OECD Economic Outlook, Volume 2018 Issue 1

Slovak Republic

The economy is projected to grow at a strong pace. Private consumption will continue to benefit from the increasingly robust labour market. Intensifying labour shortages will boost wage growth and, thereby, inflation. Exports will move up vigorously, as new automotive production capacity comes on stream. Business investment will remain strong, while public investment should pick up with the launch of new infrastructure projects.

The government should continue with consolidation, given strong growth and the absence of spare capacity. It should also enhance public‑sector efficiency in order to finance much needed structural reforms. In particular, measures to improve efficiency in education and enhance Roma integration are important to improve well‑being and make growth more inclusive and sustainable.

Economic growth is strong

A broad‑based and rapid expansion has continued. In line with strengthening external demand and the launch of new products, export performance has improved considerably. Investment activity has been subdued due to a fall in public investment related partly to weaker EU funds disbursement, but business investment has kept up. Labour market buoyancy and strong credit growth are fuelling domestic demand. The unemployment rate has declined to historic lows. Labour shortages and rising wages, particularly for skilled workers, are attracting foreign workers, women of child‑bearing age and older people into the labour market. Inflation has risen above 2% due to rising demand pressures and associated higher wages, and to higher food prices.

Fiscal policy will remain prudent

The budget deficit was 1% of GDP in 2017, better than budgeted, and modest tightening should continue as the government intends to reach a balanced budget by 2020. The consolidation is broadly appropriate, given an absence of spare capacity and efforts to build up buffers against possible future shocks. Strong growth, coupled with a still accommodative euro‑area monetary policy stance, provides room for faster consolidation. In order to ease medium‑term fiscal pressures from population ageing the 2012 pension reform must be fully implemented. Very low interest rates together with strong growth have led to rapid increases in bank loans, particularly for housing, and household indebtedness is now twice as high as prior to the crisis. While the banks are well capitalised and profitable, higher overall household indebtedness implies greater vulnerability to any economic deterioration. The National Bank has appropriately taken several pre‑emptive macro‑prudential measures and should stand ready to tighten its settings if risks continue to increase.

Slovak Republic

1. Includes the Czech Republic, Hungary and Poland.

Source: OECD Economic Outlook 103 database.

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The government should continue its efforts to improve tax collection and enhance public‑sector efficiency in order to create room to finance much needed structural reforms. Measures are required to upgrade Slovakia’s role in global supply chains by improving education policies, thereby fostering knowledge diffusion as well as talent retention and attraction. At the same time, enhancing the integration of disadvantaged groups, especially Roma, into society is crucial for social cohesion and mitigating the labour market effects of population ageing. This requires a multi‑faceted approach, including increasing their participation in early childhood education, access to health services, and improving housing and infrastructure in Roma settlements.

Slovak Republic. Demand, output and prices

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Growth is projected to rise

Growth is projected to exceed 4%, benefitting from new production lines in the car industry, which will contribute to robust export gains that exceed export market growth. Private consumption will continue to be an important growth driver, supported by rising wages and lower unemployment. Supportive financial conditions and new public infrastructure projects will boost investment. Inflation is projected to remain above 2% throughout the projection horizon. External developments pose both upside and downside risks. There is also a risk of higher inflation, should capacity limits prove to be more binding than assumed. At the same time, economic growth could be even stronger, if financial conditions and lower saving result in additional private consumption.