Recovery weakened by supply constraints

The economic recovery of Slovakia should progress in 2022. Last year, its economic activity strengthened. However, Slovakia’s growth accelerated less than in most other CEE countries. It resulted from restrictive pandemic-related measures implemented at the beginning and the end of 2021 (lockdown and closure of non-essential shops) and supply shortages. Indeed, supply chain disruptions hurt the Slovak economy, which is driven by the manufacturing sector. Vehicle production accounts for 36% of the country’s exports and 13.9% of its GDP. While the automotive industry initially benefited from the revival of demand after the initial impact of the pandemic, it suffered from a shortage of semiconductors. The latter caused all major automotive companies in Slovakia, including Volkswagen Slovakia, KIA Motors Slovakia, Stellantis (previously PSA Peugeot-Citroen), and Jaguar Land Rover, to either suspend production for several days, cut work shifts or drop certain product lines. Global semiconductor shortages are assumed to persist throughout 2022, and, therefore, export growth will be limited by such a supply constraint. That said, it should be noted that the slump in net exports’ contribution to GDP growth will be determined by lower import demand due to the significant content of imported intermediate inputs in exports. 

Domestic demand will remain a growth driver in 2022. Household consumption should accelerate despite inflation staying high (primarily due to energy prices and higher prices of inputs transferred by companies). Although labor market indicators weakened during the pandemic, supportive measures limited the deterioration scale. Labor shortages have become evident again, especially for a highly skilled workforce.

Private investments accelerated as growing demand increased companies' capacity utilization levels. Public investments will be boosted from the NextGenerationEU fund not only in 2022 but also in the following years.

Widened public account deficit set to narrow

The government deficit is expected to shrink in 2022 thanks to the progressing economic recovery and phasing out of pandemic-related support measures, which widened the debt in 2020 and 2021. Slovakia will benefit from EUR 6.3 billion from the EU’s Recovery and Resilience Facility. The planned spending includes, at first, funding for health (hospitals), the judiciary (reorganization of courts), and education (changes in the financing and evaluation of universities). Public expenditures will be gradually more dedicated to facilitating green and digital transformation. Moderating primary deficits (with interest payments deducted), accelerated GDP growth, and low financing costs will contribute to lowering the public debt load and the resumption of pre-COVID fiscal consolidation.

The current account balance will remain a slight deficit due to exports growing slower than imports due to supply issues. Vivid private consumption will also foster import growth. Slovakia remains strongly dependent on external markets, with exports of goods and services reaching 85.4% of its GDP in 2020. Moreover, companies in various sectors are included in global supply chains and indirectly subject to global demand.

Changes in the political scene

Anti-corruption campaigner Zuzana Caputova was sworn in as Slovakia’s first female president in 2019. She promised to fight impunity and champion justice. This particularly attracted people’s attention after a journalist’s murder in 2018. Indeed, the killing of Jan Kuciak - who investigated high-level graft cases - and his fiancée at their home sparked mass street protests. The latest parliamentary election took place in February 2020. The anti-corruption party, Ordinary People and Independent Personalities (OL’aNO) won the election. Taking over from the previous government led by Peter Pellegrini, a center-right four-party coalition government led by Igor Matovic was sworn into office at the end of March 2020. However, in March 2021, Matovič stepped down amid a political scandal triggered by a secret deal to buy Russia’s Sputnik V coronavirus vaccine despite the disagreement of coalition allies. Several cabinet members also resigned from their posts. The country’s previous deputy prime minister and minister of finance, Eduard Heger, took over the position of prime minister. In May 2021, opposition leaders, including the Smer-SD party, which had been governing previously, collected sufficient signatures to demand a referendum on an early parliamentary election, with opinion polls showing a sharp decline in the popularity of OL’aNO. However, President Caputova turned the petition over to the Constitutional Court, which determined that a referendum for a snap election does not comply with Slovakia’s constitution. According to the Court, it would violate the constitutional articles, according to which the election period is four years long, and the president dissolves the national council.