Slovak economy makes believer of EC

WHILE Slovaks living in the country's poorer reasons remain unconvinced of the vigour of the economy, the European Commission continues to have great faith in Slovakia's growth potential.

WHILE Slovaks living in the country's poorer reasons remain unconvinced of the vigour of the economy, the European Commission continues to have great faith in Slovakia's growth potential.

In its spring economic prognosis, the EC predicts that the country's GDP growth will remain high at around 6 percent this year, and that growth will climb to 6.5 percent next year.

Notably, domestic production will remain the main engine of this growth, while exports will pick up significantly, according to the EC.

The report also predicts that employment will increase, and that the unemployment rate will drop from 15.5 percent this year to 14.8 percent in 2007. Strong domestic demand and newly launched export production capacities are expected to provide new jobs.

As optimistic as this scenario is, analysts say that Slovakia's economy could even outdo the EC forecasts.

"The latest estimates of the EC are broadly in line with the consensus. In fact, there is a good chance that growth will be even stronger than their forecast. Note, for example, that the National Bank of Slovakia recently upped this year's GDP growth forecast to 6.6 percent and next [year's] to 7 percent," Zdenko Štefanides, chief analyst with VÚB Bank, told The Slovak Spectator.

"The main engine spurring growth from the already strong 6.1 percent last year to 7 percent next year are the forthcoming payoffs from the major FDI projects now under way, especially in the automotive industry," Štefanides added.

Štefanides said that Slovakia's economic growth will not come only from the automotive industry, but will be based on all major sectors, including the booming construction and manufacturing sectors as well as trade, transport and finance.

The EC expects that average annual inflation will reach 4.5 percent this year and should drop to 2.75 percent in 2007 unless there is a major increase in regulated prices.

The GDP and employment growth together with lower interest rates could see the public finance deficit at the end of 2006 come in at around 2.75 percent of GDP, slightly under the level estimated in the 2006 budget, the EC predicts.

The EC is not alone in its rosy outlook on Slovakia's economy. Adding to the chorus, the International Monetary Fund (IMF) also expects that Slovakia will remain the regional leader in GDP growth.

Earlier in May in its World Economic Outlook, the IMF estimated that Slovakia's GDP would grow by 6.3 percent this year and 6.7 percent next year. The IMF thus revised its estimate of 5.4 percent Slovak economic growth in 2006 from September 21, 2005.

The fund also estimated that Slovakia's GDP would rise 5 percent in 2005. In reality, the country's economy grew 6 percent.

The IMF expects that the average GDP growth rate in Central Europe will be 4.6 percent this year.

The EC projects that economic growth will rebound in 2006 to 2.3 percent in the European Union and to 2.1 percent in the euro area, up from 1.6 percent and 1.3 percent respectively in 2005, with the main impulses coming from a robust increase in investments and an improved outlook in Germany.

While fears of unemployment remain strong in most EU member nations, the EC spring forecast offers some fresh hope for new jobs, though it is unlikely to reduce public anxiety in older EU member states over the prospect of rising unemployment as corporations move their production eastward.

"The EU as a whole is expected to create 3.5 million new jobs over the period from 2006 to 2007, after nearly 3 million in the previous two years. This will help reduce unemployment from a peak of more than 9 percent in 2004 to an expected 8.2 percent in 2007 in the EU," reads an official EC release.

According to the EC, inflation remains stable at slightly above 2 percent despite soaring oil prices, which continues to pose the main risk to economic growth.

Slovakia's economy has not given the EC much cause for worry since the country scored a promising split time in the race towards adoption of the euro single currency, lining up with Estonia, Lithuania, and Slovenia at the forefront of technical and administrative preparedness.

If Slovakia keeps up its current pace, it could become the first new member of the European Union to adopt the new currency, economists agree. Slovakia is seen as having about an 80 percent chance of adopting the euro by 2009, its target date.

In order to qualify to enter the Euro Zone in 2009, Slovakia must fulfil the "Maastricht criteria" of economic health, including a public finance deficit of less than 3 percent of GDP.

Slovakia will have to keep inflation within 1.5 percentage points of the average for the three best performing EMU countries, while long-term interest rates should be no more than 2 percentage points above the average for these countries.

The public debt should be no more than 60 percent of GDP. The country also has to keep its currency exchange rate within the ERM II fluctuation band for at least two years, meaning within 15 percent above or below a central parity.

Slovakia currently fulfils two of the above conditions, those on interest rates and the public debt.

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