Slovakia: A Powerhouse Of Economic Growth In Europe

June 3rd, 2015
in contributors

by Michael Grogan, First Class Analytics

At a time when Eurozone growth remains low at an average of 0.4 percent in the first quarter of 2015, Slovakia has managed to grow at double that rate with growth of 0.8 percent in Q1. While overall growth for 2015 was forecast at 2.5 percent by the European Commission, this has since been increased to 3 percent and up again to 3.4 percent for 2016.

Follow up:

While Slovakia is a member of the Eurozone, its growth trajectory has been markedly different to that of many Eurozone countries. Private consumption has been a driver of growth in the country, with the same rebounding by 2.2 percent in 2014, which was the product of higher disposable income and decreasing unemployment rates. Moreover, Slovakia is on track to obtain a budget deficit below 2 percent, standing at a current rate of 2.8 percent of GDP; which is just slightly higher than the 2.3 percent figure for Germany.

Moreover, the country's financial system appears to be in very good shape. For instance, in the 2014 Global Competitiveness Report, Slovakia received a "Soundness of banks" measure of 20th out of 144 countries. This lies in contrast to a measure of 55th place for Germany. Slovakia's financial sector has benefited from high capital adequacy ratios and high net interest income. With quantitative easing by the ECB, use of such financial capital has been highly efficient with lower interest rates resulting in the second-fastest growth in credit for Slovakian households - which has disproportionately allowed Slovakia a higher rate of private consumption than other EU countries.

Moody's Investors Service also affirmed positive sentiment for Slovakia's banking system at the end of last month, upgrading their outlook for the industry to stable from negative. Moreover, in spite of increased credit lending, it is anticipated that the non-performing loans ratio for Slovakian banks will rise by less than 50 basis points. In this regard, return on equity is expected to remain at 10 percent while net interest margins will still remain at 3 percent; Slovakian banks have the advantage of being able to increase lending growth even in a low-interest rate environment thanks to adequate capitalisation.

In conclusion, while the effects of the ECB's quantitative easing has not been universal across all euro member states, Slovakia's financial system has benefited quite substantially. In this regard, I am optimistic on Slovakia's prospects, and expect it to continue producing among the highest growth rates across eurozone countries.

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