THE LATEST prognoses indicate Slovakia is returning to economic growth, even to levels high enough to generate new jobs. Still, the Slovak central bank is warning that geopolitical tensions and their possible escalation represent a potential risk.

“This is already the third prognosis confirming statements made by several EU representatives that we are somewhere at the end of the financial and economic crisis; in the phase of revival,” Prime Minister Robert Fico said on June 11, adding that the Finance Ministry is expected to present its prognosis within a few days. “We are in the phase when we can count on very positive trends as well as results at least during the next two to three years.”

The National Bank of Slovakia (NBS) predicted on June 10 that Slovakia’s GDP would grow by 2.4 percent in 2014, up from 0.9 percent in 2013. It decreased its growth prognosis by 0.1 percentage point to 3.2 percent for 2015 and kept its prognosis of 3.5 percent for 2016, leaving its prediction for development of the jobless rate unchanged at 13.5 percent for 2014 and 12.8 percent for 2015.

“If the GDP growth exceeds 3 percent, some experts claim, then processes leading to the creation of jobs and a reduction in unemployment will begin,” said Fico.

The central bank pointed out that Slovakia’s economy remains vulnerable to increased geopolitical tensions between the European Union and Russia.

Ján Tóth, the NBS vice-governor, introduced a special forecast based on the precondition that gas supplies from Russia to Europe would be not reduced, but an escalation in geopolitical tension would reflect in higher oil prices, the weakening of the Russian currency, the reduction of foreign demand, the decline of general confidence in Europe and thus also a lower appetite to invest. This may bring a reduction of Slovakia’s GDP by 1.4 percent in 2014 and by 2.9 percent in 2015, while inflation might increase. If the gas supplies were cut by 15 percent and all sectors of Slovakia were to feel this reduction, GDP might even decrease by 3.3 percent.

In its regular prediction the NBS reduced its prediction of the Harmonised Index of Consumer Prices (HICP) for 2014 from 0.2 percent to 0.1 percent, while it prognosticates HICP at 1.6 percent in 2015 and 1.9 percent in 2016 and, thus, the inflation rate will be closer to the 2-percent target.

When commenting on the low inflation rate in Slovakia, Vladimír Vaňo, chief analyst with Sberbank, said that the record low inflation, including temporary short-term deflation, has in the short term the slightly positive effect of boosting the real growth of wages given the momentum of ongoing nominal wage hikes.

“Hence, but only in the short term, it is a slightly positive contribution to this year’s recovery in domestic consumer demand,” Vaňo told The Slovak Spectator, adding that the problem with the deflationary spiral will start if the negative development of consumer prices becomes a long-term phenomenon.

However, according to him, even short-term negative growth of consumer prices might have negative consequences on the development of public finances and public debt, as the state budget assumed nominal development of sales and hence also indirect tax revenues in the environment of positive inflation. Likewise, extremely low or even negative inflation is narrowing the difference between real and nominal GDP growth, with the latter having an unfavourable effect on the calculation of the relative public debt.

Inflation statistics

After three months of consecutive decline in consumer prices, May has brought an expected halt when prices increased by 0.2 percent month on month, bringing the headline inflation to zero, based on data of the Statistics Office published on June 12.

Bank analysts see prices of food and transport as behind this development, which increased by 1.1 percent and 0.6 percent month on month, respectively.

“These two categories of consumption make up a big share of expenditures of Slovak households and this is why Slovakia’s inflation is sensitive to these items,” Boris Fojtík, economic analyst at Tatra Banka, wrote in a memo.

Fojtík expects that prices might increase only at the end of the year. With respect to the development of inflation, Tatra Banka also lowered its inflation prediction to 0.1 percent for 2014, which would be a historic low.

Reduced gas prices, which Fico indicated on June 11, may take inflation even lower.

The European Central Bank in efforts to stimulate the recovery cut interest rates to record lows and launched a series of measures to pump money into the sluggish eurozone’s economy.

When commenting on these steps and their impacts on the Slovakia’s economy Vaňo said that first of all, it should be kept in mind that the change in the key interest rate was only very nominal and anyway at the record low levels close to zero: 10 basis points cut of the 7-day repo rate to 0.15 percent.

“The major practical consequence is that the environment of the record low level of interest rates is here to stay for the foreseeable future,” said Vaňo. “Though one could make much ado about the effect on deposits, we must keep in mind that the low level of nominal deposit rates is coupled with record low inflation, hence the real level of interest rates looks more palatable. Let’s hope that the ECB decision will help to reinvigorate lending and growth in the eurozone, which is the major export market for Slovakia.”