SK Macro Outlook - Economic growth to shift up a gear
Household consumption and net exports driving growth
We expect growth to speed up to 3.9% this year and 4.2% in 2019. Domestic demand should remain its significant driver, mainly via household consumption and investment. Exports will benefit from the start of production in the new Jaguar Land Rover car plant (late 2018) and bright outlook of our Eurozone partners. The risks are mild and mostly balanced: Brexit negotiations and geopolitical tensions on the one hand; faster investment and Eurozone growth on the other.
Employment growth remains solid and unemployment edged down to record lows. Labour market should continue to fare well, with the unemployment rate averaging 7.2% and 6.6% in 2018-19. The tightening labour market exerts upward pressure on nominal wage growth. Owing to the return of inflationary pressures, we expect inflation to average 2.2% in 2018 and 2.3% in 2019.
Yields on government bonds could increase somewhat, reflecting the steady return of 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. We expect the 10-year government bond yield to be at around 1.05% in 1Q18 before rising to 1.25% by the end of the year.
The Slovak political scene became quite turbulent in early March as the murder of investigative journalist J.Kuciak and his fiancée sparked nation-wide protests and led to the resignation of the Minister of the Interior. The next steps are still not fully clear, after one of the coalition parties Most- Híd has asked for snap elections. If their request is denied, they will leave the coalition which would be left with a minority in the parliament and could lose a subsequent confidence vote.
The nationalist SNS is not opposed to the idea but will consider snap elections only after a definite fall of the government. The largest coalition party SMER opposes the idea of early elections, but they do seem like the most likely outcome. A technocratic government remains an option as well, but less likely. Nevertheless, medium-term stability should not be affected.