Investments take break after last year’s sprint

Surprising GDP growth in the first half of the year, the pro-Brexit result of the British referendum and further strengthening of the labour market have changed the initial conditions of our forecast. The changed outlook for the external environment poses another challenge for the Slovak economy. All in all, it means economic growth is set to reach 2.8% this year. A deceleration to 2.3% is ahead in 2017 as net exports are expected to turn negative due to enhanced investment activity.

The increasing participation rate is pressing wages up. Hours worked and rising salaries are pushing up the wage bill. Hence, gross disposable income growth depends on the labour market income, but it allows consumers to save. Higher savings do not undermine the propensity to consume. Private consumption will remain the key growth driver.

Investments are losing ground since the EU funds channel has dried up and political uncertainties do not favour any courageous investment activity. However, investments should turn positive again next year.

Solid export growth and low import dynamics as a result of muted investment activity bring the net export contribution to GDP into positive territory for this year. As soon as investment activity revives, will send the net export contribution to GDP growth into the negative again.

Deflation recorded a historical high in July (-0.9% yoy), thus just a little change that the average for this year will be positive. Our forecast indicates to record the change in the consumer price level at -0.3%. With the fading out of the high statistical base on crude oil prices, inflation should pick up next year. The higher pace will be supported by rising food prices, as well.

Autor: David Kocourek