In Central Europe, capital flows (foreign direct investments, portfolio flows and bank lending flows) have resisted rather well despite geopolitical uncertainties. Similarly, they do not seem to be affected, for the time being, by the weakening of economic activity in the region.
All growth drivers weakened in the second quarter of 2022. With a high exposure to Russia for its oil and gas supplies, Slovakia could be amongst the most affected Central European countries by the consequences of the war in Ukraine. The steep rise in energy costs, as well as supply disruptions, will have an adverse impact on industrial activity, which has not yet returned to its pre-Covid level. Moreover, inflation has increased rapidly but is still more moderate compared to other countries in the region. Finally, public and external accounts will deteriorate in the short term, but this situation remains manageable.
Slovakia has a population of 5.5 million. It belongs to the group of high-income countries. It has been a EU member since 2004. Slovakia joined the Eurozone in January 2009.
Intra-EU trade is important. It accounts for 79% of Slovakia’s exports (mostly Germany) and 80% of its imports.
The country is less exposed to foreign financial shocks than other central European economies, benefitting from Euro membership. However, Slovakia is a small open economy, with significant exposure to the automotive sector. As a result, Slovakia was hit hard by the COVID-19 outbreak through lower exports to western Europe. Inflation and the twin deficits (fiscal and current account balances) were under control before the outbreak, giving enough leeway to ease the fiscal stance during the shock. Euro membership was again a strength, since Slovakia benefitted from ECB monetary easing measures.
