Weekly Briefing, Vol. 3, No. 2 (SK), January 2018
Outlook for 2018: Slovak Economy
Contemporarily, the Slovak Republic is facing a positive economic growth, which is likely to continue in 2018. The country has an industry-intensive economy focused mainly on machinery and automotive production. The sectors possess considerable potential for further growth, which is illustrated by for example Jaguar Land Rover, which started building a factory in the West Slovak town of Nitra in the previous year.[1] Regarding the year 2018, any quantitative forecast of macro-indicators is surely possible and valuable, however, one also needs to put a significant emphasis on the most likely development and trends embracing the Slovak economy in this year. Looking at the economic growth of Slovakia from a broader perspective, the Slovak example should not be analyzed separately, but it ought to be understood as a complex phenomenon mainly reflecting the economic relationship between Western and Central Europe.[2]
Considering Slovakia’s export and import activities, the state’s most important partners lie in the the region of Europe, especially the EU. Accordingly, except for the necessity of creating attractive and sustainable domestic economic conditions, the Government needs to put a great emphasis on maintaining good relations with the country’s key economic partners. Additionally, the state’s economic diplomacy has to be able to attract new domestic and foreign investments. The year 2018 shall not be an exemption in this context.
Slovakia’s macroeconomic perspective
Thanks to the start of the new productions in the car industry, the economy will generate new jobs and thus the labor market might overheat. This trend shall lead to wage growth pressures with the unemployment rate declining towards 7% at the end of the next year, according to the National Bank of Slovakia. Even though employment developments in the previous year exceeded prior expectations, employment growth ought to moderate, as a mismatch between labor supply and labor demand is building up – new employees are increasingly difficult to find.[3]
Further improvements of the labor market conditions and an optimistic investment activity in the private sector shall nourish the economic expansion in 2018. Real GDP growth is believed to gradually increase to over 4% in the next year. Additionally, investment growth is expected to peak in 2018, driven by the prospering investments in the automotive industry and the large-scale public infrastructure projects. On the other hand, consumer inflation is set to increase gradually while bringing the annual average to around 2% in this and the next year. This mainly reflects expected increases in the prices of services in line with rising wages and buoyant private demand, and higher energy prices in 2018, according to the forecast of the European Commission.[4]
From a macroeconomic perspective, one of the relevant problems Slovakia faces is the overheating of the labor market, which logically results into wage growth pressures. Taking this issue into account, we can expect influences on the dynamics of nominal wages. Furthermore, we should not underestimate the drop of the employment rate resulting from the imbalance between the labor supply and the labor demand. Therefore, authorities will be confronted with a serious challenge to attract a qualified labor force. This is, however, not an easy task and from a relative perspective, it is unlikely that the years 2018 and 2019 can bring any visible change.
Slovak domestic economic affairs
Regarding the Slovak economic policy at home, not surprisingly, also in 2018 the country’s key interest lie in supporting and improving its domestic industry, securing its energy policy goals, and very importantly, creating a stable and attractive environment for domestic and foreign traders.
Speaking about the Slovak industry, experts argue that the year 2018 shall be a critical one for the car industry. The lack of qualified employees is the key factor determining the level of competitiveness of the car industry. It is estimated that in the next three years, the Slovak industry will need around 45,000 employees with mainly technological and vocational education.[5] Taking such a relevant trend into account, it is in the interest of the Slovak authorities to face this challenge. However, it is not likely that this year will bring any major progress, as any relevant solution is surely a long-term matter.
In Slovakia, research and development are the areas that can be considered underdeveloped. Despite the fact that the country has significantly increased investments into this sector over the past decade, research and development investments in the business sphere remain low. However, in this and the next years, we can expect the increase of investment into this sector, as Slovakia follows the objectives of the Europe 2020 strategy, EU’s strategy for sustainable and inclusive growth.[6] Concerning this purpose, Slovakia is supported by the European Structural and Investment Funds, which cover various opportunities for Slovakia to promote its economic development, research, competitiveness, etc.[7]
Regarding the Slovak domestic economic affairs, we wish to highlight the promising role of the “Industry 4.0” concept, which brings ideas on decentralizing production management. Accordingly, the mutual relationship between machines, parts of production, and the environment would be created – and thus the process of production significantly automatized, optimized and more effective. This, however, requires numerous new algorithms and applications securing a smooth cooperation among the key segments.[8] As several companies have already expressed their interest in the transition, the governmental institutions need to support these efforts if they want promising Slovak companies to keep their competitiveness in the future.
