Slovakia - Economic update February 2019
Following lower growth forecasts for the entire European economy, the Slovak Central Bank and the Slovak Ministry of Finance (MoF) also revised their growth forecasts downward. The National Bank of Slovakia (NBS) adjusted its GDP growth forecast to 4.2% yoy in 2019 (previously 4.3%), 4.0% yoy in 2020 (unchanged) and 3.0% yoy in 2021 (previously 3.1%). The MoF reacted in early February during the release of its regular economic forecasts. GDP growth was reduced to 4.0% yoy in 2019 (previously 4.5%), 3.7% yoy in 2020 (previously 3.9%), 3.2% yoy in 2021 (previously 3.3%) and 2.5% yoy in 2022. These revisions are a step in the right direction and are now closer to our own GDP growth forecasts (3.7% for 2019, 3.5% for 2020). The forecasts, however, consider only a limited amount of current risks (impact of Brexit, etc.). The MoF decreased the dynamics of exports to Germany and expects weaker private investments. However, both institutions confirm that the risks are on the downside, mentioning a possible hard landing of EU economy, the impact of Brexit, and protectionism. We expect more downside forecast revisions closer to our prognosis in the future.
The downward economic revisions from several Slovak institutions are in line with various recently released leading indicators. The index of economic sentiment decreased in almost all its sub-indices in January (with the exception of services). Economic sentiment decreased to 97.1, which is the lowest level in almost 5 years (figure SK1). Confidence in manufacturing was affected by the expected future decline of production by entrepreneurs. Orders in manufacturing decelerated from around 20% yoy to less than 11% yoy in November 2018. Almost all relevant industries registered a decline. The only exception was car production with a rise in new orders of almost 28% yoy. However, even with car production there are signs of the start of a gradual deceleration.
The foreign trade balance ended in a small surplus of EUR 68 million in November 2018 (vs. EUR 490 million last year). The foreign trade surplus should be around EUR 2.6 billion for the whole year of 2018 (vs. EUR 3.09 billion in 2017). However, it should rise once again with increased exports thanks to the new Jaguar plant. The local economy should be supported by the start of new export capacities in the car industry with a positive contribution from net exports to GDP in the future.
Slovak inflation slowed to 1.9% from 2.0% yoy in December 2018. This was mainly affected by the decline of fuel and air travel prices. Annual average inflation stood at 2.5% yoy in 2018. Inflation should accelerate in January 2019 due to higher regulated prices and an acceleration of food prices. We then expect a deceleration in the second half of the year, resulting in an annual average inflation rate around 2.6% in 2019. Despite labour market overheating, demand side pressures are still limited. The unemployment rate stayed unchanged at 6.1% in December 2018 which is an all-time low (7.4% in December 2017). However, factoring in the signs of a growth deceleration, the space for a further decline in unemployment will be limited. The number of job vacancies is close to all time-highs as well as the number of foreigners working in Slovakia (mainly Serbians and Ukrainians).
The state budget ended 2018 in a deficit of EUR 1.2 billion compared
to the approved budget deficit of EUR 2.0 billion. The most
significant contributing factor to the smaller deficit was the
increase of tax revenues thanks to strong economic growth. The
increase of revenues from the EU budget was also significant. This
result probably means a further reduction of the public fiscal deficit
from an all-time low of -0.8% of GDP in 2017 to -0.7% of GDP in 2018.
Government bond spreads are around 70 bps above Bunds and they should
gradually widen in a context of more international risk aversion and
gradual ECB policy normalisation.