OECD Economic Outlook, Volume 2025 Issue 1

Slovak Republic

Real GDP is projected to grow by 1.4% in 2025 and 1.1% in 2026. Exports will slow due to trade barriers lowering foreign demand, particularly in the automotive sector. Accelerated absorption of EU funds will support investment against the headwinds created by heightened economic uncertainty. In an environment of low consumer confidence and high uncertainty, real wage gains on account of lower inflation will primarily be used to rebuild household savings. Escalating geopolitical tensions, further trade barriers and slower‑than-expected growth in Europe pose downside risks to the outlook.

A sustainable medium-term fiscal strategy is needed to rebuild fiscal buffers, including further reforms to the pension system and changes to family benefits. Enhancing the efficiency of public spending by strengthening project preparation and implementation capacity can increase public investment. Better tertiary education and stronger incentives to participate in adult learning would help reduce skill shortages that remain a barrier to investment. Continuing efforts to fight corruption and strengthening trust in the judiciary system is essential to reducing uncertainty and spurring growth.

Growth is slowing amid heightened uncertainty

Real GDP grew by 0.2% in the first quarter of 2025 compared to the previous quarter according to the Eurostat flash estimate. Weak business sentiment, low consumer confidence, and slow momentum in industry and retail trade point to sluggish growth in the second quarter of 2025. Uncertainty is weighing on exports and investment spending, while increased absorption of EU funds boosts capital formation. Harmonised consumer price inflation has risen to 3.9% in April, reflecting higher VAT rates and persistent service price growth. Harmonised core inflation remained elevated at 5.5% in April. Real wage growth has continued to strengthen. The labour market is tight, with the unemployment rate and employment rate remaining at historic lows and highs respectively. Labour and skills shortages remain pressing.

Slovak Republic

Source: Statistical Office of the Slovak Republic; and OECD Price Statistics database.

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Slovak Republic: Demand, output and prices

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New orders and goods exports strengthened at the beginning of 2025, reflecting still buoyant foreign demand ahead of the announcements of tariffs and the associated increase in uncertainty. The Slovak Republic is highly exposed to trade barriers, due to its specialisation in the highly trade-dependent automotive value chain. The sector and associated industries account for 10% of total value added, among the highest in the OECD, and more than 80% of gross goods exports to the United States come from the automotive sector, which is now facing 25% tariffs. Furthermore, Slovakia’s deep linkages to the European automotive value chain will transmit the effects of lower foreign demand for automotive output.

Tighter fiscal policy to reduce the deficit

The fiscal deficit remained high in 2024, at 5.3% of GDP. A revised fiscal plan aims to reduce the deficit below 3% of GDP by 2028, one year later than previously envisaged. Most instruments are on the revenue side, thus increasing the tax-to-GDP ratio. Notably, a financial transactions tax was introduced from 1 April 2025. The tax will be deducted by banks from each transaction and ATM withdrawals. The basic VAT rate will increase to 23% from 20%. There are also increased fees for motorway stamps, tolls and vehicle taxes for companies. The increase in taxes will help reduce the budget deficit to 4.8% in 2025. For 2026, the projections assume that higher defence expenditures and rising interest costs on debt will slow consolidation efforts, and the fiscal deficit is expected to narrow just slightly to 4.7%.

Lower demand will reduce GDP and inflation

Tariffs on the automotive sector will reduce goods trade in 2025 and 2026. Heightened uncertainty due to the risk of additional trade restrictions will weaken investment growth. Real wage gains, due to lower inflation, will primarily be used to rebuild household savings, and to a lower extent to support consumption. Headline inflation is projected to rise to 3.5% in 2025 before gradually falling back to 2.5% in 2026. The fiscal consolidation package, while needed, focuses almost exclusively on revenue-raising measures and does little to tackle expenditures and spending inefficiencies, which risks lowering growth in the medium-term. Lower foreign demand and heightened uncertainty would negatively affect trade and investment.

Promoting investment through reforms and incentives

The public finances deteriorated following the pandemic and Russia’s war of aggression against Ukraine, resulting in public debt remaining above pre-pandemic levels. A sustainable medium-term fiscal consolidation strategy that reduces expenditures and broadens the tax base is needed to create fiscal space, with a focus on improving the efficiency of public spending and addressing the challenges of rapid population ageing. Targeted training to strengthen project preparation and implementation capacity can boost public investment by maximising the impact of substantial inflows of EU funds. Making R&D tax allowances refundable for small and young companies could help increase R&D investment. Skills shortages are a significant and persistent barrier to investment. Expanding work-based learning, improving the quality of tertiary education through targeted funding, strengthening incentives to participate in adult learning, and increasing training for the unemployed would help reduce skill imbalances, retain and attract high skilled people, and boost productivity. Continuing efforts to fight corruption and strengthening trust in the judiciary system is also essential to unleash investment.