OUTLOOK 2019 Slovakia

OUTLOOK 2019 Slovakia
By bne IntelliNews December 21, 2018

OUTLOOK 2019 Slovak Republic

Slovakia’s economic activity is expected to strengthen in 2019. Real GDP growth accelerated to 4.6% y/y in the third quarter of 2018, driven mainly by domestic demand. The growth is expected to average 4.3% in both 2018 and 2019, before slowing down to 3.6% in 2020. Private consumption should continue to be the main driver of overall growth, backed by solid real wage growth. Risks to economic growth such as Brexit negotiations, EU politics (particularly Italy) and protectionism persist.

Despite Eurozone growth slowing down, Slovak exports should benefit from production in the new Jaguar Land Rover car plant, which is to show more in 2019. Expanding export capacities in the large automotive sector will help significantly accelerate export growth from 2019 onwards, despite an expected slowing in foreign demand. This should result in substantial export market share gains. Exports are expected to replace investment in 2019. The economic growth is expected to ease in 2020 as export growth slows down.

In 2020, the end of the current EU funding program period and several large public investment projects are projected to revive public investment. However, rising pressure on capacity growth could lead to overheating the economy, resulting in increasing inflation and decline in competitiveness.

Further increases on the labour market are likely to make private consumption a key factor of GDP growth in 2019.

Labour market improvements and solid investment growth, supported by positive financial conditions and increased disbursements of EU funds, will contribute to strong domestic demand. At the same time, however, labour shortages are expected to push wage growth above productivity growth, which will likely erode the economy’s external competitiveness and pose a risk towards further expansion in affected sectors.

Due to labour market improvement, unemployment falls to historical lows and labour shortages become more acute in many sectors. The unemployment rate decreased to 6.4% (down by 1.6pp y/y) in the third quarter of 2018 and employment growth rose by 1.4% y/y. The unemployment rate is expected to reach 6.7% and 6.2% in 2018-19 and fall to 5.7% in 2020. In the context of low unemployment risk and supportive financial conditions, consumers are likely to keep spending and invest in the real estate market. Nominal wage growth is likely to average 6.2% and 6.4% in 2018-19 and remain at about 6% in 2020.

The inflation rate slowed down to 2.1% in November 2018 and is expected to amount 2.6% in 2018 and around 2.5% in 2019-20. Higher oil prices will lead to an increase in regulated energy prices in 2019. Food prices are expected to continue growing at recent trend rates of around 2.5%. Wage growth, higher food prices, pressures on production capacity as well as robust private demand are projected to lead also to consumer price inflation increase, reaching around 3.0% by the end of 2020.

The government plans to reach a budget balance by 2020 is fully in line with EU requirements. In December 2018 Slovakia’s parliament approved a 2019 budget that sees the deficit falling to zero for the first time in Slovakia´s modern history. The government’s fiscal policy objective is to eliminate budget deficit by 2020. The general government deficit is foreseen at 0.1% of GDP in 2019, a balanced in 2020 and a surplus of 0.2% of GDP in 2021.

However, most of this budget improvement will result from strong cyclical growth, with little structural consolidation. Moreover, the government plans to increase public sector wages by 10.0% in each of 2019 and 2020. However, given vulnerability of the country to escalating global protectionism, great demand pressures and low Eurozone policy interest rates, a tighter fiscal policy would be recommended.

The Slovak central bank has been tightening credit standards in order to address increasing household indebtedness. This has slowed down credit growth, but it remains high.

Revenues from individual income taxes and social contributions are expected to expand significantly, revenues from corporate income taxes are to increase due to the growing profitability of companies. Revenues from value-added taxes are anticipated to benefit from improved tax collection. In line with significant real GDP growth and a strong labour market, tax revenues are expected to continue growing. Public expenditures are expected to rise by 0.2pp of GDP more than revenues.

The general government debt-to-GDP ratio is expected to decline to 46.4% of GDP by 2019 and to 44.2% of GDP in 2020, driven by expected primary surpluses and robust nominal GDP growth.

Czechia is the wealthiest nation among other Central and Eastern Countries (CEE), the Allianz Global Wealth Report 2018 comparing 53 countries found. Czechia occupied the middle of the chart at 26 in the regional ranking. The net wealth was €15,290 per capita in 2017, up from €12,360 in 2016.

The wealth of neighbouring Slovakia was half that of Czechia in per capita terms, or around €6,100. But whereas Czechia has already passed its economic peak and beginning to slow, Slovakia is still in the upswing and should be growing at 4.5% in 2019. In a long-term perspective, Slovakia is growing faster than Czechia and its wealth will catch up.

Politics

In the longer term, same as in other European states, population ageing will increase public spending significantly. The authorities, therefore, should not weaken the 2012-13 pension reform and are expected to maintain the link between the statutory pension age and life expectancy. The government is also expected to persist in its efforts to improve tax collection and enhance public-sector efficiency in order to improve structural reforms, particularly in education and for Roma inclusion.

In 2018, Slovakia’s parliament approved the government’s nomination of current finance minister Peter Kazimir (Smer-SD) as central bank’s next governor who is likely to take the post in March 2019.

In spring 2019, the presidential elections will take place in Slovakia. Current president Andrej Kiska will not run for a second term.

In 2019, together with the Czech Republic, Slovakia will celebrate 30-year anniversary of the Velvet Revolution and 15-year anniversary of its accession to the EU.

World Bank doing business 2019 ranking. The Czech Republic sits 35th (down by 5 rows y/y) with 76.10 of DTF score, Slovakia 42nd with 74.90 of DFT core in the new list. In starting business, the Czech Republic is 115th and Slovakia 127th. In terms of getting credit, the countries share 44th place. In terms of paying taxes, the Czech Republic and Slovakia are ranked as 45th and 48th, respectively.

According to the 2017 Corruption Perceptions Index by Transparency International, Czechia was ranked as the 42nd least corrupt nation out of 175 countries. Corruption rank averaged 45.68 from 1996 until 2017, with an all-time high of 57 rank in 2011 and the lowest rank of 25 in 1996. Slovakia is the 54 least corrupt nation out of 175 countries. Its corruption rank averaged 54.20 from 1998 until 2017, the highest rank of 66 in 2011 and a record low of 47 in 1998.

Within the Global Competitiveness Index 4.0 2018 rankings, which measures national competitiveness, the Czech Republic reached the 29th rank with the score of 71.2, same as in 2017. The Slovakia dropped down by 2, to 41, with 66.8 score.

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