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ECONOMY

Macro Notes: Is economic growth back on track?

Slovakia recorded 1.9% year-on-year headline growth in 2Q00, very similar to headline growth rates in recent quarters. But are current growth dynamics the same? We think not. Base effects were such that headline growth numbers did not reveal true Slovak growth dynamics. The following analysis focuses on annualised quarter-on-quarter changes.
Slovak growth actually strong in 2Q00
The state of the economy was much worse in 2H99 than headline numbers indicated. The economy began its recovery from post-election price shocks (following the floating of the currency in September 1998) and rapidly recovered after no more than five months. This was in sharp contrast to the experience of the Czech Republic in 1998-1999.Slovak growth actually strong in 2Q00


Ján Tóth is Chief Economist at Dutch investment bank ING Barings in Bratislava.

Slovakia recorded 1.9% year-on-year headline growth in 2Q00, very similar to headline growth rates in recent quarters. But are current growth dynamics the same? We think not. Base effects were such that headline growth numbers did not reveal true Slovak growth dynamics. The following analysis focuses on annualised quarter-on-quarter changes.

Slovak growth actually strong in 2Q00

The state of the economy was much worse in 2H99 than headline numbers indicated. The economy began its recovery from post-election price shocks (following the floating of the currency in September 1998) and rapidly recovered after no more than five months. This was in sharp contrast to the experience of the Czech Republic in 1998-1999. However, the economy was hit again with a May 1999 fiscal austerity package, and output continued to fall for the remaining months of 1999. Slovak purchasing power fell and the government cut its capital expenditures by 34% in the course of one year. Growth very slowly recovered again in 1Q00, and 2Q00 actually shows a very strong recovery with growth above 3%.

* Shock one - post-election floating of the Koruna in 1998

The abandonment of the fixed exchange rate regime on October 1, 1998 and the consequent 9% nominal depreciation caused a run on imports by the public. With money spent on these imports, there was not enough left to buy locally-produced Slovak goods. The first shock was also transmitted through lower government expenditures and public investments. Investment growth had already started to fall before the elections in 3Q99, from annualised growth rates of 20% to a mere 5% in September 1998.

* Shock two - May 1999 fiscal austerity package (price deregulation and tax hikes)

After the second shock, household consumption was hit hardest. The fall was a dramatic 7.6% in 1Q00 and 5% in 2Q00. Investments collapsed too, at a rate of 10% year-on-year. It is interesting to note that government consumption did not fall sharply when the austerity package was implemented in 2H99. It is only this year that the government has been more successful in capping its role in the economy, and government consumption is now falling at a respectable 5% annual rate. Since September 1999, domestic demand has been declining by a huge 3% year-on-year.

* What to expect?

We will soon see a positive stream of numbers for retail sales (signalling rising household consumption trends), construction (investments), and industrial output (exports). The purchasing power of Slovaks will pick up on real net wage growth and unemployment stabilisation. In addition, highway construction plans and FDI-related activities will prevent construction falling any further, while the pick-up in growth in the EU and the Czech Republic will continue to fuel export growth. Should the trend set in the 2Q00 GDP numbers continue, this summer will prove to have been the turning point for the Slovak economy.

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