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. In 2024, Slovakia's GDP grew by +2.0% supported by the recovery of consumption from the energy price shock and a rebound in public spending. Looking ahead, exports are expected to grow despite risks from weaker trading partners. Private consumption may decline due to VAT increases and subsidy expirations, but wage growth will help. Strong private and public investments, aided by EU funds, will support GDP growth, projected at +1.7% in 2025 and +2.3% in 2026.

Inflation has moderated but will remain pronounced in 2025-2026. Consumer price inflation has eased from an average +11% in 2023 to +2.8% on average in 2024, in part due to base effects, the ECB's tighter monetary policy and slower domestic demand. Going forward, inflationary pressures remain in the cards. Energy inflation is set to rise as government measures regarding gas prices for households are set to expire in 2025. Additionally, the consolidation package, which is set to be implemented in January 2025, includes an increase in VAT rates and thus directly affects consumers. Moreover, the tight labor market provides conditions for strong wage and price growth in the services sector. We forecast annual average headline inflation at +3.2% in 2025 and +2.7% in 2026. 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 as present. 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 Eurosceptic 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.