Slovakia - Economic update

Slovak economic growth accelerated to 4.6% yoy in the third quarter according to preliminary figures. GDP growth accelerated from the previously reported 4.5% in Q2 2018 and 3.7% in Q1 2018. Growth was probably supported by household consumption as there was strong demand for loans as well as a continued rise in employment and wages. The start of the Jaguar Land Rover car plant production will again increase the Slovak export capacity. However, the projected slowdown of the global economy due to rising tensions and the possibility of a trade war pose risks to the Slovak economy.

Economic sentiment indicators suggest some growth slowdown though (figure SK1). The economic sentiment indicator was on a declining trend since the beginning of the year but reversed that in October. The support came from the rising confidence in services, retail and in construction. The overall index of economic sentiment increased by 1.6 points to 98.9. Similar development was registered in the Eurozone during last months. Moreover, PMI in the EMU declined to two years low in October. If this decline continues, it might affect the economic activity in Slovakia going forward. However, the start of the new production capacities in the automotive industry (new Jaguar Land Rover car plant) could make Slovakia an outlier in the region.

The unemployment rate stabilised at 6.6% in September according to Eurostat statistics, which is well below the EMU average of 8.1%. Generally speaking, strong growth pulled unemployment to all-time lows this year and the labour market started to overheat which is visible in several labour market statistics. For example, the number of vacancies is at all time high as well as the number of employed non-Slovakian nationals. The less complicated rules for employment of non-Slovakian nationals should help to even increase the number of employees from non-EU countries, mainly from Serbia and Ukraine.
HICP inflation decreased slightly from 2.9% to 2.7% in September 2018. There are visible demand led price pressures as well as the impact of higher fuel and food prices on inflation.

House prices continue to rise but at a slower pace in third quarter of 2018. Prices increased by 7% yoy in Q2 compared to 11.7% yoy in Q1 according to Eurostat data. As measured by the Slovak central bank, there was a deceleration in house prices that continued in the third quarter. The impact of measures with the aim to curb the demand for housing loans (registering double digit growth this year) appear to be having their intended effect.
Government bond spreads moved up by approximately 10-12 bps to 52 bps compared to 10y Bunds. This is in line with the expectation as the ECB will gradually reduce its purchasing activity on the bond market and demand for bonds will be more in the hands of market forces. However, the good economic performance and healthy public finances should help to limit the spread increase.

Eurostat revised the earlier published Government deficit for 2017. The all-time low deficit was revised even lower to 0.8% of GDP (1.0% in the spring notification). Public debt was reduced to 50.9% of GDP in 2017 from 51.8% in 2016. This is still well below the EMU average (87%). Better results of the public finances were due to the better collection of corporate taxes in 2017.

Figure SK1 – Economic sentiment indicator suggests some growth slowdown (DG ECFIN Economic Sentiment Indicator)

Source: KBC Economic Research based on European Commission (2018)