Growth set to continue at a slower pace amidst cloudy external environment
Domestic demand returns to the driving seat
Real GDP growth reached 2% y/y in 2Q19, decelerating from the 3.7% y/y in 1Q19. The key reason behind the slowdown was the disappointing performance of net exports. In light of the recent data and ongoing tensions in the global economy, we have adjusted our GDP growth forecast downwards: from 3.4% to 2.5% in 2019 and from 3.3% to 2.3% in 2020.
Even though the domestic side of the economy should continue to support growth, external environment remains overcast (slower growth in Germany and China, uncertain Brexit outcome, unresolved protectionism and possible impact on local car makers). Moreover, this year's high base on inventories will likely cause a mild correction next year.
Labour market remains in a good condition as the unemployment rate fell to alltime low of 5.7% (-0.9pp y/y) in 2Q19. However, the pace of employment growth eased to 0.5% y/y in 2Q19, amidst somewhat cloudier economic environment. Nominal wage growth exceeded expectations and accelerated to 9.7% y/y in 2Q19, reflecting still tight labour market and recent administrative changes (night and weekend work).
We now expect this year's nominal wage growth at 7.3% before easing to 4.8% in 2020. Unemployment rate should hover around 5.8-5.9% in 2019-20, respectively. Inflation is expected to reach 2.6% this year and 2.3% in 2020, driven by food, service and energy prices.
The 10Y government bond yield has been negative since July, reflecting dovish ECB, cautious Fed and higher uncertainty (Brexit, trade). Government debt remains comfortably under Maastricht’s 60% of GDP. This year's proposed balanced budget will likely be missed and we expect fiscal deficit at 0.8% of GDP. SK10 yield may inch up only slightly to -0.05% at the end of 2019 and to 0.3% in 4Q20.