Slovakia

Fiscal consolidation and inflation are weighing on economic growth

Economic growth slowed markedly over 2025 amid ongoing fiscal consolidation, with the introduction of a higher VAT rate – the standard rate rose from 20% to 23% and the reduced rate edged up from 10% to 19% – and the new financial transaction tax, which has eroded household spending capacity and weighed on consumption. As a result, private consumption turned negative in year-over-year terms in the final quarter of 2025. Weak household demand was partially offset by rising capital expenditure, a trend expected to continue in 2026 as remaining projects accelerate ahead of EU funds disbursement deadlines. Having said that, the European Parliament’s resolution of April 2026 calling on the European Commission to trigger the rule of law conditionality mechanism poses a significant risk to near-term absorption - particularly for the EUR 12.6 billion in cohesion funds allocated through 2027. Exports have remained resilient despite global trade tensions, supported by increased production capacity in the automotive sector. 2027 should bring new projects from major carmakers, such as the Volvo manufacturing plant in Košice, which will support the exports but deepen country dependence on the automotive sector.

Further fiscal consolidation measures continue to exert downward pressure on household consumption. Moreover, the disinflationary process associated with the end of 2025 VAT hikes is likely to be halted by the surge in energy and commodity prices stemming from the blockade of the Strait of Hormuz. Even with state interventions on the fuel market limiting retail price increases. Increases in fuel prices feed through inflation rapidly, while a prolonged blockade would generate broader and more persistent inflationary effects as the rise passes through to broader range of goods. Moreover, the decision to uncap heating prices earlier this year will exert upward pressure on inflation. Households are expected to devote a larger share of their spending to fuel and other affected commodities, crowding out expenditure on domestically produced goods and services.

EU funds may soften fiscal tightening

Fiscal consolidation will continue but at a slower-than-expected pace and will be curbed by structural spending rigidities and approaching elections in 2027. The government's third consolidation package in early 2026 targeted both revenue and expenditure, introducing increased health care contributions for employees, enhanced income tax progressivity, new minimum corporate tax levels, and higher VAT rates on selected goods. However, sustained defence spending – a permanent increase resulted from security concerns – and energy support measures, which cap electricity and gas prices for most households until at least 2027, limit room for further expenditure adjustments. Public sector wage freezes in most sectors provide some relief, but wages indexation in education and healthcare offsets savings elsewhere. The general government deficit is projected to remain elevated, with full consolidation to below 3% of GDP pushed beyond the current medium-term outlook. Interest payments continue to rise as a share of revenue, thereby exacerbating long-term fiscal sustainability concerns. The government's fiscal trajectory hinges on efficiently absorbing EU Recovery and Resilience Plan funds as these inflows are critical for supporting investment and offsetting weak domestic demand. Political pressures associated with the upcoming elections will likely limit additional consolidation measures, particularly those affecting public sector employment or social transfers.

Slovakia's external trade position remains vulnerable to weak European demand and global trade uncertainty. Net exports rebounded in 2025, but exporting sectors continue to rely heavily on automotive production, which creates concentrated export dependency. The trade deficit is expected to widen as the global energy and commodity volatility will increase the imports through price effect and possibly weigh on economic activity in Western Europe, including a key trading partner, Germany. A significant upside opportunity is set to emerge in late 2027 with the launch of new automobile production capacity in Košice, which should provide a substantial export boost and help restore market share lost since the pandemic. The current account deficit, driven by trade imbalances and income outflows, underscores the economy's reliance on EU fund inflows and foreign direct investment – though the latter remains thwarted by investor concerns regarding foreign policy and frequent tax policy changes that fuel business uncertainty.

Slovakia’s political divide widens

Slovakia's political landscape remains deeply polarized, with the three-party coalition of Direction – Social Democracy (Smer, left wing populist), the Slovak National Party (SNS, national conservative), and Voice – Social Democracy (Hlas-SD, social-democratic and populist) facing mounting political headwinds. The Fico government's attempt to strengthen control over national institutions – most recently through efforts to abolish the country's whistleblower protection office, a move overturned by Slovakia's top court – reflects escalating tensions within the coalition and broader democratic concerns. Fico's idea of postponing regional elections to 2027 was also met with public pushback from coalition partner, Hlas-SD. As fiscal consolidation measures bite and macroeconomic conditions deteriorate, the incumbent coalition, particularly Smer and Hlas, is gradually losing popularity to the center-liberal opposition party Progressive Slovakia and the far-right Republic Movement, which does not currently hold parliamentary representation. These shifting political dynamics suggest that electoral pressures will intensify as 2026 regional elections approach and the campaign starts for the 2027 parliamentary elections, which is curbing the government's ability to pursue additional costly or unpopular fiscal adjustments.

Slovakia's international relations have undergone a subtle but meaningful realignment. The loss of Viktor Orbán as a key ally in Hungary following the latter’s recent electoral setback has weakened Fico's negotiating clout on EU matters and removed an influential voice for obstructive stances in the EU bloc. Previously, Orbán and Fico shared a common position opposing EU sanctions against Russia, military support for Ukraine and deeper European integration, so without this alliance, the Fico government has come under greater pressure to align with EU positions. This shift has already materialised in Slovakia's turnaround regarding Ukraine's EU accession. The approach of EU fund disbursement deadlines and the urgent need to accelerate the economy ahead of the 2027 elections will also persuade Fico to adopt a more cooperative stance toward Brussels. That said, Fico will likely maintain a firm position on issues with direct economic consequences for Slovakia, particularly regarding the continued flow of Russian oil through the Druzhba pipeline. Slovakia may also find common ground with other Visegrád Group countries, particularly Czechia and Hungary's new government, which are expected to pursue pragmatic policies toward Russia, especially given shared energy import dependencies.

Last updated: June 2026