Slovakia's real gross domestic product maintained high growth momentum and rose by an impressive 6.1%, year-on-year, in the first half of 1998. But macro-economic analysts said such high growth could not be sustained over the longer term, and that a slow-down was inevitable before the end of the year.
"We expect a slowdown in the second half. The economy is getting overheated and this is unsustainable for the longer or medium term perspective," said Miloš Bozek, an analyst at J&T Securities in Bratislava.
Real GDP grew by 6.2% in the first quarter of 1998, while it was up by a real 6.0% in the first half of 1997. The Slovak Statistical Office said that nominal GDP was up 11.7% in the first six months of 1998, totalling 347.8 billion Sk ($10 billion).
According to macroeconomic analysts, the GDP continued to be driven by strong domestic demand, a large part of which came from heavy government spending. The state has recently been completing major investment projects, especially motorways construction, which added significant impetus to GDP growth.
On the other hand, household consumption also remained high, as retails sales were up 14.4% in June after an 11.3% increase in the previous month. Since the central bank has been running a strict monetary policy, which has kept wage increases below labour productivity over the first half of the year, some analysts attributed the high household consumption to a rapidly growing shadow economy whose size has been estimated at between 60 and an incredible 100 billion Sk ($2.9 billion) a year.
"The government has been boasting one of the highest GDP growths in the region as evidence of the good health of the economy," said one analyst at a foreign bank who asked not to be identified. "The truth is that the fundamentals are not so sound if you look at factors behind the growth, such as high domestic demand, the growing current account deficit and rising foreign debt. It will be impossible to maintain such strong growth, and the country will hit the wall pretty soon."
Economists have long been warning that a large part of Slovakia's economic growth is being fuelled by domestic demand based on foreign borrowing. Even the central bank recently warned, in its monetary development report for the first half of 1998, that high economic growth cannot continue if driven by increasing foreign debt. Slovakia's overall gross foreign debt totalled $11.313 billion at the end of June 1998, compared with $9.9 billion at the end of last year.
ING Barings analyst Martin Barto said that the large current account deficit showed that the GDP growth was not being driven by any significant improvement in the export efficiency of Slovakia's economy. "The current account deficit could total around 9 to 10% of GDP in the first half of 1998," Barto said.
Barto and several other analysts said they expected that a decrease in government spending, continuing tough central bank monetary policies and increasingly scarce sources for foreign borrowing were likely to lead to a slowdown in economic growth in the second half of this year. Although none of the analysts expected growth to fall under a real 5%, they agreed that the figure was likely to end up below 6% by the end of the year.