Wage growth in Slovakia eases in February

The average nominal monthly wage increased by the robust 7.0% y/y in February, thus decelerating from 8.8% y/y growth in January, our calculations based on the latest data by the statistical office released on Friday show. Thus, real wage growth decelerated to 4.6% y/y in February from 6.5% y/y in January, reflecting the slower nominal wage growth coupled with the accelerating m/m CPI inflation (2.3% y/y in February vs. 2.2% y/y in January). The nominal wage growth in the key industry sector inched down to 7.8% y/y in February from 7.9% y/y in January, with the real wage growth in the sector decelerating to 5.4% y/y from 5.6% y/y the previous month. Nominal wage growth in manufacturing remained quite robust at 7.9% y/y in February, the strongest print in the last four months. The sector breakdown shows that in February, the highest wage was paid in ICT (EUR1,828, up by 3.9% y/y), followed by the electricity and gas sector (EUR1,825, up by 4.7% y/y), while the lowest (EUR496, up by 8.3% y/y) – in restaurants and bars. The wage growth remains quite robust, which reflects the overheating of the labor market that already suffers from significant labor shortages. Therefore, the wage development are likely to continue to support strong household consumption going forward, in our view. The robust wage growth is likely to continue in the next months as although foreign workers are to be imported, the government has pledged that it would not allow social dumping. In addition, the higher minimum wage as of January 2019 (it was raised by 8.33% to EUR520 per month), as well as regulatory measures such as higher allowances for night, weekend and holiday work, the introduction of 13th and 14th salaries, will create additional upward pressures on wages. Our consideration is also shared by the central bank and the government. Note that the NBS forecasts the nominal wage growth to accelerate to 6.6% in 2019, while the finance ministry – to 6.7%, while the real wage — to slower 4.0%, in line with the projected to speed up inflation. However, such an excessive wage growth, well above the labor productivity growth as seen in latest LFS last data, if preserved in the months to come as it seems the case, may erode the competitiveness of local firms, in our view.

Meanwhile, the employment growth in industry remained quite subdued increasing by only 0.9% y/y in February, an inch higher than that reported in January. This is the second lowest pace of job creation since October 2013. The strongest pace of employment creation was again seen in mining (9.1% y/y), followed by accommodation (8.4% y/y), construction (7.9% y/y), market services (7.0% y/y). Jobs were shed in four sectors – again water supply and sewerage, wholesale trade, retail trade and post and courier activities (jobs were shed only in two sectors in December and in one in November). The meager employment growth in the first two months of the year may be reflecting the companies still assessing their labor needs for this year after some contracts have expired at the end of 2018. Yet, on the downside, the more probable reason in our view could be the existing or even deepening skill mismatch, which again raises the question for the need of a comprehensive education reform. We believe that the creation of new jobs is likely to continue going forward supported by the continuation of strong industrial output expansion, including in the automotive industry, the implementation of public infrastructure projects, such as the Bratislava bypass construction, as well as the expected to accelerate EU funds drawing. At the same time, its pace is likely to remain meager going forward as many companies continue to complain of lack of qualified and non-specialized labor and of a need of changes in the education system to secure better matching of the qualification of the labor force with the labor market needs. In this regard, the fact that the number of places in the dual education system in the 2019/2020 school year has almost doubled to 5,055 from 2,700 places available in the current academic year, is positive news. The employment creation may be expected to slowdown further in the next months as the economic activity is likely to ease this year due to the weakening external demand, in our view. In view of the likely to continue to increase at robust pace wage costs, we may expect companies to increasingly focus on substitution of scarce and expensive labor with machines, new more advanced technologies and innovations, which would boost investments, hence domestic demand, and would improve their competitiveness in the long run.

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