Fragile growth engine facing a myriad of uncertainties

The Slovak economy is set to slow slightly, from 2.0% last year to 1.8% in 2025, due to the effects of the consolidation package. However, we see several downside risks to growth. We assess that this year’s growth is therefore quite fragile in nature. It is likely to benefit significantly from higher absorption of EU funds, although there are still question marks hanging over this. Tax changes as part of the consolidation led to an acceleration of inflation to over 4% yoy at the start of the year. We expect it to decelerate gradually to 3% by the end of 2025, but its elevated level should undermine the recovery in the household purchasing power. While the capping of energy prices is helping to temporarily contain the inflationary burden on Slovak households, their gradual catching-up with wholesale prices remains a risk of elevated inflation in the coming years. The labour market situation should remain robust, but wage growth is likely to continue to decelerate gradually. Fiscal consolidation should continue in the coming years, but further measures are needed to achieve a deficit of 3% of GDP.

Key features of the outlook.

We expect fiscal consolidation to take some of the steam out of the economy’s resilient growth, which should slow from 2.0% in 2024 to 1.8% in 2025. As in 2024, domestic demand should be the key driver, although household consumption is set to be hampered by the inflation upturn related to the fiscal consolidation. We expect a strong positive contribution from investment and inventories, driven by the increased uptake of EU funds, the restocking cycle, and preparations to deploy new capacity in industry. In contrast, government expenditure and net exports are set to decline, reflecting fiscal consolidation and weak external demand, respectively. After accelerating above 4% in January, we expect inflation to follow a rocky path in 1H25, gradually easing to 3% towards the year end and averaging 3.8% in 2025. Core inflation is likely to remain sticky as firms attempt to pass on some of the costs of consolidation to consumers. We see a myriad of downside risks and uncertainties to growth, including the blocking of EU funds due to rule-of-law disputes with Brussels, political instability, and US tariffs. On the other hand, the German fiscal ‘bazooka’ could help drive stronger growth in the coming years thanks to positive spillovers on the back of strong economic ties between Germany and Slovakia.

Author: Kevin Tran Nguyen,Jana Steckerová