Economy in focus: Slovakia

Once nicknamed the ‘Tatra Tiger’, Slovakia faces high inflation, slowing growth, and political uncertainty. Nonetheless, its prolific auto industry will be vital to the EU’s transition to electric vehicles.

Home to 5.4 million people, stunning castles, and the rocky Tatra mountains, Slovakia has economically punched above its weight with the most productive auto sector in the world—making more cars per capita than any other country—despite being oft-overlooked.  

A decade after the peaceful dissolution Czechoslovakia, Slovakia emerged as the ‘Tatra Tiger’, with gross domestic product (GDP) growth of 10.8 per cent in 2007 rivalled only by the ‘Baltic Tigers’ within the European Union. 

In the latest edition of the Emerging Europe IT Competitiveness Index, Slovakia ranked eighth out of the 23 countries in the region—down from seventh in the 2022 edition. It ranked fourth in the region for IT talent and sixth for business environment.  

Slovakia currently has an ‘A’ long-term foreign-currency issuer default rating with a negative outlook from Fitch. Fitch notes its EU and eurozone membership underpin “a relatively stable and credible macro-economic framework and steady EU capital inflows, as well as a competitive export sector and stable foreign direct investment” that support its ‘A’ rating while “medium-term vulnerabilities stemming from the country’s relatively high dependence on the automotive manufacturing sector and structural indicators slightly weaker than peers” constrain the rating.

The negative outlook is attributed to “an unclear policy framework after the upcoming September elections, in particular around fiscal consolidation, and the ongoing uncertainty over the fiscal and macroeconomic impact from the war in Ukraine and the energy crisis, aggravated by Slovakia’s still considerable reliance on Russian energy.”  

Strain from war in Ukraine threatens political stability

Even as pent-up demand from the Covid-19 pandemic kept household consumption strong in 2022, Slovakia’s post-pandemic recovery has been seriously constrained by the economic effects of the war in Ukraine and chronic structural issues. Inflation was 12.1 per cent for 2022 and reached close to 15 per cent in April 2023, although the Vienna Institute for International Economic Studies (wiiw) forecasts it will fall into single digits by later this year and average 10.2 per cent for the year as a whole.  

While the war in neighbouring Ukraine drove commodity prices up, issues in Slovakia’s labour market pre-date the conflict. 

“There is an imbalance in the Slovak labour market — it is characterised by chronic labour shortages in the most advanced parts of the country, and persistently high unemployment rates in lagging regions,” wiiw economist and country expert for Slovakia Zuzana Zavarská tells Emerging Europe.   “Overall, the unemployment rate was experiencing a steady decline, but this trend has come to a halt following the pandemic.” 

While the national unemployment rate averaged 6.1 per cent in 2022, it remains over nine per cent in Slovakia’s eastern regions. Amid high inflation, real wages declined in 2022 and GDP growth amounted to a meagre 1.7 per cent. Growth in 2023 is expected to reach just 0.6 per cent. 

This economic slowdown has coincided with political tumult, as the country’s pro-Ukraine government lost a vote of no-confidence in December and snap elections have been called for September 30.  

“Following months of political instability resulting in a caretaker government, the upcoming parliamentary elections will be a decisive factor for Slovakia’s future prospects,” says Zavarská. For months, polls showed pro-Russia former prime minister Robert Fico and his Smer party in the lead, but newer polls show support for Smer stagnating but increasing for its main rival, Progressive Slovakia. Still, the parties have become so fragmented over time that any future government is likely to be very unstable. 

Automotive industry in transition 

Amid political chaos and stagnating economic growth, Slovakia’s industrial production also declined by almost seven per cent year on year in the first two months of 2023. However, this decline was led by the electricity, rubber, and computer sectors—the country’s automotive industry still grew by three per cent in the same period.  

Car manufacturing is the largest industry in Slovakia, accounting for 13 per cent of total GDP—compared to Germany’s famous auto industry, which accounts for only five per cent of its GDP—and 54 per cent of industrial production—compared to 33 per cent in neighbouring Hungary and 31 per cent in Czechia. 

Numerous multinational auto firms have announced large investments in Slovakia this last year, including over 1.2 billion euros from Volvo for a third production plant in the country that will specialise in electric car production and over one billion euros from Porsche for battery module manufacturing for electric cars. With an eye on the EU’s plan to phase out the new sale of fossil fuel automobiles by 2035 to minimise carbon emissions, Volkswagen Bratislava will produce the all-electric Porsche Cayenne. 

“Foreign firms are driving the transition in Slovakia, showing that the country has the potential to remain a major automotive producer in the electric age,” says Zavarská. “We have seen a number of large-scale investments in electric vehicle production, the most significant being the Volvo production plant in Eastern Slovakia. On the other hand, domestic firms are lagging behind in the transition, calling for a more assertive industrial policy approach in the country.” 

Most of the engines produced in Slovakia are still traditional combustion engines, and the electric motors used in electric vehicles are simpler to build and require fewer parts and less work to assemble. Ultimately, this means fewer workers will be needed to maintain the same rate of auto production once a transition to electric vehicles manufacturing is complete. The sector will also have to grapple with long-term bottlenecks in chips. 

Still, in 2023, Slovakia’s auto sector is set to benefit from a backlog in orders from last year and higher production capacity amid the inflow of new investment, offering the economy a resilient bright spot. 

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