The finance ministry has kept its GDP growth projection for 2017 unchanged at 3.3%, but raised that for 2018 by 0.2pps to 4.2%, according to the June quarterly macroeconomic forecasts for 2017-2020 prepared by the Committee on Macroeconomic Forecasts at the Financial Policy Institute IFP, a think-tank that advises the government on macroeconomic policies and sets its forecasts, and presented on Monday. The ministry has also kept its GDP growth projection for 2019 unchanged, while that for 2020 has been raised by 0.1pp. The economic growth this year is to be driven by both domestic and foreign demand, but the latter is to dominate particularly driven by household consumption and investments. The expected to expand at a stronger rate household consumption will be supported by the improving labor market – we see the latter coupled with increasing labor shortages resulting into robust nominal wage growth. The recovered investments will be mainly driven by the automotive industry, while public investments are to be supported by the construction of D4/D7 motorways. Net exports are to have smaller positive contribution to growth as although exports growth is to accelerate, the rebound in investments will also support stronger increase in the investment-intensive imports. The sharp acceleration of GDP growth in 2018-2019 will reflect the fact that the new car plant of Jaguar Land rover in Nitra will start operations, thus supporting exports growth speeding up to close to 8%. In 2019-2020 the economic expansion is to be more balanced with the external demand contributing stronger to GDP growth as the import demand related to the more moderate increase in investments (as the JLR plant will be already built) will ease. The economy will slow down close to its long-term growth potential in 2020 growing by 3.9%.
The labor market improvement will continue also in 2017 with the employment projected to increase by 1.8% as more than 40,000 new jobs are to be created only this year, whereas 35,000 in industry and market services. The construction sector is also to start creating new jobs as it is expected to start gradually recovering. Thus, the unemployment rate is to decrease to 8.2% this year and further to 6.2% in 2020. The nominal wage growth will continue to accelerate by 2020 to reflect the shrinking labor market and lack of qualified staff to meet demand, but along with accelerating inflation real wages growth will decelerate but hover close to 3%. The return of inflation to positive values in 2017 would be supported mainly by already increasing oil prices, as well as food and services prices.
The ministry noted that the risks to the forecast are overall balanced. Negative risks continue to be ‘hard’ Brexit, the threat of protectionism in world trade and the unstable banking sector in Italy. New positive risk to the forecast is acceleration of the euro area growth in line with the leading indicators and the impact from the fiscal expansion in the US. As for the domestic economy, a positive risk is more pronounced acceleration of the wages in the overheated labor market due to growing labor shortages. Still, the ministry notes that the latter may limit companies’ profitability.
The ministry also said that the new forecasts were having positive effect on the tax base via the improving labor market and the stronger household consumption. The positive impact is somewhat dampened by the withholding tax base and the bank levy, and the weaker increase of the corporate income tax base this year. In 2018 the improving labor market and stronger GDP growth will have positive impact on the tax base. The Committee on tax forecasts to the IFP is to discuss the new tax revenue forecast on Jun 22.