SK Macro Outlook - December 2017
Economic growth stood at 3.4% y/y in 3Q17, slightly lower than in 2Q17 (3.7% y/y, revised data). Domestic demand remains the key driver, as household consumption benefits from the improving labour market and investment is gradually picking up again.
Employment growth remains solid as unemployment edges down to record lows (8% in 3Q17, 1.5pp lower annually) and the tightening labour market puts upward pressure on nominal wage growth. Due to the high import growth (for consumption and investment purposes), net exports are taking a backseat this year. Inflation reached 1.2% on average in January-October 2017.
We expect growth at 3.3% this year, before speeding up to 3.9% and 4.2% in 2018-19. Domestic demand should be the key driver. From 2018 onwards, exports should benefit from the start of production in the new JLR car plant and the bright outlook of our Eurozone partners. The risks are mild and mostly balanced: Brexit negotiations and geopolitical tensions on the one hand; faste r investment growth and Eurozone growth on the other.
Labour market should fare well, with the unemployment rate averaging 8.2% this year, then 7.5% and 6.8% in 2018-19. Owing to the return of inflationary pressures, we expect 2017 inflation to average 1.3%, before increasing to 2% in 2018 and 2.3% in 2019.
Yields on Slovak government bonds could increase somewhat, reflecting the steady return of inflation and the reduction of ECB asset purchases from January onwards. However, increases will still be dampened by the longer duration of QE and Slovakia's good fiscal stance. We expect the 10-year government bond yield to be at around 0.7% in 4Q17 before rising to 0.85% in 1Q18.