SLOVAKIA’S economic growth maintained sound growth dynamics during the second quarter of 2014; however, the contraction of Germany’s economy and stagnation in the Czech Republic is not good news for Slovakia.

The Slovak economy grew 0.6 percent in the second quarter compared with the first quarter of 2014, seasonally adjusted. This means a moderate deceleration from the 0.7-percent growth during the first quarter, based on the flash estimate of the Slovak Statistics Office. On an annualised basis, economic growth in fixed prices accelerated from 2.4 percent in Q1 to 2.5 percent in 2Q.

While the Statistics Office will release the detailed structure of the GDP growth only on September 3, analysts estimate that Slovakia’s economy was driven especially by domestic demand.

“We assume that household consumption has also contributed positively to the growth, even though the year-on-year growth will probably be slower that the year-on-year 3.4 percent growth from the first quarter,” Michal Mušák, analyst with the Slovenská Sporiteľňa, wrote in his memo.

Ľubomír Koršňák, analyst with UniCredit Bank Czech Republic and Slovakia, believes that the contribution of net exports should, similar to the first quarter, oscillate around zero, when the growth of exports in fixed prices compensated for the stronger growth of imports due to revised domestic demand.

“From the viewpoint of the structure of domestic demand’s growth on the basis of monthly data, it seems especially that the consumption of households remains the driving force, while investments have not registered any significant revival,” Koršňák wrote in his memo.

Employment grows

Slovakia’s economic growth in the second quarter was accompanied by relatively strong growth in employment. It rose by 0.5 percent between April and June, while its y/y growth dynamic accelerated from 0.6 percent to 1.4 percent, according to Koršňák.

“Thus, employment rose the fastest since Q3 2011, while the growth of employment in combination with the continuing growth of wages and the absence of inflation was probably one of main momentums of the growth of household consumption,” wrote Koršňák. “On the other hand, the faster growth of employment reduced the growth dynamics of labour productivity, whose year-on-year growth in fixed prices slowed down from 1.9 percent to 1.1 percent.”

According to Koršňák, in all probability the growth of wages again exceeded the growth of labour productivity.

Slovakia’s main partners perform worse than expected

Analysts have noted worse than expected results for Slovakia’s major economic partners. Germany’s economy contracted by 0.2 percent between April and June, while analysts expected stagnation. This is the first contraction in over a year. The Federal Statistics Office sees foreign trade, which has traditionally been a driver of German growth, and investment, particularly in the construction sector, as behind the decline in GDP. Annualised economic growth of 0.8 percent did not meet the expectations of Reuters analysts, who expected 1.5 percent.

According to Mušák, estimates of German economic growth at around 1.5-2 percent in 2014 will probably remain unfulfilled.

Another large eurozone economy, France, has also failed to meet expectations. Its economy stagnated between April and June, while the markets expected moderate growth of 0.1 percent, said Mušák.

Out of Slovakia’s neighbouring countries, Hungary offered a positive surprise when its GDP grew 0.8 percent between April and June and 3.9 percent y/y. The Czech Republic’s economy stagnated quarter-on-quarter, despite analysts expecting 0.3-percent growth. Czech GDP grew 2.6 percent y/y, while the market anticipated 2.9 percent.

Outlook

Analysts expect that the weaker performance of Slovakia’s main trade partners as well as the Ukrainian crisis may affect Slovakia’s economy, too.

Zdenko Štefanides, chief economist with VÚB bank, believes it is questionable whether Slovakia can maintain its relatively fast economic growth for the rest of the year.

“Also, thanks to the continuing improvement of the labour market, it is possible that domestic demand will even accelerate its growth dynamics in the coming months and, thus, it will compensate for the expected deceleration of foreign demand,” Štefanides wrote in his memo, assuming that it is especially domestic demand, including household and government consumption, that is currently propelling GDP growth.

Slovenská Sporiteľňa expects Slovakia’s economy to grow about 2.2 percent in 2014 and does not expect that current figures will affect it significantly.

“The first half of the year was moderately faster; on the other hand, our main trade partner, Germany, has slowed down,” wrote Mušák. “This may later negatively mirror also in the performance of Slovakia’s economy.”

According to Koršňák, the revival of Slovakia’s economy in the first half of the year may be negatively impacted by the Ukrainian crisis during the third quarter.

“Even though the direct impact of sanctions on Slovakia’s economy should not be significant indirectly, via trade partners but especially via the worsening of business and consumer moods across Europe as a consequence of the growing uncertainty, Slovakia’s economy should also feel the escalation of the tension,” wrote Koršňák.

If there is no further escalation of tension resulting in other sanctions, the shock from the worsening mood in Europe might calm down, and the slowdown of economic growth might only be temporary.

“However, in case of further escalation of tension, it cannot be excluded that the growth of Slovakia’s economy might even come to a halt,” said Koršňák.