Weekly Briefing, Vol. 24, No. 2 (SK), December 2019
Economic developments in Slovakia in 2019
Overview[1]
Slovak economy in 2019 performed quite well form the point of view of main economic indicators. Regarding the first quarter of 2019, the economy grew in line with the assumptions from 2018 with net exports being the main driver as documented by the developments in industrial production, sales and export statistics. At the beginning of 2019, the economy grew by 3.7% year-on-year (3.6% in the fourth quarter of 2018) and by 0.9% quarter-on-quarter. Non-financial sector, in particular industrial production and industrial sales, indicated a strong recovery in economic growth compared to 2018. However, this strong growth was, to a certain extent, dampened by the moderation of economic activity in other sectors (financial institutions and households).
However, the strong growth from the first quarter of 2019, did not last in further month. The economy slowed significantly to 1.9% year on year in the second quarter of 2019 (compared to 3.7 in first quarter). While industrial production, sales and exports only slowed their pace of growth in April and May, they fully plummeted in June. The decrease was also seen in the automotive industry, which was able to offset the slowdown in the rest of the economy in previous months. The gradual moderation of economic activity was caused mainly by shortening of working weeks and a consequent decrease in hours worked. The cooling of foreign demand affected mainly the metal production sector, where this trend has been seen for a long time at the European level. Another factor in the economic slowdown in the second quarter of 2019 was the planned technological outage in the petrochemical industry. The main factor in the slowdown in GDP growth were, unlike in the first quarter, net exports, partly offset by better household consumption.
Regarding the third quarter, year-on-year growth levelled at 1.3% (down from 1.9% in the second quarter). Further slowdown resulted mainly from continuing weaker foreign demand. The unfavorable situation in the European industry and the weakening demand for cars affected the economic activity of industrial companies producing in Slovakia. Domestic demand developed positively as the service sector was pulled by the increased consumer demand.
Economic activity
In January 2019, the year-on-year growth of monthly economic indicators accelerated. The source was mainly the automotive industry, which had a shorter holiday period compared to the previous year. However, there was still a risk of slower economic growth in the coming month since the German industry, to which Slovak economy is tied, failed in January and its further development were uncertain. In February, there was a partial correction of the January improvement in economic indicators. As mentioned, January results were strong, mainly due to the automotive industry and also machine production and exports have also recovered since the beginning of the year.
In April 2019, economic indicators continued in growth moderation. Industrial production slowed down mainly due to failures in European demand for metals and probably machinery and equipment as supply to the automotive sector. These failures could not be compensated by increased production of electrical equipment. The slowdown in industry, together with weaker retail trade, was reflected in lower overall sales in the economy, which was not also not helped by the export of goods leading to the stagnation of exports on a year-on-year basis. Monthly indicators of the real economy continued to slow in May. The year-on-year growth in industrial production was dampened mainly by the production of petrochemical products, where extensive shutdowns were taking place, but also by the production of metals which functioned on a shorter working week basis than usual.
The June decline in economic indicators moderated in July. Industrial production resumed its year-on-year growth, however, exports of goods and sales remained in negative numbers. The slowdown in economic activity was also visible in domestic internal trade, where the year-on-year decline in wholesale and retail sales continued. On the other hand, this decline was partially offset by higher increase in turnover in restaurants and accommodation facilities. In August 2019, economic indicators declined on a year-on-year basis. Several key sectors of the Slovak industry were weaker than a year ago. Production and sales in industrial sector reached the deepest drop in the last three years with industrial production falling by 8.1%. Within the industrial sector, the production of cars, as a key industrial sector in the Slovak economy, fell significantly. In addition, the decline in wholesale and retail sales deepened.
In the third quarter of 2019, domestic monthly indicators continued with negative developments from previous months. Although the September data for industrial production, sales and exports were slightly more favorable than during the previous holiday months, they did not bring a significant recovery in the economic activity. Especially in the automotive industry, which has been the main growth sector so far, after the positive effects of last year’s launch of new production, the decline in foreign demand started to have a significant impact. The main factor of the slowdown in GDP growth were net exports (unlike in the beginning of the year 2019), which was partially offset by domestic demand. The development of monthly indicators in October 2019 remained weak. Key industries and trade failed with both weaker demand from abroad and also in domestic retail and wholesale sales. Industrial production and exports fell on a year-on-year basis in October. The slowdown in economic activity was also reflected in domestic demand. Retail sales recorded the highest decline of 2019 in October.
