Slovak GDP is expected to grow by 1.7% in 2023, supported by a strong expansion of investment and by 2.1% in 2024 mainly due to a recovery in exports as supply chain bottlenecks are expected to disappear. Since the energy prices were mostly fixed in 2022, convergence with the market prices is set to push the inflation to 10.9% in 2023 and 5.7% in 2024. Core inflation remains strong, fuelled by rising prices of food and services. New measures, including those aimed at mitigating high energy prices, are projected to lead to an increase in the public deficit to 6.1% of GDP in 2023. It is then set to decrease to 4.8% as most of the measures are expected to be phased out.
| Indicators | 2022 | 2023 | 2024 |
|---|---|---|---|
| GDP growth (%, yoy) | 1,7 | 1,7 | 2,1 |
| Inflation (%, yoy) | 12,1 | 10,9 | 5,7 |
| Unemployment (%) | 6,1 | 5,8 | 5,4 |
| General government balance (% of GDP) | -2,0 | -6,1 | -4,8 |
| Gross public debt (% of GDP) | 57,8 | 58,3 | 58,7 |
| Current account balance (% of GDP) | -7,8 | -6,7 | -5,3 |
Growth dependent on investment and exports
GDP growth in 2022 was relatively subdued, held back by poor exports and public consumption, while private consumption held up relatively well. Economic activity is expected to accelerate in the second half of 2023 as supply chain bottlenecks are set to ease, which will likely support export growth over the forecast horizon. The economic outlook for Slovakia’s major export destinations is also set to improve and should support demand for the main export products, including cars.
Government measures reduced the impact of rising energy prices for households and businesses in early-2023, avoiding a price shock. After its strong growth in 2022, private consumption is expected to stagnate this year due to declining real wages. Conversely, investment is set to significantly grow thanks to EU structural funds, the RRF and government investments. Overall, GDP growth is projected at 1.5% in 2023 before returning to stronger growth of 2.1% in 2024.
Labour market remains tight
The unemployment rate is expected to continue decreasing from 6.2% in 2022 to 5.7% in 2023 and 5.5% in 2024, reflecting a very tight labour market. The decline in the working age population is one of the contributors to decreasing unemployment, while the lack of workers is one of the main challenges for Slovak companies. In 2022, nominal wages increased below the inflation rate, leading to losses in real purchasing power. As economic sentiment recovers, the compensation of employees is expected to start growing slightly faster than inflation, which is set to result in an increase in real wages in 2024.
Inflation set to remain elevated
Inflation soared to over 12% in 2022 due to high energy prices and the pass-through to other components, particularly food. Due to government interventions, Slovak energy prices for households are still significantly below market prices. Average household gas prices in the second half of 2022 were the third lowest in the EU and are expected to increase only slightly in 2023. As government measures start to be phased out in 2024, currently low energy prices will continue to rise towards market prices, keeping energy inflation high. Consumer food prices grew swiftly in 2023-Q1, at over 25%. Further growth in food price inflation is not expected to continue given the recent decline in input prices, including energy. Food prices are expected to be the main contributor to overall inflation for the year, even if they are set to level off in 2023-Q2. Labour market tightness is projected to contribute to more persistent growth of prices in the service sector. Inflation is forecast at 10.9% in 2023 and at 5.7% in 2024.
Budget deficit to increase again in 2023
After a low deficit of 2.0% in 2022, the general government deficit is expected to increase to 6.1% in 2023, driven by expenditure measures adopted by the government. New measures to mitigate the impact of high energy prices are set to bring the deficit back to a high level in 2023. The net budgetary cost of the energy support measures is projected in the Commission 2023 spring forecast at 2.0% of GDP in 2023, compared with 0.2% in 2022. The Commission currently assumes a full phasing out of energy support measures in 2024. Higher compensation of public employees, decreasing VAT rates in some food and leisure sectors, and the family package including a tax bonus and increased child allowances, introducing a parental bonus under the pension reform, as well as re-introducing free lunches for pupils, are expected to increase the budget deficit. Deficit developments in 2023 are also affected by the assumed complete phasing out of COVID-19 emergency temporary measures, which are estimated to have amounted to 0.8% of GDP in 2022
The tax revenue is growing on the back of strong nominal economic growth, despite some revenue measures, such as the permanent VAT rate reduction on selected sectors, are reducing revenue. In 2024, the general government deficit is expected to decrease to 4.8% of GDP as inflationary pressures ease and energy-price related measures are withdrawn.
After decreasing to 57.8% in 2022, the government debt-to-GDP ratio is projected to increase to 58.3% in 2023 and to 58.7% in 2024. This increase is driven by high deficits in 2023 and 2024, although the strong growth of nominal GDP is expected to partially offset the increases in deficits.