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Second quarter GDP growth 2.9%

Slovakia's economy expanded by 2.9% in the second quarter of 1999, buoyed by surprisingly strong domestic consumption and soaring exports. The results confirmed the cabinet's GDP growth predictions, which many international analysts had mocked as unrealistic, but drew warnings from domestic economists that the economy was not out of the woods yet.
"We can draw one conclusion from these GDP results," said Finance Minister Brigita Schmögnerová at a press conference on September 9. "We are going to meet the [macroeconomic] goals that we set for this year."
"This shouldn't be taken as a victory, but it's definitely a good sign," said Martin Barto, a senior economist at state bank Slovenská Sporiteľňa (SLSP). "However, this sign also says that the government has to continue in its reforms, and has to continue to lower the fiscal and current account balance deficits."

Slovakia's economy expanded by 2.9% in the second quarter of 1999, buoyed by surprisingly strong domestic consumption and soaring exports. The results confirmed the cabinet's GDP growth predictions, which many international analysts had mocked as unrealistic, but drew warnings from domestic economists that the economy was not out of the woods yet.

"We can draw one conclusion from these GDP results," said Finance Minister Brigita Schmögnerová at a press conference on September 9. "We are going to meet the [macroeconomic] goals that we set for this year."

"This shouldn't be taken as a victory, but it's definitely a good sign," said Martin Barto, a senior economist at state bank Slovenská Sporiteľňa (SLSP). "However, this sign also says that the government has to continue in its reforms, and has to continue to lower the fiscal and current account balance deficits."

The government set a GDP growth target of 3.0% for 1999, but after adopting an economic austerity package in May, cabinet changed the target figure to 2.0%. International financial experts set their estimates much lower, with Deutsche Bank predicting zero GDP growth for Slovakia in 1999.

Taking into account first quarter growth of 1.8%, however, the country's economy expanded 2.4% in the first six months of 1999.

The Finance Ministry has now re-revised its full year growth estimate to 2.8%, reasoning that the full effects of the economic austerity measures, which were not reflected in first half results, should boost growth as consumer demand slows down.

"The results of the measures approved should be reflected in year-end results," Schmögnerová said. "There has so far not been enough time for their effect to be shown in results and data."

Better structure of growth

Barto said that the government austerity measures had produced "a slightly improved structure" of GDP growth in 2Q99 - principally in a 4.5% decline in investments and in lower borrowing, meaning that economic growth was becoming less driven by foreign sources.

On the other hand, the second quarter showed a large increase in government consumption despite the austerity programme, principally a result of higher spending on social benefits and a failure to cut the number of civil service employees.

Another positive factor was a 4.7% surge in exports, coming on top of first quarter growth of 6.1%. Barto explained that this export growth was due to increased demand in the Czech Republic and Germany, Slovakia's main trading partners, as well as to strong output at Slovak companies with foreign capital such as Sony Slovakia and VW Bratislava, which managed to double their production by expanding their work forces 15-20%. "Of course, there are still many companies in this country losing money, but their share on exports is falling," said Barto.

One final surprise in the results was a 3.1% growth in final household consumption during the first six months. Barto said he had not expected such high figures, and guessed that "the economic situation of the population is not as bad as has been described in some media or by some politicians."

However, Barto added, as austerity measures such as price increases and higher taxation began to take a bite out of incomes in the second half of the year, GDP growth could be expected to slow down.

According to preliminary calculations by the Slovak Statistical Office, the country created a gross domestic product worth 200.1 billion Slovak crowns ($4.76 billion) in the second quarter of 1999, a 2.9% increase in fixed prices and a 10.2% rise in current prices compared to the same period of 1998. The Slovak GDP for 1H99 was 378.3 billion crowns.

The pace of growth in the second quarter was 3.2 percentage points slower than in 2Q98, but 1.1 percentage point quicker than in 1Q99 and 2.4 points up on the ominous pace recored in 4Q98. GDP creation was influenced by a 10% increase in foreign demand and a 1.7% drop in domestic demand. The decrease in domestic demand was linked to lower creation of gross fixed capital (down 12.6%). Final state consumption increased 6%.

In 1H99, the share of the private sector on GDP increased 2.5 percentage points to 85% compared with 1H98, while in agriculture it accounted for 96.9%, in industry 80.2%, in construction 88.4% and in services 95.9%.

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