Government capital expenditures do not support the economy

The Slovak economy grew 0.8% qoq (SWDA) in the second quarter of the current year, which is 3.3% yoy (SWDA). Both dynamics can be chiefly attributed to the contribution of net exports. Both export and import dynamics accelerated heavily. Exports were mainly supported by automotive supplies to the eurozone. Imports have reacted subsequently. However, import activity is suppressed by low investment activity, as well. Fixed capital formation added 0.9% qoq in the second quarter, which due to the increasing statistical base achieved only 0.6% yoy. Slowing investment activity is primarily the result of steadily decreasing government investment, because a lack of EU funding still prevails. Generally speaking, our assumption for the second quarter was remarkably correct in terms of the expenditure side composition. The supply side of the economy was mainly supported by manufacturing and trade. Nevertheless, all sectors recorded a positive or zero contribution.

July’s data for industry and construction are really disappointing. However, industry output was influenced by the cumulation of factory holidays in the automotive industry. Construction output suffers mostly due to missing government investment. Retail sales in July slowed to 1% yoy growth, which is just a temporary move since industrial wages growth and unemployment rate decline show a continuous gradual improvement.

Even inflation in August moved toward zero, since adjusted inflation recorded 0.1% mom, food prices added 0.3% mom, and the lower statistical base for fuel prices erased 3.3 pp in the yoy decrease. The government deficit remains at record lows since expenditures especially capital ones are muted.

Autor: David Kocourek