Slovakia

Slovakia has been a strong performer compared to both Eurozone and emerging economies, with real GDP expanding by an average +3.3% over the past 20 years. However, a high dependence on exports (amounting to almost 100% of GDP), in particular on automotive shipments, causes above-average cyclical fluctuations in growth. Moreover, a high dependence on global supply chains and energy imports makes the Slovak economy vulnerable to external shocks. As a consequence, the economy was hit hard by the global Covid-19 crisis (-3.3% decline in 2020), despite sizeable economic policy support. And after a strong recovery in 2021 (+4.8% growth), growth slowed down markedly in 2022 (+1.9%) and 2023 (+1.6%) as a result of the consequences of the war in Ukraine, notably the subsequent EU sanctions on Russia and soaring energy prices. On the demand side, weak growth in 2023 reflected contracting consumer and public spending and a drop in inventories. However, a recession was avoided, thanks to a solid rise in fixed investment and a positive contribution to growth by net trade. The latter was a result of a much stronger decline in imports than in exports.

Looking ahead, we expect a moderate acceleration of annual real GDP growth to around +2.4% in 2024-2025, supported by the recovery of consumption from the energy price shock and a rebound in public spending. Investment will continue to grow, albeit at a slower pace, driven by EU structural funds, the Recovery and Resilience Facility and government investment. External demand for Slovakia’s main export products is expected to strengthen over the next two years, but the increase in Slovak imports is set to be as strong so that the contribution of net exports to growth will be more balanced.

Inflation has moderated but will remain pronounced in 2024-2025. Consumer price inflation has eased from an average 11% in 2023 to 2.7% in the first half of 2024, in part due to base effects, the ECB's tighter monetary policy and slower domestic demand. Going forward, inflationary pressures will ease but remain on the cards. Energy inflation should remain moderate this year but is set to rise in 2025 as government measures regarding gas prices for households are expected to be phased out next year. Moreover, the tight labor market provides conditions for strong wage and price growth in the services sector. We forecast annual average headline inflation at around 2.7% in 2024 and 3.4% in 2025. Meanwhile, Eurozone membership provides for low transfer and convertibility risk and has decreased external vulnerabilities related to exchange rate risk in Slovakia.

The Slovak business environment is well above average. The World Bank Institute’s annual Worldwide Governance Indicators surveys suggest that the regulatory and legal frameworks are generally business-friendly though a certain level of corruption is still perceived. The Heritage Foundation’s Index of Economic Freedom survey 2024 assigns Slovakia rank 34 out of more than 180 economies, reflecting strong scores regarding property rights, judicial effectiveness, tax burden, trade freedom and investment freedom. However, weaknesses remain in the areas of government integrity and labor freedom. Meanwhile, our proprietary Environmental Sustainability Index puts Slovakia at rank 69 out of 210 economies, reflecting strengths in energy use and CO2 emissions per GDP, water stress as well as its exposure to climate events and its readiness to protect itself against such events. However, there are still weaknesses in renewable electricity output and the recycling rate.

Overall systemic political risk is relatively low. Slovakia is a stable democracy and has good international relations, reflected in its EU, NATO and OECD membership. Government stability has suffered somewhat since 2016 which jeopardizes effective policymaking and reform progress. The left-nationalist coalition government, which came into office after early elections in September 2023, is more Euro-sceptic than its predecessor. The European Commission argues that it has made several legislative changes that weaken the rule of law and the prosecution of corruption allegations. Slovakia is therefore threatened with the suspension of some EU funding.