24.
SLOVAKIA
Global downturn weighs on exports
Slovak exports under pressure in Q4-2008
As the weaker foreign demand took its toll on
Slovak exports, the economy has started to lose
momentum in the last quarter of 2008, growing by
a lower-than-expected 2.5% (year-on-year)
compared with a downward revised growth of
6.6% (year-on-year) in the previous quarter. In
addition to exports, the slowdown in the fourth
quarter was also driven by declining private
consumption and investment.
Overall, GDP growth decelerated to 6.4% in 2008
from 10.4% in 2007. Domestic demand
contributed some 5.9 percentage points to growth
in 2008, reflecting still resilient private
consumption and buoyant investment, especially in
dwellings and equipment. For the first time since
2005, the external growth contribution entered
negative territory, while another pre-stocking of
cigarettes ahead of the February 2009 hike in
excise taxes resulted into a slightly positive
contribution of inventories to growth.
Growth enters negative territory in 2009
After several years of sustained expansion in
economic activity, GDP growth is expected to
contract by around 2½% in 2009 and to slightly
rebound, by some ¾%, in 2010.
While fixed investment was the strongest GDP
component in 2008, the overall slowdown in
economic activity, tightening credit conditions and
deteriorating investor sentiment are likely to
induce a sizeable contraction in investment in
2009. The launch of the public private partnership
Graph 2.24.1: Slovakia - GDP growth, unemployme nt rate
and inflation
12 yoy%
%
10
8 forecast
6 12
4 10
2 8
0
-2
-4
04 05 06 07 08 09 10
Unemployment rate (% of labour force, rhs)
GDP growth (lhs)
Inflation (lhs)
102
investment projects for motorway construction in
the course of 2009 may limit the downward trend
in 2009 and it is expected to induce a rebound in
fixed investment in 2010.
Against the background of declining inflation and
pension indexation, private consumption is
anticipated to remain above ½% over the forecast
horizon. Overall, domestic demand is expected to
negatively influence growth in 2009, before
turning positive again in 2010. Given the limited
impact of the financial crisis on the banking sector,
there have been no financial rescue operations.
On the external front, the downward trend in
exports observed since mid-2008 will continue in
2009, when exports are projected to fall by some
10% before increasing again by a meagre ¼% in
2010. Foreign trade developments coupled with an
increase in the deficit of the income balance are
anticipated to induce a widening of the current
account deficit in 2009. A slight improvement is
expected in 2010, on the back of a decreasing trade
and services balance deficit.
Mounting strain on labour markets
In 2008, total employment grew by 2.9%, mainly
due to a strong increase in employment in the
construction sector, while the unemployment rate
fell significantly to 9.5%. On the back of the
economic downturn, the unemployment rate is
anticipated to rise significantly to above 12% in
2009 and to remain flat in 2010. Given strong
wage growth in 2008, unit labour costs increased
in nominal terms by some 5%, and due to a
slowdown in productivity, are likely to further
increase in 2009, before declining again in 2010.
Inflation on a downward trend
20
18 In 2008, annual HICP inflation averaged at 3.9%
16 compared with 1.9% in 2007. Annual HICP
14 inflation increased gradually in the first half of
2008 against the background of rising food and
energy prices and started to ease in the last months
6 of 2008. The disinflationary trend seen since
4
2 October 2008 has largely been driven by
0 decreasing food and fuels prices due to favourable
base effects combined with falling energy and food
prices on international markets. However, these
disinflationary trends have been partially offset by
 Member States, Slovakia

