Slovakia Central Bank Statement

Author: | Published: 19 Oct 2018
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Macroeconomic forecasts represent an important and integral part of the decision-making process in central banks. Their main challenge is to identify turning points. But while our artillery of macroeconomic models is highly sophisticated and constantly improving, reality quite often surprises us. An economy is a living organism that can abruptly change its behaviour. Therefore, in an uncertain external world, the economy may develop in different directions and at unforeseeable speeds. The quality of our forecasts may be affected by many factors; therefore, it can be tricky to discern future trends using historical data.

Nowadays, interest rates have never been lower, nor monetary policy so accommodative (looking at the balance sheets of many central banks). We are discussing Phillips Curve slopes (could they be less steep?), the pass-through of exchange rate (how are they affected by subdued demand and tough competition?), and so on.

Our experts are now assessing the future implications of the latest data for the euro area, specifically the dip in confidence indicators and the unexpected slowdown in first-quarter GDP growth: are they a blip or the beginning of a trend? Our diagnostic methods suggest the former but the situation needs to be monitored carefully. We are now experiencing good times: our economies are growing. Although growth rates are not as high as before the last recession, incoming GDP and unemployment data are still favourable. At the same time, however, economic overheating is also part of the outlook, which naturally gives rise to questions about the next recession.

The Slovak economy is a small and extremely open economy, with favourable prospects for GDP growth. EU funds provide major support for investment plans in highway construction and environmental projects. Household consumption should benefit from the improving labour market, with unemployment at an all-time low and expected to fall further. The central bank's macroprudential policies are safeguarding households, banks, and the wider economy from the risks of excessive household indebtedness. Labour market tightening is increasing pressure for structural reforms that should, for example, improve the educational system, make the hiring of foreigners easier, and support internal mobility.

Given that Slovakia's exports are as large as its GDP, one of the most important technical assumption for forecasts of the Slovak economy is foreign demand. Our main trading partners continue to show strong demand for Slovak exports, and therefore Slovakia's foreign demand growth is assumed to average almost 5% over the next three years. A further boost to our economy will be provided by Jaguar Land Rover, when its new car plant in Slovakia begins production in late 2018. This and other new investment in the automotive industry should add approximately one percentage point to Slovakia's GDP growth in 2019, which is projected to be 4.8%.

The average long-term GDP growth rate, excluding one-off factors, is estimated to be around 3%. These figures demonstrate the importance of foreign direct investment to further convergence. Equally important, however, is to continue pursuing all reforms aimed at sustainable growth and to support them with sound fiscal policies.