Slovakia

Slovakia has been a strong performer compared to both Eurozone and emerging economies. However, a high dependence on exports, in particular on automotive shipments, causes above average cyclical fluctuations in growth. Moreover, a high dependence on global supply chains and energy imports has made the Slovak economy very vulnerable in the current global context of ongoing supply disruptions and significantly higher energy prices.
Real GDP expanded by an average +3.5% over the past 20 years (above the average of the Central and Eastern European EU member states but slightly below the whole Emerging Europe average). As a consequence of the dependence on exports (amounting to almost 100% of GDP), Slovakia's economy was hit harder by the global Covid-19 crisis than others (-4.4% in 2020), despite sizeable economic policy support. And after a moderate recovery in 2021 (+3% growth), economic activity slowed down markedly in 2022 as a result of the consequences of the war in Ukraine, notably the subsequent EU sanctions on Russia and soaring energy prices. We expect the Slovak economy to be on the brink of a recession in early 2023. Full-year real GDP growth is forecast at just below +1%. Our tentative forecast for 2024 is modest growth of approximately +2%.

Inflationary pressures will remain significant in 2023. Consumer price inflation has been on the rise since early 2021 and rose to more than 15% y/y in Q4 2022, driven by interrupted supply chains and surging energy and food costs. We expect it to remain in the double digits in the first half of 2023 before a likely gradual decrease towards the end of the year, in part due to base effects, the ECB's tighter monetary policy and slowing domestic demand. Meanwhile, Eurozone membership provides for low transfer and convertibility risk and has substantially 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 2022 assigns Slovakia rank 36 out of 184 economies – a marked improvement from rank 61 in the previous survey – reflecting strong scores with regard to property rights, judicial effectiveness (the main reason for the improvement), tax burden, trade freedom, investment freedom and financial freedom. However, weaknesses remain in the areas of government integrity and labor freedom. Meanwhile, our proprietary Environmental Sustainability Index puts Slovakia at rank 51 out of 210 economies, reflecting strengths in energy use and CO2 emissions per GDP, water stress and general vulnerability to climate change, though 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 and could, if continued, result in ineffective policymaking and slow reform progress. Yet, broad policy continuation has been the rule after past government changes.