OECD Economic Outlook, Volume 2020 Issue 2

Slovak Republic

After contracting by 6.3% in 2020, the economy is projected to grow by around 2.7% in 2021 and 4.3% in 2022. Consumption will recover gradually on the back of higher disposable income, improving labour market conditions and increased household confidence as an effective vaccine is rolled out. Investment growth will be limited by high uncertainty, weakened corporate balance sheets and low capacity utilisation. Unemployment is set to fall gradually, but will remain above pre‑crisis levels at the end of 2022. Inflation will remain subdued given considerable economic slack.

The sizeable fiscal stimulus has helped prevent a deeper contraction. Fiscal policy should remain supportive in the near term. The recovery package should stimulate short-term demand and boost the long-term growth potential. Improving the digital infrastructure, access to early childhood education and female participation in the labour market is key to strengthening the recovery and making it inclusive.

The Slovak Republic is facing a second wave of the pandemic

After successfully containing the first wave of the virus outbreak, the Slovak Republic is now experiencing a strong increase in the number of confirmed cases. Testing has become more widespread, but hospitalised cases and occupancy rates in intensive care units are also increasing. In response, the government has enhanced healthcare capacity, launched a massive operation to test the entire population and declared a state of national emergency on 1 October. All mass events have been banned, secondary schools have switched to online classes, outdoor mask-wearing has become compulsory, and restaurants can serve customers only outdoors. A partial curfew has been also imposed, but, unlike in spring, businesses have not been shut down nor have store operations been restricted.

Slovak Republic: Car production and inflation

1. The graph represents a simple average of six Google mobility indicators: workplaces, retail and recreation, grocery and pharmacy, public transit stations, parks, and residential. Each indicator represents the deviation from baseline consisting of the median value, for the corresponding day of the week, during the 5-week period January 3-February 6, 2020 (i.e. the period before the COVID-19 outbreak).

Source: Statistical Office of the Slovak Republic; and OECD calculations based on Google LLC, Google COVID-19 Community Mobility Reports, https://www.google.com/covid19/mobility/.

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Slovak Republic: Demand, output and prices

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The second wave of the pandemic is slowing the recovery

In the first half of 2020, the economy contracted less severely than in many other European countries thanks to more resilient private consumption. Economic activity rebounded rapidly in the third quarter, driven by very strong exports growth as car production quickly recovered. Monthly data on retail sales and credit card purchases also indicate a pick-up in private consumption. While the rise in unemployment has been limited, working hours are still far below the pre-crisis level. High-frequency data suggest weakening activity since the recent tightening of confinement measures. For example, mobility data show a sharp decline in people’s movement since the end of September. Consumer confidence also weakened again in October.

Fiscal support is substantial

The government has reacted promptly with a series of fiscal stimulus measures to cushion the shock. Announced discretionary fiscal measures amount to around 4.4% of GDP in 2020. In particular, the introduction of a short-time work scheme has been effective in preventing a surge in unemployment. The government has decided to extend this temporary scheme until the end of 2020. Several other temporary policies have also been extended. For instance, the deferral of loan payments for households and the benefit for families with members in need of care were prolonged until the end of the state of national emergency. The government plans to continue fiscal support in 2021. The draft budget for 2021 includes a reserve of around 1.1% of GDP for covering potential needs due to the pandemic. The budget also foresees extra spending on healthcare, education and transport infrastructure to strengthen the recovery.

The economy will recover gradually

The economy is projected to grow by around 2.7% in 2021 and 4.3% in 2022. The second wave of the pandemic will weigh on economic activity in the near term. From mid‑2021, a gradually improving labour market, together with stronger wage growth and confidence gains related to vaccination against the virus, will support household disposable income and consumption. Export growth is set to weaken again in the near term given the renewed restrictions in trading partners. Investment growth will be sluggish amid high uncertainty and weak confidence, but will start to rise as demand increases. The use of EU structural funds as well as the new EU Recovery and Resilience Facility will also support investment in 2022. The general government budget deficit will narrow as economic activity picks up and some emergency measures are phased out. A faster-than-expected distribution of an effective vaccine is an upside risk to the projections. On the downside, a further deterioration of the health situation before the implementation of an effective vaccine, triggering another national lockdown, would delay the economic recovery. Supply-chain disruptions, notably for cars, and weak foreign demand, especially from Germany, also pose negative risks to exports and investment.

Measures to boost both short-term demand and productivity should be prioritised

Fiscal policy should remain supportive as planned to sustain the recovery in the near term. Going forward, strengthening public employment services is crucial to facilitate workforce reallocation. In addition, the EU funds will provide an opportunity to strengthen the growth potential of the economy and boost productivity and inclusiveness. In particular, room exists to invest in the lagging digital infrastructure to better prepare the country for the likely increase in demand for digital services that the COVID-19 crisis may bring. The government plans to expand support for pre-school education for children at the age of five. This is welcome and should be complemented with investment to enhance access to early childhood education and care for younger children as well. This would help increase female labour force participation and improve educational outcomes.