Slovakia Outlook | Growth eases amidst external headwinds
Labour market feels a slight dent from cooler economic environment
External headwinds arising from weaker global economy, trade wars and unresolved risks such as Brexit are slowing down growth. Moreover, structural changes in the car sector as preferences are shifting towards hybrids and ecars are affecting the export-focused industry. Yet, domestic side of the economy should continue to support growth which we see at 2.3% and 2% for 2019-20, respectively. As the weakness in industry and foreign trade abates, growth should inch up to 2.5% in 2021.
Overall, the unemployment rate may average 5.8% in 2019, before inching up to 5.9% in 2020, as the slower pace of economic growth takes its toll and employment growth eases. Nevertheless, the labour market remains fairly tight and coupled with legislative changes; there are sizeable upward pressures on wages. Nominal wage growth is set to speed up to 7.6% in 2019, before easing to 4.5% and 5% in 2020-21, respectively.
Inflation gathered speed and should average 2.6% in 2019, before easing to 2.2% and 2% in 2020-21. Core inflation is expected to slow down to 2.3% in 2019 and 2% in the following two years. ECB's monetary policy will remain very expansionary for the foreseeable future.
Government bond yields remain low, largely following the development of German Bunds and reflecting dovish ECB, cautious Fed and volatile risks (Brexit, trade wars). Budgetary situation is likely to be little changed from the previous years, with fiscal deficits at 1.1-1.2% of GDP in both 2019-20.
The most important event in 2020 will be the parliamentary elections that are scheduled to take place on 29th February 2020 but given the amount of uncertainty, the economic impact of a new government is difficult to forecast.