the euro area, it is too early to say whether the Slovak GDP deceleration was only a temporary phenomenon.

Slovak HICP inflation increased to 2.2% yoy in January 2019 from 1.9% yoy in December 2018. This was driven mainly by cost factors and administrative factors (e.g. food and energy price increases). Average inflation stood at 2.5% yoy in 2018. Upward price developments should accelerate in early 2019 - due to higher regulated prices and an acceleration of food prices - and persist through H1 2019. We expect HICP deceleration in the second half of 2019 with average inflation in 2019 around 2.6% yoy. The National Bank of Slovakia reduced its inflation forecast for 2019 to the same level.

The harmonised unemployment rate (Eurostat) stood at 6.2% in January 2019 and has been roughly unchanged the last three months (figure SK1). This remains an all-time low unemployment rate. The room for further unemployment rate declines will be limited. This is already visible in some confidence indicators. However, the number of job vacancies is still at all-time highs.

Government bond spreads hovered in a narrow range around 60 basispoints in February. Budget developments have been positive, but we can expect more populistic proposals for non-covered tax reductions or expenditure increases as there are regular Parliamentary elections in the spring 2020. Presidential elections scheduled for March 2019 should not have a significant impact on the market, but could reveal voters’ preferences (generally, one expects a gradual decline in the current government’s popularity). However, ECB policy will remain the most important factor influencing the development of the government bond spread.

Figure SK1 – Limited room for further unemployment rate declines

Source: KBC Economics based on Eurostat, Slovakian Statistical Office (2019)

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