SK: Domestic demand drives growth once more

The Slovak economy increased by 0.9 % y/y in 1Q25, while compared to the previous quarter, seasonally adjusted GDP rose by 0.2 %, the slowest pace since 1Q23. This result is below both market consensus and our expectations.

As this is a flash estimate, we do not yet have a detailed breakdown of the figure. However, the press release from the Statistical Office indicated that the main drivers of economic activity were household spending and government consumption. Moreover, we expect a positive contribution from changes in inventory levels, while foreign trade is anticipated to have a negative impact.

Employment declined slightly by 0.3% year-over-year in the first quarter of 2025 and also decreased by 0.3% on a quarterly basis in seasonally adjusted terms.

For this year, we expect GDP growth of 1.8% year-over-year. Household consumption and inventory buildup are projected to provide a positive boost, while foreign trade could make a significant negative contribution. The first downward revision of GDP growth forecast came with the introduction of fiscal consolidation (from 2.5% to 2.0%). In May, we further cut growth forecasts due to tariffs imposed by the United States. The current projections reflect only part of the potential negative impact, as we are adopting a wait-and-see approach due to the ongoing political negotiations.

The threat of tariffs and a potential trade war creates substantial uncertainty for the business environment and economic forecasts. Further actions by the U.S. president and the EU will be key to economic activity, particularly for the Slovak economy, as exports and trademost notably in the automotive sectorsupport thousands of jobs. For that reason, the impact on the Slovak economy will not only be direct, due to lower exports to the United States, but also indirect, resulting from a slowdown among our trading partners, especially Germany.

Overall, the impact of high tariffs on cars could reduce Slovak GDP growth by around 1.5 percentage points over a three-year horizon. In the case of general reciprocal tariffs, the total negative impact could double, reaching 2.53.0 percentage points.