Presenting a new macroeconomic forecast

Our economy will grow at 1.2% this year. This is mainly owing to investment from EU funds and the recovery plan. The effects of the crises and the war in Ukraine are still causing problems for our economy. The good news is that we are past the peak of price hikes. Inflation will reach single digits this year and we expect it to approach 6% by the end of the year. These are also the conclusions of the latest macroeconomic forecast published by the Ministry of Finance of the Slovak Republic.

There is not exactly positive news when assessing domestic consumption. It was clear from the beginning of the year that consumption would fall, and this fact has again been confirmed by the forecast. The year-on-year decline is estimated at 0.5%. However, the Ministry of Finance of the Slovak Republic expects real incomes to grow, also thanks to government measures.

Exports were dragged down mainly by the influence of foreign countries. The good news is that investment will remain a strong component of the domestic economy. This is because EU funds will peak and the second half of the year will see the start of the implementation of the recovery plan. Investment will help stabilise the unemployment rate and help wages as well.

Inflation will reach single digits this year and we expect it to approach 6% by the end of the year, with growth in goods prices decelerating faster than growth in services prices.

In 2024, economic momentum will accelerate slightly to 1.3%. A gradual recovery in the purchasing power of the population, with real wage growth above 2% again, will have a positive impact. The peak drawdown of EU funds from 2023 will be largely replaced by the recovery plan in 2024.

On the other hand, mainly the need for recovery of public finances will dampen activity. The consolidation mix on the revenue and expenditure side of 1.1% of GDP will cause real GDP growth to slow down by 0.8% in 2024.

The main impetus for GDP acceleration from 2025 onwards will be a decline in inflation below 3%. Household consumption will return to the strong pre-pandemic growth. Additionally, an increase in the export capacity of the automotive industry from 2026 onwards, which will take over the baton after the completion of the Recovery and Resilience Plan programmes, will also propel the Slovak economy forward.

The development of Russia's aggression in Ukraine remains a risk in the latest forecast as well. A renewed rise in the price of raw materials for the food industry may postpone the recovery in consumer spending.

Year-on-year growth in tax and contribution revenues will exceed 9% in 2023. In the coming years, revenue growth will decelerate significantly to around 5% per annum. The main reason is slower economic growth and inflation stabilising at lower levels. The slowdown in wage and employment growth reduces revenues from contributions and personal income tax.

As regards corporate taxes, the better results in 2022 were more of a one-off nature and are unlikely to be repeated in subsequent years. We revise total tax and contribution revenues downwards compared to the approved budget by about EUR 0.3 billion in 2023 and EUR 1.1 billion and EUR 1.5 billion in 2024 and 2025, respectively.

Even though our economy will perform worse than expected in 2023, we revise our overall tax revenue estimate slightly upwards. The temporary capping of household energy prices and the drawdown of Recovery Plan funds in 2023 will keep VAT revenue well above expectations at the start of this year. Labour taxes and contributions will be negatively affected by weaker employment and wage developments.

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