Slovakia - Economic update June 2019

Flourishing economy continues

Slovak real GDP growth accelerated to 3.7% yoy in 2019Q1, mainly driven by domestic demand and supported by the strong labour market (figure SK). Economic sentiment recovered in May 2019 from its five-year low, but no clear rebound has been noted yet. Hence, similar to other countries in the region, domestic factors continue to support the economy, while the international context causes challenges to the Slovak economy.

The unemployment rate remains at a record low, reaching 5.7% in April (figure SK). In this context, employers are still reporting a shortage of employees. To compensate for the lack of domestic labour, a lot of foreign workers are hired. Still, the job vacancy rate is at record highs. In particular in the Western half of the country the number of vacancies is elevated. In contrast, unemployment rates remain in the double-digit area in some regions in the East.

Figure SK – Strong labour market remains supportive for domestic demand (harmonised unemployment rate, in %)

Source: KBC Economics based on Eurostat

Inflationary pressures eased somewhat from 2.7% to 2.4% yoy in April 2019, thanks to lower prices for flights and alcohol. However, we expect some correction in the coming months as increasing tightness on the labour market will lead to additional wage and inflationary pressures. Hence, we stick to our forecasts of 2.5% annual inflation for this year.

A recent evaluation by the OECD led to a slight downward revision on economic growth forecasts to 3.5% yoy in 2019 and to 3.4% in 2020. The OECD expects favourable developments in Slovak public finances. A balanced budget should be within reach in 2019. Public debt is expected to reach 47.1% of GDP in 2019 and will drop further to 45.1% in 2020. However, these projections may be too optimistic, taking into account the political cycle.

In line with other euro area countries, Slovak spreads to the German 10-year government bond rates dropped, supported by favourable domestic public finances and the expectation of more accommodative ECB monetary policy.

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