Abstract
After slowing in 2013, the Slovak economy is gathering momentum as the euro area and domestic demand recover, the latter complementing the strong export sector that has made Slovakia one of Europe’s more dynamic economies. Reducing still very high unemployment remains a key challenge, as does sustaining fiscal adjustment. Manageable public and private debt as well as a sound banking system limit vulnerabilities, but Slovakia’s fortunes remain closely tied to external developments, especially in the euro area, and there are risks from regional tensions since Russia provides much of Slovakia’s energy and is a reasonably important export market, including for Slovakia’s trading partners.
This statement summarizes the main developments in the Slovak Republic since the staff report was issued on July 31, 2014. The information does not alter the thrust of the staff appraisal.
Growth: Preliminary data for the second quarter of 2014 showed seasonally adjusted output growing by 0.6 percent quarter-on-quarter and 2.6 percent year-on-year, consistent with forecast growth of 2.4 percent for the year.
Inflation: In July, headline HICP inflation was -0.2 percent year-on-year, primarily reflecting declining fuel prices, while core HICP inflation was 0.5 percent. Recent data suggest somewhat greater downside risks to the forecast of 0.4 percent headline inflation for 2014, although annual deflation is not expected.
Fiscal policy: Data for the first quarter of 2014 are broadly in line with expectations for the year and confirm the improvement in VAT collection seen in 2013. While government debt reached 58 percent of GDP in the first quarter, this mainly reflects pre-funding, and debt is still forecast to be just above 55 percent of GDP at end-2014. The first draft of the budget for 2015 and the medium term is largely in line with staff projections.
Minimum wage: The Finance Ministry has proposed that the minimum wage be increased from €352 to €380 per month, effective in January 2015. It also has proposed that employer health contributions for low-wage workers be reduced to help offset the impact of the minimum wage increase on labor costs.