Economic Analysis - Growth To Remain On Solid Path - DEC 2017


BMI View: We expect Slovakia to remain on a healthy growth trajectory over the coming quarters, supported by a rebound in investment levels , and by an uptick in exports growth, in turn driven by the country ' s thriving automotive sector. Private consumption will remain the largest contributor to growth, underpinned by the country ' s tightening labour market, although we note that this also represents a source of longer-term risk to the country's growth model.

Following a robust first half of 2017 which saw real GDP growth expand at an average rate of 3.2% y-o-y, we expect the Slovak economy to remain on a solid growth path over the coming quarters. The breakdown of the components of GDP shows that in H117 economic activity was primarily driven by an upswing in domestic demand, in turn underpinned by strong private consumption. This is also reflected in the analysis of key sectors which shows that strongest growth was witnessed in construction, wholesale and retail trade, and in the real estate sector. We expect this momentum to be carried through to the coming months, and from a level of 3.3% in 2016, we forecast real GDP growth to stand at 3.3% in 2017 and 3.4% in 2018.

Although fixed investment growth has been relatively sluggish over the past few quarters, expanding by 0.9% y-o-y in Q117, and then contracting by 6.7% y-o-y in Q217, we expect to see a steady rebound in the months ahead. In particular, we anticipate the recovery to be underpinned by an acceleration in the absorption of European Structural and Investment Funds for the period 2014-2020, as the country has thus far spent only 5.3% out of the total EUR15bn allocated. In addition to that, investment growth will be supported by an increasingly stable banking sector and interest rates at historic lows. We expect the European Central Bank to keep an ultra-loose monetary policy well into 2019 ( see ' Improving Growth to Bring ECB Closer to a Gradual Exit ' , September 1). Alongside this, and as suggested by robust business confidence, investment decisions will be supported a healthier outlook across Slovak firms. Companies operating in Slovakia have witnessed steady increases in their profits since the start of the year.

Private Consumption Remains Growth Driver
Slovakia - Real GDP, Private Consumption & Gross Fixed Capital Formation, % chg y-o-y
Source: Eurostat, BMI

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