According to the Institute of Financial Policy (IFP) of the Ministry of Finance (MF) in its current macroeconomic forecast, Slovakia’s economy should grow by 2.3% this year, thanks mainly to domestic demand. Wednesday’s report lowered its previous estimate from June by 0.2%. Real incomes of residents should rise significantly by 4% this year after the price shock subsides, which will be reflected in household consumption. "Investment activity will shift to the private sector, but overall capital formation will stagnate due to the slower start of the drawing of new EU funds," the IFP predicts.
Next year, according to the institute, the acceleration of inflation will dampen household consumption, but the recovery of the economy will drag exports. Economic growth will then peak at 2.4% in 2026, thanks to continued drawdown from the recovery plan. In 2027, the withdrawal of these funds will end, causing growth to slow to around 1%. In 2028, economic growth should accelerate above 2%. "Over the entire horizon of the forecast, we anticipate a slightly cooled economy due to the planned consolidation of public finances with the aim of stabilizing the debt," IFP assessed.
At the end of this year, according to the forecast, inflation in Slovakia will rise above 3% and for the whole year, prices will rise by an average of 2.8%. "Energy prices are stable year-on-year thanks to price subsidies, and the prices of goods will increase only slightly. However, the prices of services maintain a high dynamic of increase and the growth of food prices will also accelerate again," the institute announced.
Next year, according to the institute, the pace of price growth will accelerate to 5.4%. Inflation will be affected by an increase in the value added tax (VAT) rate and an increase in energy prices. "A higher VAT will add 1.5 p.p. to the increase in the price level, and regulated energy prices will add another 1 p.p.," calculated the IFP.
As long as electricity prices for households do not change in the medium term, in the case of gas, the institute expects its return to the market price. Together with the higher VAT, this would represent approximately a 30% increase over the current subsidized level. For the price of heat, IFP expects a gradual increase spread over several years.
The institute pointed out that both domestic and foreign economic developments are characterized by high uncertainty and a preponderance of negative risks over positive ones. Domestically, lower recovery plan uptake may push down expected employment and investment. Foreign conflicts, in turn, can complicate the outlook for foreign demand. "The risk of increasing trade barriers between the EU and China may intensify after the elections in the USA and threaten the revival of global trade and Slovak exports," he added in the current IFP forecast.
Source: TASR
