SK Macro Outlook - Growth acceleration is under way
Investment and consumption are behind the GDP steering wheel
Real GDP growth accelerated to 4.2% y/y in 2Q18, driven by domestic demand
and net exports. Gross fixed investment rose by 20.4% y/y, the fastest since
late 2015. Surprisingly, household consumption slowed down to 2.2% y/y,
whereas net exports' contribution to GDP growth turned positive after a
Labour market improvement continued as the unemployment
rate fell to 6.6% (-1.5pp y/y). Employment growth (LFS) kept its pace at 1.2%
y/y whereas nominal wage growth remained rather high at 6.4% y/y, reflecting
tighter labour market conditions. Inflation reached 2.6% on the back of food,
service and transport prices in July.
We expect growth to average 3.9% this year and 4.2% in 2019. Domestic
demand (household consumption and investment) should remain the key driver
this year. Exports will benefit from the start of production in the new JLR car
plant (later this year) and good outlook of the Euro Area, but their impact will be
more pronounced in 2019. Risks to growth are mild: Brexit negotiations, EU
politics and protectionism on the one hand; faster return of domestic
investment and better labour market development on the other.
unemployment rate should average 6.9% and 6.4% in 2018-19. Nominal wage
growth is likely to speed up close to 6% in 2018-19. Spurred by food, service
and energy prices, we expect inflation to average 2.5% in 2018-19.
Yields on Slovak government bonds could increase somewhat, reflecting
faster inflation, move towards a more hawkish stance at the ECB and the
tightening of monetary policy in the US. Yet, increases will still be mitigated to
some extent by the duration of QE and Slovakia's good fiscal stance.Given
that the sequencing guidance remained unchanged, key ECB rates should
remain at their current level for a while and well past the horizon of net asset
purchases. We expect the 10-year government bond yield to be at around
0.9% in 3Q18 before rising to 1.1% by the end of the year.