the increasing inflation contribution of tobacco and
heating prices. Average annual HICP inflation is
expected to continue its downward trend and to fall
to some 2% in 2008, against the background of
further declining food and energy prices; it is
expected to rebound again to just above 2½% in
2010, due to increasing goods and services prices.
Deficit set to widen above 3% of GDP
In 2008, the general government deficit increased
to some 2¼% of GDP compared with the deficit
target of just above 2¼% of GDP. The better-than-
expected budgetary outturn in 2008 was the
outcome of the revenue-increasing measures
implemented in 2008 (e.g. broadening of the
corporate and personal income tax base, increase
in the maximum ceiling on social contributions),
which offset the shortfall in revenues due to
worsening economic conditions.
impact of the anti-crisis packages. On the revenue
side, the anti-crisis packages include measures
such as a temporary increase in the tax-free part of
income from €3,435 to €4,027, an in-work benefit
for low-income employees (negative income tax),
as well as a decrease in social contributions for
mandatorily insured self-employed. On the
expenditure side, the bulk of the measures with
budgetary impact are related to the subsidies for
R&D activities, for programmes aiming at
increasing energy efficiency and supporting
existing or newly established SMEs as well as for
the Slovak cargo and railway company.
Under the customary no-policy-change
assumption, the general government deficit is
expected to rise to just below 5½% in 2010. The
debt-to-GDP ratio is projected to increase from
27½% of GDP in 2008 to some 36% in 2010.

In 2009, the general government deficit is expected

to widen to some 4¾% of GDP, compared to the
deficit target of 2.1% foreseen in the 2009 budget.
The difference is mainly explained by the
slowdown in economic activity resulting in lower
revenues, the implementation of the social package
(increases in child-birth benefits, pension
indexation as of January 2009) as well as by the

Table 2.24.1:
Main features of country forecast - SLOVAKIA
2007 Annual percentage change
bn Euro Curr. prices % GDP 92-04 2005 2006 2007 2008 2009 2010
GDP at previous year prices 61.5 100.0 - 6.5 8.5 10.4 6.4 -2.6 0.7
Private consumption 34.4 55.9 - 6.5 5.8 7.0 6.1 0.5 0.9
Public consumption 10.7 17.3 - 3.3 10.2 -1.3 4.3 2.0 1.2
Gross fixed capital formation 16.0 26.1 - 17.6 9.3 8.7 6.8 -5.2 0.2
of which : equipment 6.2 10.1 - 22.0 -6.3 4.2 19.6 -4.1 0.1
Exports (goods and services) 53.2 86.5 - 10.0 21.0 13.8 3.2 -10.2 0.2
Imports (goods and services) 53.8 87.5 - 12.4 17.7 8.9 3.3 -7.6 0.3
GNI at previous year prices (GDP deflator) 59.8 97.2 - 7.9 9.0 10.0 6.7 -3.8 0.5
Contribution to GDP growth : Domestic demand - 8.7 7.6 6.1 6.0 -0.7 0.8
Stockbuilding - 0.1 -0.9 0.6 0.5 0.1 0.0
Foreign balance - -2.1 1.7 3.8 -0.2 -2.0 -0.1
Employment - 1.4 2.3 2.1 2.9 -1.7 0.4
Unemployment rate (a) - 16.3 13.4 11.1 9.5 12.0 12.1
Compensation of employees/head - 9.7 7.6 8.8 8.7 4.9 5.5
Unit labour costs whole economy - 4.3 1.5 0.6 5.2 5.9 5.2
Real unit labour costs - 1.9 -1.4 -0.5 2.2 2.2 1.5
Savings rate of households (b) - - - - - - -
GDP deflator - 2.4 2.9 1.1 2.9 3.6 3.7
Harmonised index of consumer prices - 2.8 4.3 1.9 3.9 2.0 2.4
Terms of trade of goods - -0.2 -1.8 -1.1 -1.9 1.3 0.9
Trade balance (c) - -5.4 -5.2 -1.7 -1.7 -2.8 -2.1
Current account balance (c) - -8.6 -7.4 -5.1 -6.8 -7.5 -7.1
Net lending(+) or borrowing(-) vis-à-vis ROW (c) - -9.0 -7.0 -4.7 -5.6 -7.6 -6.2
General government balance (c) - -2.8 -3.5 -1.9 -2.2 -4.7 -5.4
Cyclically-adjusted budget balance (c) - -2.6 -4.0 -3.8 -4.5 -4.9 -4.7
Structural budget balance (c) - -1.8 -3.7 -3.8 -4.7 -5.0 -4.7
General government gross debt (c) - 34.2 30.4 29.4 27.6 32.2 36.3
(a) Eurostat definition. (b) gross saving divided by gross disposable income. (c) as a percentage of GDP.

103