Inflation is forecast to increase sharply to 13.9% in 2023 after reaching an estimated 11.5% in 2022. The rapid rise in energy and commodity prices is expected to increase production costs and to erode the purchasing power of households, constraining real GDP growth to 1.9% in 2022, 0.5% in 2023 and 1.9% in 2024. Inflation boosts public expenditure with a delay compared to tax revenue, resulting in a decrease in the public deficit to 4.2% of GDP in 2022 and an increase to 5.8% of GDP in 2023. Strong nominal GDP growth is set to help to decrease the debt-to-GDP ratio over the forecast horizon.
Last update (forecast)
Last update (11/11/2022)
|GDP growth (%, yoy)||3,0||1,9||0,5||1,9|
|Inflation (%, yoy)||2,8||11,8||13,9||3,6|
|General government balance (% of GDP)||-5,5||-4,2||-5,8||-4,7|
|Gross public debt (% of GDP)||62,2||59,6||57,4||57,4|
|Current account balance (% of GDP)||-2,6||-6,5||-5,6||-5,3|
Weaker growth prospects in the medium term
The Slovak economy is expected to slow down significantly in 2023 due to energy price increases and a global slowdown. Higher energy prices will erode households’ purchasing power and increase the production costs of firms, which are already facing supply bottlenecks and will now also be affected by lower demand. Despite expanding by 1.9% in 2022, the Slovak economy is expected to grow by only 0.5% in 2023 before returning to stronger growth of 1.9% in 2024.
High inflation will continue to weigh on the economic prospects of Slovakia. Regulated energy prices for households are expected to increase sharply at the beginning of 2023, decreasing the purchasing power of households, and their consumption, especially due to the large share of energy in household spending. This significant increase already assumes effective implementation of governmental measures to compensate households and suppliers.
Although consumption is expected to be strong in 2022, it is set to decrease substantially at the end of the year. The saving rate is expected to fall to an all-time low due to a pickup in consumption after the lifting of pandemic-related restrictions and precautionary spending in the anticipation of prolonged high levels of inflation. Consumers already anticipate new regulated energy prices for 2023 and they are expected to moderate their consumption already in 2022-Q4.
Private investment is set to counterbalance some of the effects of lower consumption and exports. Companies face higher pressure from energy prices and wages, but they are expected to pass the price increases onto consumers. A successful absorption of EU structural and RRF funds, as well as government investment will be crucial to keep growth in positive territory in 2023.
Exports are expected to pick up in 2023 and 2024 as supply bottlenecks ease. Demand for some of the main export products, like cars, is set to remain strong despite higher prices. Energy-intensive production is projected to be postponed and the global slowdown is set to further delay the recovery of exports.
Labour market remains tight
The weakening of economic activity is expected to moderate further the expansion in employment growth. Due to labour shortages, firms are reluctant to lay off workers and there is a scope for adjustment between labour demand and limited labour supply. The unemployment rate is not projected to be strongly affected by the economic downturn, increasing from 6.3% in 2022 to 6.4% in 2023 and 2024. The compensation of employees is expected to lag behind the spikes in inflation, resulting in real wages declining in 2022, and catching up only slowly in 2023 and 2024.
Inflation rises sharply
The inflation forecast was revised sharply upwards, due to the higher-than-expected impact of regulated energy prices for households, even under the assumption of an effective implementation of governmental measures to mitigate the impact of high energy prices. The gradual expiration of many companies’ long-term energy contracts at the end of 2022 is set to raise their production costs. The inflation peak is now expected during early 2023 and non-energy inflation is projected to be more persistent as it is affected by higher costs of inputs and labour. As a result, annual HICP inflation is forecast to remain around 11.5% in 2022 and to rise further to 13.9% in 2023 before stabilising at around 3.5% in 2024.
Budget deficit to increase in 2023
The general government deficit is expected to decrease from 5.5% of GDP in 2021 to 4.2% in 2022, driven by the high growth of nominal GDP that boosts tax revenue. Pandemic-related spending has been withdrawn, but new measures to mitigate the impact of high energy prices keep the deficit at a high level in 2022. The total budgetary cost of energy-related support measures is estimated at 0.2% of GDP in 2022 (net of revenue resulting from the new tax on windfall profits by energy companies).
As a result of a sharp increase in inflation-linked expenditure, the budget deficit is set to increase to 5.8% of GDP in 2023. The strong inflation is boosting nominal tax bases, but higher compensation of employees, a pension reform, and other measures that the government has announced, are expected to increase the government budget deficit. The announced measures for temporary tax on excessive profits of EUR 0.9 bn are projected to bring only a small amount of additional revenue. In 2024, the budget deficit is expected to narrow to 4.6% of GDP as inflationary pressures ease.
Growth in public investment is forecast to accelerate in 2022 and to peak in 2023. While the use of EU structural funds stimulates investments in 2022, the RRF will also contribute to investment activity.
After an increase to an all-time high of 62.2% in 2021, the government debt-to-GDP ratio is set to decline to 59.6% in 2022 and to 57.4% in 2024. The decreasing government debt-to-GDP ratio is impacted by the strong growth of nominal GDP, despite a higher deficit and an increase in the nominal debt value.