Slovakia

GDP growth has slowed significantly. Investments were a positive surprise.

The Slovak economy continues its cooling trend. The statistical office confirmed its preliminary estimate of 1.3% yoy growth in the third quarter. This follows growth of 2.2% yoy in the second quarter and even stronger growth at the start of the year. At the same time, growth in 2018 was revised downwards slightly, from 4.1% to 4.0%. Slovakia’s performance is tracking the trend in Western Europe. The growth slowdown is mainly due to weaker external demand (figure SK). The slowdown in Germany has had a notable effect on Slovakia’s foreign trade and manufacturing industry (especially in the automotive sector). Exports of goods and services reached -0.2% yoy, slowing from a rate of +9% yoy in the first quarter. The decline in imports can be linked to lower car sales in the main European markets in the third quarter.

By contrast, Slovak import growth accelerated from 1.5% to 3.3% yoy. These imports were probably destined for investments, because investment accelerated at the same time from 2.4% to 7.8% yoy. Machinery was the strongest area of investment despite the weak economic performance of Germany, Slovakia´s largest trading partner. The sectors with the most investment included refineries, wood processing and the automotive industry amongst others. The growth in imports and investments may be linked to the expected growth in the automotive industry when new production comes online. A decline in investment activity was observed in the public sector. This can also be seen in the underuse of EU funds, which are traditionally the main source of public sector investment. Government consumption growth slowed from 5% to 3.7% yoy.

Household consumption showed a similar slowdown, from 2.7% to 1.8% yoy. One reason for this is a deceleration in average wage growth from 9.7% to 7.7% yoy. Another factor is the continued growth of the household savings rate, which reached record levels (almost 11%) in Q3 2019. The creation of new jobs in the labour market is also slowing. Employment increased by 1% (1.4% in Q2) and jobs were created mainly in construction and the public sector. Manufacturing, on the other hand, saw a decline in employment fully reflecting the cooling of demand.

Given the surprisingly weak GDP growth in the third quarter, our estimate for 2019 growth is reduced to 2.2%. On the other hand, some evidence of slightly more favourable prospects is provided by the economic sentiment index, which jumped above its long-term average in November. It was driven upwards mainly by increasing confidence in manufacturing and retail. Entrepreneurs are expecting growth in demand and production in the near future.

Slight fall in inflation

Inflation fell slightly to 2.9% yoy in October (3% in September). The main driver was a weakening of demand factors in response to cooling economic growth. A faster fall in inflation was prevented by rising food prices and labour costs which are reflected in the cost component of inflation. Food prices have grown by more than 5% yoy. However, inflation should no longer rise significantly and could fall slightly next year. An important factor for its development will be the regulator’s decision on increases in household gas and electricity prices for 2020 (the decision process is ongoing).

Budget approved

Parliament approved the 2020 budget. A general government deficit of less than 0.5% of GDP is forecasted. The more likely scenario, however, is a deficit of around 1.5% to 2.0% of GDP. The reason is the economic slowdown, as well as several overvalued dividend income items. It is therefore likely that the new government will have to introduce budget correction measures after the elections (29 February 2020). The bond market is remaining calm though. Ten-year bond yields have copied the trend for German Bunds. Spreads of around 40 points have been maintained on Bunds.

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