Wage growth speeds up in Slovakia

The average nominal monthly wage increased by the robust 9.6% y/y in May, speeding from 7.3% y/y growth in April, our calculations based on the latest data by the statistical office released on Friday show. Thus, real wage growth accelerated to 6.7% y/y in May from 4.9% y/y in April, despite the fact that the annual CPI inflation speeded up to 2.7% y/y in the month from 2.3% y/y in April. The nominal wage growth in the key industry sector speeded up to 10.4% y/y in May from 8.1% y/y in April, with the real wage growth in the sector accelerating to 7.5% y/y from 5.7% y/y the previous month. Nominal wage growth in manufacturing of 10.7% y/y in May even outstripped that in the industry as a whole and speeded up from 7.0% y/y in April. The sector breakdown shows that in May, the highest wage was paid in ICT (EUR1,983, up by 6.2% y/y) and electricity and gas sector (EUR1,793, up by 11.3% y/y), while the lowest (EUR528, up by 14.5% y/y) — in restaurants and bars. The wage growth remains extraordinary robust, which in our view reflects the overheating labor market that already suffers from significant labor shortages and which creates strong upward wage pressures. Therefore, the wage development are likely to continue to support relatively strong household consumption going forward, in our view. And yet, in view of the projected easing of the global and domestic economic activity, households may be expected to save a bigger part of their disposable income as well, 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 6.7% in 2019, while the finance ministry — to 6.3%, while the real wage — to slower 4.0% and 3.7%, respectively. At the same time, the possibilities of employers to increase wages that much will soon exhaust in view of the adverse macroeconomic developments. Overall, 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, something they have been long complaining of.

Meanwhile, for the first time since September 2013 the employment declined by 0.1% y/y in May mainly reflecting job shedding in manufacturing, wholesale and retail trade. The employment growth has been on downward trend since September 2018. Job shedding was reported in four sectors (two in April) — manufacturing by 0.2% y/y, wholesale trade (by 1.8% y/y), retail trade (by 2.0% y/y) and post and currier services. At the same time, the strongest paces of employment creation were seen in accommodation (13.1% y/y) and construction (9.2% y/y), mining (7.7% y/y), selected market services (7.6% y/y) with the job creation in the construction and the tourism related sectors being related to the gradual start of the active tourism season. The meagre employment growth since the beginning of the year until April and the employment fall in May in our view indicates that the skill mismatch continues to be a problem for the employers, that the labor costs are too high and they try to optimize their expenditures amid slowing down economic activity at home and abroad. We may expect the creation of new jobs to recover somehow in the next months on the back of the still relatively 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 of increase is likely to remain meagre 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. Another adverse factor that may affect the employment creation in the next months would be the slowing down economic activity in Slovakia and abroad, especially in Germany, in our view.

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