The economy proved resilient to the energy crisis following Russia’s war of aggression against Ukraine, but Slovakia’s recovery from the COVID-19 pandemic has slowed. Inflation has fallen but remains elevated. Improving fiscal sustainability is a key challenge.
OECD Economic Surveys: Slovak Republic 2024
OECD Economic Surveys: Slovak Republic
Headline inflation, y-o-y % changes
Note: Harmonised CPI inflation for the Slovak Republic and euro area.
Source: OECD Price Statistics database.
Growth has slowed amid high inflation, weak foreign demand and tighter financial conditions. Government measures and diversification of energy supply away from Russian sources have mitigated the energy shock but growth has slowed. Inflation has fallen (Figure 1) but underlying price pressures, especially from services, remain elevated. The labour market has been resilient and nominal wage growth has accelerated.
Growth is set to pick up in 2024 and 2025 (Table 1). Lower inflation will lead to higher real wage and consumption growth. The expected recovery of foreign demand and absorption of EU Recovery and Resilience funds will support exports and investment. Risks are mainly related to a resurgence in energy prices and supply chain disruptions.
Risks from higher interest rates and the cooling real estate sector should be closely monitored. The banking sector appears resilient but many mortgage holders will have to face significantly higher interest rates in the near-term and the banking sector has become more exposed to mortgage credit and the commercial real estate sector in recent years.
Source: OECD EO 114 database, with updates.
Ambitious fiscal consolidation is needed to rebuild fiscal buffers, support the disinflation process and improve long-term fiscal sustainability in the face of rapid population ageing. Expansionary fiscal policy during the pandemic and the energy crisis have deteriorated public finances. A credible medium-term fiscal consolidation strategy is needed that should draw on spending reviews to improve the efficiency of expenditures. Measures to mitigate increasing costs of living, if needed, should be targeted at households not sufficiently covered by the social safety net. Shifting the tax mix from labour to property and environmental taxes could make the tax system more growth and environmentally friendly.
Substantial inflows of EU funds provide an opportunity to pursue ambitious consolidation without harming investments for digitalisation and the green transition. Maximising the impact of EU inflows requires improving the historically low absorption of EU funds and enhancing the efficiency of public investment spending.
Pension reforms in 2022 have had an overall positive impact on the sustainability of the public pension system, especially by linking the statutory retirement age to life expectancy. Nevertheless, a substantial funding gap remains. Tightening pathways to early retirement would further improve pension sustainability and help raise the low effective retirement age.
Increasing employment rates of mothers with young children would help reduce the gender wage gap and mitigate the impact of a shrinking work force. Family benefits need to be reviewed with a view to reducing disincentives for mothers with young children to work outside the home. Enhancing access to pre-school facilities and increasing the flexibility of working arrangements can help combine work and family obligations.
The manufacturing sector has been a key engine of productivity growth, thanks to its integration into global value chains. However, the sector is highly exposed to global shocks and trends such as automation and the green transition.
The quality and adaptability of education and skills provision needs to be improved to provide opportunities to reskill and upskill workers throughout their career. Expanding work-based learning, improving the quality of tertiary education through targeted funding, strengthening incentives to participate in adult learning and increasing training for workers out of work would help reduce skill imbalances, retain and attract high skilled people, and respond to changing skill demands.
The capacity to innovate and adopt new technologies needs to be strengthened. Patent applications, the share of innovative firms and expenditure on research and development (R&D) are low (Figure 2), and firms lag in the adoption of many digital tools and technologies. Targeted support for R&D investment and technology adoption, especially for small firms, can help overcome financing constraints.
Continuing efforts to strengthen the anti-corruption framework are crucial to improve the business environment. Despite progress, many firms still view corruption as a widespread problem when conducting business. A new Anti-Corruption Strategy is planned and should be accompanied by a specific framework for regulating lobbying.
Expenditure on R&D in the business sector, as % of GDP
Source: OECD Main Science and Technology Indicators database.
Slovakia has significantly reduced greenhouse gas (GHG) emissions over the past three decades, but progress has slowed in recent years (Figure 3). Further reducing the energy and emission intensity of the economy can help meet climate goals, reduce dependency on imported fossil fuels and enhance energy security.
Effective carbon prices are too low to reach environmental targets and vary widely across sectors. Only around 20% of GHG emissions have a net effective carbon rate above EUR 60 per tonne of CO2 equivalent, a mid-range estimate of current carbon costs. Incentives to boost green investment and innovation need to be strengthened to reduce emissions in energy-intensive industries.
Emissions in the transport sector continue to increase and the sector is the second largest source of GHG emissions. The car fleet is older and more polluting than in other EU countries. Reducing transport emissions requires increasing the share of low- or zero emission vehicles and improving public transport and the quality of the rail network.
A larger share of workers is employed in heavily polluting industries than in most OECD countries. Active labour market policies are key to help workers affected by the green transition find jobs more quickly. Regional development policies can mitigate the impact on the most vulnerable regions.
Net greenhouse gas emissions, tonnes of CO₂ equivalent per capita
Note: Greenhouse gas (GHG) emissions include those from the land use/land use change and forestry sector (LULUCF).
Source: OECD Environment database; OECD Population database; OECD calculations.
Housing affordability has deteriorated in the past decade. Improving housing affordability requires structural reforms to improve the efficiency of the housing market, property tax reforms, and targeted support to vulnerable households. Incentives for housing renovation must be strengthened to address energy poverty and achieve environmental goals.
Source: OECD Affordable Housing database; and OECD (2021), Brick by Brick: Building Better Housing Policies, OECD Publishing, Paris, https://doi.org/10.1787/b453b043-en.
Complex administrative procedures for granting building permits slow down construction projects. Implementing more efficient planning and construction processes, including by adopting digital tools in building permits procedures, would make housing supply more responsive and reduce pressures on house prices.
An underdeveloped rental market hampers mobility (Figure 4) and leads to high regional inequalities. Reforms to rebalance landlord-tenant rights and to reduce the tax bias in favour of owner-occupied housing would facilitate the development of a rental market. Changing the base of the recurrent taxes on immovable property from area to market values would encourage a more efficient use of the current housing stock, while raising the equity of the property tax system.
Many low-income households, especially among the Roma, live in low-quality and overcrowded housing, overburdened by housing costs. Ensuring adequate supply and funding for construction and operation of social housing is crucial to improve living conditions. Accelerating the formalisation of property rights in Roma settlements would help to provide basic infrastructures, such as access to tap water and basic sanitary facilities.
The housing stock is often old and energy- inefficient, exacerbating energy poverty and air pollution. Implementing stricter regulation and targeted financial assistance to households most in need would help incentivise housing renovations, reduce energy poverty and advance environmental objectives.