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2019/03/13 / Erste Group Research

Slovakia: Growth continues amidst a more cautious outlook and headwinds from abroad

Domestic demand remains behind the GDP steering wheel, aided by good labour market development.

The economy ended last year on a weaker footing; yet overall, 2018 represents a cyclical peak of 4.1%. This year, we expect economic growth to average 3.4%, driven predominantly by domestic demand that continues to benefit from a supportive labour market development. The external environment is likely to remain cloudy (Germany, Euro Area and China slowing down, protectionism, uncertainty stemming from Brexit, and possible impact on local car makers - which the newly started production of Jaguar Land Rover will not make up for).

The slowdown should prove to be temporary. We stick to our 2020 GDP growth forecast of 3.6%.Labour market invigoration is under way as the unemployment rate fell to 6.1% (-1.6pp y/y) in 4Q18 and reached 6.6% on average last year. Employment growth (LFS) sped up to 1.9% y/y at the end of the year, bringing the FY2018 average to 1.4%.

Despite some easing in 4Q18 (5.8% y/y), nominal wage growth averaged 6.2% last year, reflecting tighter labour market conditions. We expect the unemployment rate to drop to 6.3% in 2019, before falling to 5.8% in 2020. Nominal wage growth is likely to average 6.4% this year and could remain close to 6% also in 2020. Inflation is expected to average 2.5% both this year and the next, driven by food, service and energy prices.

Slovak 10Y government bond yields moved lower reflecting more dovish ECB stance. Net inflows of QE stopped in December 2018 but reinvestment of maturing amounts will continue for a substantial amount of time beyond the first rate hike. The recently announced TLTRO3 and changed forward guidance that sees rates at their current level at least until the end of 2019 constitute more easing on the part of ECB. Domestically, macroeconomic conditions and tax collection help to trim the budget deficit, which fell to 0.8% of GDP in 2017.
We see a bumpier pace of consolidation than budgeted, with deficits at 0.8% and 0.7% of GDP in 2018-19, respectively, due to risks regarding the municipalities' performance. Government debt should fall below 50% of GDP already in 2018. Overall, yields on government bonds could increase somewhat; however, more uncertain pace of monetary policy tightening in the US and the first ECB hike being postponed to 2020 have led us to revise our forecast downward. We expect the 10-year Slovak government bond yield at 0.9% at the end of 2Q19 before rising to 1% in the second half of 2019.

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General information

AuthorErste Group Research
Product nameCEE Country Macro Outlook
Topic in focusFX, Macro/ Fixed income
Economy in focusSlovakia
Currency in focusEuro
Sector in focus-


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