Slovakia - Economic update

Outlook remains weak, but manufacturing tries to find ground

The Slovak economy slowed down substantially due to the global manufacturing slowdown. The manufacturing output decline in Slovakia throughout 2019 was strongly affected by car production. However, the November 2019 decline was mainly driven by negative developments in metal production and electrical engineering. By contrast, the production of cars decreased to a lesser extent. On a month-on-month basis, the automotive industry even experienced slight growth, which is a first good signal that may point to a bottoming-out, similar to the trends seen in Germany. However, car sales in Europe have not experienced a positive year. Logically, this was also felt by the Slovak economy, for which Western Europe is the largest trading partner. This was evidenced by slow growth in the sector, exports and GDP over the entire previous year.

Apart from trends in manufacturing, the weaker outlook for the Slovak economy is visible from other sectors too. In October, construction decreased by 2.4% yoy, mainly due to a decline in new construction on the domestic market. The construction of buildings (especially apartments and offices) was kept at a solid level, supported by affordable and cheap financing. However, the construction of infrastructure projects such as roads and motorways was reportedly weak in the second half of 2019. In October alone, this indicator fell by almost 11%. This is also evident in the relatively low uptake of European funds which are the main source of public infrastructure funding.

The trade surplus reached a high in October (EUR 160 million euros versus EUR 110 million one year ago). Nevertheless, the surplus for the entire calendar year 2019 will be significantly lower than in 2018 (EUR 1.2 billion vs EUR 2.3 billion). This is due to weaker exports over the spring and summer (figure SK). There has been particularly weaker demand for cars in the main markets in Europe. Slovakia remains the largest car manufacturer per capita in the world. Developments in the automotive industry will therefore be very important.

Despite the Slovak growth slowdown, the unemployment rate remained at the same level in November as in October, at 5.7%. In the winter months it may increase slightly due to seasonal factors, particularly in the agriculture and construction sectors. However, in the early days of 2020 some employers announced their interest in foreign labor (Serbs, Bulgarians). This indicates a persistent shortage of domestic workers.

Finally, parliamentary elections are upcoming in Slovakia, which are announced for the end of February 2020. Opposition center-right parties with a focus on economic reforms are expected to form a new government. The political situation does not seem to affect the economic outlook at this moment. For instance, risk premiums remain relatively stable around 40 bps above the 10-year German government bond.