Slovakia’s foreign economic engagement
Speaking of the Slovak trading interests and economic activities in general, the focal role of the EU for Slovakia needs to be highlighted. Slovakia’s import and export interests visibly reflect the country’s economic focus on machinery and automotive production. Thus, also in the year 2018 the state’s main imports will include specific vehicle parts and machines used for industrial production. Then, not surprisingly, Slovakia has been mainly exporting cars and various vehicle parts, while machines also find a relevant place in Slovakia’s export. Considering the specific export and import destinations, Germany and the two neighbors – the Czech Republic and Poland have played a key role in Slovak import and export activities.[9]
A new project under Slovakia’s energy policy is supposed to come to life in 2018. EU’s Innovation and Networks Executive Agency, Poland’s Gaz-System and Slovakia’s Eustream have signed an agreement to construct a new pipeline connecting the two neighbors – Slovakia and Poland. The new 165-kilometer long pipeline will allow for the diversification of the region’s gas sources, and both Slovakia and Poland shall gain direct access to a variety of gas supply sources in the north and south. Construction works are planned to begin in the second half of 2018 and the whole project should be finalized in the end of 2021.[10] The project offers Slovakia opportunities to diversify its energy imports. Moreover, it can enhance the position of the Visegrad group in the region.
Slovakia can also take advantages from the expected trade agreement between the EU and Britain. The issue is supposed to play an important role in the Slovak foreign economic efforts, as there is a relevant amount of Slovak citizens working and living in the UK.
Among the possible opportunities to attract valuable foreign investments lies the participation in the Chinese OBOR initiative. Possible impacts of the participation are questionable and often criticized by experts, however, Slovakia already expressed its interest in the project and can certainly find benefits in its involvement.
Conclusion
It is expected that the year 2018 will be a positive year for the Slovak economy. From a macroeconomic point of view, real GDP growth will most likely increase and the unemployment rate decline towards 7% at the end of the next year. However, the country is about to face the overheating of the labor market, resulting in wage growth pressures.
Concerning the Slovak labor market and the prospering automotive, a significant deficit of qualified labor is very likely. Additionally, many challenges regarding research and development in the context of the Slovak economy still need to be taken into account, as Slovakia’s policy in this sphere still remains inefficient.
Finally, Slovakia’s foreign economic perspective in 2018 offers various opportunities. It is clearly visible in the energy sector – the EU-Poland-Slovakia pipeline project. Furthermore, the country coulc also benefit from the Chinese OBOR initiative. In 2018, Slovakia and EU’s considerable challenge lies in forging a new trade relationship between the EU members and Britain.
[1] Tomáš Madleňák, “Innovation of Energy Sector in Slovakia: high hopes without strategy?”, Central European Day of Energy, 11 December 2017, <https://www.ceep.be/www/wp-content/uploads/2018/01/Innovation-of-Energy-Sector-in-Slovakia_CEDE2017.pdf>.
[2] See Zdenko Štefanides, “Slovak economy should sustain solid growth momentum in 2018“, The Slovak Spectator, 27 December 2017, <https://spectator.sme.sk/c/20713591/slovak-economy-should-sustain-solid-growth-momentum-in-2018.html>.
[3] Jan Toth, “Slovak Macroeconomic Outlook”, National Bank of Slovakia, 29 March 2017, <https://www.nbs.sk/_img/Documents/_Rozhovory/2017/Vystupenie_vcg_J_Toth_CFA_macro_outlook.pdf>.
[4] European Commission, “Slovakia: growth strengthens, inflation picks up“, European Commission, 2018, <https://ec.europa.eu/info/sites/info/files/economy-finance/ecfin_forecast_winter_0718_sk_en.pdf>.
[5] Anca Dragu, “2018 a critical year for the car industry in Slovakia“, RTVS, 16 January 2018, <http://enrsi.rtvs.sk/articles/news/152699/2018-a-critical-year-for-the-car-industry-in-slovakia>.
[6] European Commission, “Europe 2020 Strategy”, European Commission, <https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-economic-governance-monitoring-prevention-correction/european-semester/framework/europe-2020-strategy_en>.
[7] European Commission, “EUROPEAN STRUCTURAL AND INVESTMENT FUNDS 2014-2020: Official texts and commentaries”, European Commission, November 2015, <http://ec.europa.eu/regional_policy/sources/docgener/guides/blue_book/blueguide_en.pdf>.
[8] i-Scoop, “Industry 4.0: the fourth industrial revolution – guide to Industrie 4.0“, i-Scoop, <https://www.i-scoop.eu/industry-4-0/#Industry_40_is_not_just_about_factories_anymore>.
[9] See OEC, “Slovakia”, Observatory of Economic Complexity, <https://atlas.media.mit.edu/en/profile/country/svk/>.
[10] Murat Temizer, “Slovakia-Poland pipeline gets €107.7 million EU grant“, Anadolu Agency, 21 December 2017, <http://aa.com.tr/en/energyterminal/natural-gas/slovakia-poland-pipeline-gets-1077-million-eu-grant/16062>.