Slovak retail sales growth revived somewhat in March, data from the statistics office showed on May 4, as the expansion pushed to 2.0% y/y from the disappointing 0.5% growth registered in the first two months of 2016.

The result will come as something of a relief for an economy heavily reliant on consumption for growth in the medium term. However, growth remains tepid, despite continued tightening of the labour market and low inflation. On top of that, a 50% cut in VAT on a number of food products – including meat, milk and bread - at the start of the year had been expected to boost retail sales to a greater extent.

The main contributors to the annual growth for March were a 10.9% increase in sales of automotive fuel in specialised stores, while turnover of food, beverages and tobacco rose an impressive 34.2%. However, food and beverage service activities saw sales drop 0.1%.

Retail sales grew 1.7% last year, down from 3.6% in 2014. The Slovak economy grew 3.6% in 2015 on the back of domestic demand, mostly thanks to investment driven by the absorption of EU funds. Household consumption was another major contributor, and has more onus on it this year due to an expected slump in available EU funds. The European Commission predicts real GDP growth will reach 3.2% this year and 3.3% in 2017. Household consumption growth is expected to reach 3.6% in 2016 and slow only marginally next year.

Consumer prices declined by 0.3% in 2015 as energy prices fell sharply. However, deflationary pressures are expected to dissipate gradually, in line with the pickup in household demand and solid nominal wage growth. Labour market conditions are expected to further improve, but unemployment levels remain high and are only projected to fall below 10% next year.