Slovak economy slowing down rapidly

The economy slowed down sharply in Q4, as the growth reached 0.7 % y/y, compared to 2.1 % in 3Q12. The slowdown was suggested by deteriorating economic sentiment as well as the drop in industrial production in late 2012. Due to the magnitude of the slowdown, we have cut GDP growth forecast for 2013 to 0.5% y/y.

Changes in the forecasts since the previous version:

For the whole 2012, GDP grew by 2.0% y/y. We expect a deceleration this year, with more pronounced weakness in the first half of 2013 due to the sharp decline of IP at the year-end and worsened economic sentiment. Besides, a temporary boost due to new automotive plants in 2012 will no longer play a role in 2013. Fiscal austerity and the associated tax hikes are also likely to take its toll on growth. Therefore, we have revised our GDP forecast for 2013 downwards from 1.3% to 0.5%.

The fiscal deficit for 2012 might surpass the originally planned level at 4.6% of GDP and reach up to 5% of GDP, which is suggested by the cash data of government budget. Thus, the accrual fiscal deficit might reach a similar level than in 2011 (4.9% GDP). Apart from that, public debt is likely to surpass 50% of GDP, partly due to the ESM contribution as well as bigger- than-usual pre-financing for 2013.

Slovak government bond yields are still trading near record low levels of around 2.2% for 2020 maturities, having dropped amid a widespread rally in CEE government paper. However, we have seen a moderate rise in the recent weeks which is likely to continue. We expect the yields to rise slightly in the near term, possibly reaching 2.70% by the end of the year.