Investment in Slovakia

Slovakia - Investment

Growth dives in Q2 as European headwinds blow external sector off course

Growth almost halved in the second quarter of the year, amid a sharp downturn in external demand and despite a stronger domestic economy. GDP rose 2.0% year-on-year in Q2, down markedly from Q1’s 3.7% outturn but slightly up from the 1.9% increase projected by the preliminary release, according to detailed national accounts data released on 6 September.

Domestic demand gained strength in the second quarter. Consumer spending growth accelerated to 1.9% from Q1’s 1.0% uptick —which had marked the slowest expansion in almost five years—against the backdrop of improving consumer sentiment and strengthening labor market conditions. Meanwhile, government consumption jumped 4.2%, almost tripling Q1’s 1.5% increase. However, fixed investment contracted 3.7%, contrasting Q1’s 2.1% rise, weighed down by headwinds stemming from stemming from the car sector amid slowing dynamics in the EU. Despite the drop in fixed investment, total investment growth spiked, likely as companies saw their inventories piling up on flagging demand from the EU.

The external sector weighed notably on the economy as was expected. Exports contracted 1.9% year-on-year, marking a sharp downturn from Q1’s 7.2% surge, as external demand from the EU dried up and on the waning effect of stock-piling in Q1 in preparation for Brexit. Meanwhile, import growth fell to 0.8% (Q1: +6.4% yoy).

On a quarter-on-quarter, seasonally-adjusted basis, GDP growth in the first quarter came in at 0.5%, down from the 0.7% expansion logged in Q1.

The economy is seen losing traction this year, mainly owing to tapering investment growth. That said, sustained wage and credit growth should keep private consumption expanding at a healthy pace. The primary risk for the highly open economy stems from a prolonged downturn in the German car industry and a challenging trade environment.

Our panel sees growth of 3.3% in 2019, which is down 0.1 percentage points from last month’s forecast, and 3.0% in 2020.