Labor market
Employment in the Slovak economy grew by 1.8% year-on-year in the first quarter and by 0.3% quarter-on-quarter. The employment growth rate was almost the same as at the end of 2018. Compared to the overall dynamics of the previous year (2%), however, we note that employment increased more slowly in 2019. Based on monthly indicators, construction and services were the main sectors of the Slovak economy significantly contributing to employment growth. Growing demand in the field of tourism also had a positive effect on services sector. On the other hand, job creation in industry slowed down more mainly as a result of the less favorable conditions affected by the evolution of the global economy. At the same time, companies were no longer able to fill the jobs as easily as in previous years. Another reason was the rising labor costs, making employers look for ways to streamline production and automation. Factors such as dynamic labor costs and staff shortages are responsible for weaker employment dynamics in business activities.
Employment in the second quarter slowed down significantly with continuing decline in next months. In the second quarter, employment in the economy slowed to 1.4% year-on-year (down from 1.8% in the first quarter) and by 0.3% quarter-on-quarter. This slowdown in employment dynamics was the most pronounced in the last 2 years. In particular, industrial and business activities were responsible for this downward trend in the second quarter. In industry, mainly the manufacturing of machinery and transport equipment. However, there were also negative developments in other industries, such as the textile and chemical industries. On the other hand, the dynamics of employment in construction and services (9% and 7% growth respectively) continued to develop quite favorably. In services, employment was developing positively thanks to strong growth in tourism, the IT sector and other market services.
In the third quarter, employment in the Slovak economy grew by 1.0% year-on-year, which is a slowdown compared to the previous quarter (1.4%). Quarter-on-quarter employment increased by 0.2%, supported mainly by the public sector. Employment stagnated in each of the months of the third quarter. We note that there are two main factors for this situation. The first one is the weakening of foreign demand and the second is the pursuit of higher efficiency in order to dampen the impact of strong growth in labor costs.
Price developments
Inflation accelerated to 2.2% in January 2019 (compared to 1.9% in December 2018) mainly due to regulated energy and food prices. The rise in electricity and heat prices for households and the increase in processed food prices contributed to this acceleration. Food prices increased significantly in January compared to December with possible effect of the introduction of special levy on commercial chains reflected in food prices. Inflation slightly accelerated in next months to 2.3% (February) and 2.7% (March) due to food and energy developments. Food prices continued to rise, mainly the unprocessed food prices at 3.1% with processed food prices falling slightly by 0.4%. one of the factors in this development may be the introduction of changes in wages for night work and weekends as well as a growth in wages in the retail trade). However, the inflation slowed down in April (2.4%) mainly due to prices of services and alcoholic beverages and tobacco. Since May, inflation accelerated again due to the same sectors – services and food. Potato prices increased due to dry weather, low domestic production, lack of domestic storage capacity and more expensive imports of foreign production. Also expectations of rising meat prices as a result of the pork supply on the Asian market were also fulfilled. Inflation was 2.7% in June (the same as in May). Energy prices have slowed down, but the rise in prices of services accelerated. In further months the inflation accelerated again to maximum of 3.2% in November mainly due to changes in the food prices in all these months, but also the increase in the prices of services and administrative prices.
Conclusion
Slovak economy grew in the beginning of the year 2019 along the lines with previous expectations from 2018. However, the strong growth from the first quarter of 2019 slowly deteriorated in upcoming quarters due to several factors such as the decreasing foreign demand, developments in the global economy and changes in the domestic consumption. Regarding the employment, the rate of growth also slowed down with the unemployment in the second half of 2019 reaching less than 6% with decreased will of employers to hire new people because of changes in the wages and the slowdown of the economy. Price changes in Slovakia during 2019 were higher than the average of the European Union mainly due to changes and increases in the food and energy prices throughout the year and the changes in the prices of services and administrative prices since the half of 2019.
References:
NBS. (2019). Monthly bulletins January-December 2019. Available on-line: http://www.nbs.sk/sk/publikacie/mesacny-bulletin-nbs/2019
[1] Data in this report were extracted from NBS (2019).