Country Report Slovakia September 2009

Outlook for 2009-10

• The Economist Intelligence Unit's central forecast is that the government will survive until the next scheduled election in mid-2010. However, occasional tension between the ruling parties carries the risk of a coalition break-up.
• Given the continuing high levels of popularity of Direction-Social Democracy (Smer-SD), we expect it to head the next government. However, Smer-SD would have to form another coalition government.
• In the short term the government is likely to continue to focus on alleviating the impact of the economic slowdown.
• Most of the previous government's free-market reforms should remain in place. However, a sharper economic slowdown and a drop in popularity could yet increase the government's incentives to reverse these reforms.
• GDP growth is forecast to contract by 5.5% in 2009 as higher unemployment and tighter lending conditions reduce domestic demand and as recession in Slovakia's main export markets reduces exports.
• Modest growth in economic output should return in 2010, although we expect the outlook for exports to remain subdued.
• We now forecast that the current-account deficit will narrow as a share of GDP in 2009, as goods imports fall faster than exports. In 2010 we expect the current-account deficit to widen modestly as domestic demand picks up.

Monthly review

• The fallout from a language law adopted by the Slovak parliament in June has caused relations between Slovakia and neighbouring Hungary, already uneasy, to deteriorate further.
• The unwillingness of the government to cut expenditure, even when faced with poor revenue collection, raises questions about how the growing budget deficit will be financed.
• In July the government approved the merger of two state-run health insurers.
• According to the Statistical Office of the Slovak Republic (SUSR), in the second quarter of 2009 real GDP contracted by 5.3% year on year, a marginal improvement compared with the 5.6% contraction posted in the first quarter.
• The intra-quarterly pattern of the main economic indicators suggests that the economy, or in any case those sectors most highly dependent on external demand, may have turned a corner, at least in the short term.
• The poor state of consumer demand is reflected in inflationary pressures, which continued to wane in July.