Wage growth decelerates, employment expansion eases in Slovakia

Employment growth decelerated further to 2.5% y/y in February from to 2.8% y/y in January, while annual real wage growth slowed down to 2.1% y/y in the month from the downwards revised 3.4% y/y increase in January, according to the latest data released by the statistical office on Wednesday. Real wages in the industrial sector grew at a stronger pace of 3.1% y/y (decelerating from 4.9% y/y increase the previous month). Real wage growth deceleration reflected the fact that consumer price inflation speeded up to 1.2% y/y in February from 0.7% y/y in January, thus reporting the strongest annual growth since September 2013. Still, nominal wage growth both in the economy as a whole and industry in particular also slowed down, albeit to a smaller extent. Nevertheless, the nominal wage growth remains overall robust, which we believe reflects employers’ efforts to retain their qualified employees or to lure new staff with the appropriate qualifications amid narrowing labour market and growing shortage of qualified workforce, especially in some sectors such as the automotive industry, the main growth and exports driver. Going forward, we may expect robust wage growth to continue in the next months as well on the back of the strong GDP growth outlook that supports entrepreneurs’ sentiments and hence, their expansion and hiring plans. Moreover, the shortage of adequately trained labor force among Slovaks, of which companies have been continuously complaining, and the slow process of bringing in foreign workers, would support additional upward wage pressures, in our view. However, higher wage costs may make companies postpone their investment and expansion plans, thus hurting their competitiveness and growth potential, while if wages growth continues outstripping the labor productivity growth as it is currently the case, we may also expect deterioration in the economy’s competitiveness. The government projects nominal wage to increase by 3.5% this year, while the NBS – by 4.4%, but despite the fact that it will keep robust pace of increase in next couple of years (even accelerate to 5.1% in 2020 according to the finance ministry), the real wage growth will decelerate on the back of the expected to speed up inflation.

Employment in industry increased by 2.5% y/y in February, slowing down from 2.8% y/y increase in January, which above all reflected the fact that employment increase in manufacturing inched down to 3.0% y/y in the month, while somewhat less jobs were shed in the mining sector. Moreover, the employment creation in other important in terms of weight sectors of the economy also slowed down or even fell in February. In particular, employment in construction decreased by 0.5% y/y in February possibly to reflect the worsening sentiments among constructors in the month – this is bad news given that the seasonal activity in the sector must have gradually started as February was milder than usually and may be suggesting downbeat outlook for the sector this year. Moreover, the shedding of jobs in construction may be also indicative of still slow EU funds drawing and potential delays in the construction of the Jaguar Land Rover new car plant in Nitra and of the Bratislava bypass. Job creation in retail trade decelerated to 3.9% y/y in the month, as did that in transport and storage activities (to 4.4% y/y). At the same time, job creation speeded up in accommodation and wholesale trade. The NBS projects the employment growth this year to slow down to 2% (from 2.4% in 2016), which is somewhat more upbeat than the government expectation for 1.8% increase – in its February forecast the finance ministry projects that some 42,000 new jobs will be created this year, of which more than 60% in market services. According to earlier information, the state has managed to create 63,500 new jobs already in 2016, and if the 2017 plan is met, it will fulfil its target for 100,000 new jobs to be created two years ahead of the set by the government deadline in 2020. Still, it is yet to be seen whether these jobs will be sustainable or will be lost after the expiry of the measures implemented under active labor market policies. For the time being it seems that the government focuses too much on job creation stimulus measures and neglects measures in education and training which would enhance the employability of the unemployed people.

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