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GDP growth rate sparks worries

WHILE Slovakia continues to outpace western countries in economic growth, analysts say that the factors behind the increase are not going to lift the country's living standards in the long term, but instead achieve the opposite.
While gross domestic product (GDP) grew by 3.9 per cent to Sk244.8 billion in the first quarter of 2002 from the same period a year ago, analysts were heavily critical of the structure of the growth, saying that high consumption and low inflation were not conducive to stable economic expansion.
The main problem, say experts, is that the state is spending far too much.

WHILE Slovakia continues to outpace western countries in economic growth, analysts say that the factors behind the increase are not going to lift the country's living standards in the long term, but instead achieve the opposite.

While gross domestic product (GDP) grew by 3.9 per cent to Sk244.8 billion in the first quarter of 2002 from the same period a year ago, analysts were heavily critical of the structure of the growth, saying that high consumption and low inflation were not conducive to stable economic expansion.

The main problem, say experts, is that the state is spending far too much.

"The structure of economic growth does not create conditions for sustaining current trends," said Ľudovít Ódor from the Slovak Rating Agency, pointing out that public spending had increased by 5.7 per cent over the first quarter in 2001, reaching the second highest quarterly value in the last six years.

In spite of warnings from domestic and international economists over Slovakia's worrying fiscal deficit - projected by some to exceed five per cent of GDP this year - analysts doubt the government will do much to reduce public spending in the run-up to September's parliamentary elections.

According to Ľudová banka analyst Mário Blaščák, "higher government expenditures in pre-election periods are common anywhere around the world."

The state spending spree has been abetted by a glut in money from privatisations of state assets over the last four years, which are expected to hit Sk300 billion, or about five times the entire receipts in the nation's history since 1993.

It's not a situation that promotes fiscal responsibility. Ján Tóth from ING Bank said that "increased government expenditures imply that proceeds from privatisation will continue to be used to fill holes in sectors that are still not reformed, like the health care system."

What the state isn't spending directly to drive GDP growth is being added by household consumption. Public wages are scheduled to increase by 15 per cent this year, driving wage growth in other sectors. Real wages grew by 3.7 per cent in 1Q02, said the Statistical Office, the highest quarterly increase in the last four years. Nominal wages also grew in all sectors, with an aggregate year-on-year increase of 8.6 per cent.

The real wage growth has also been driven by record low inflation, stemming from a state decision to defer rises in regulated prices this year, with the resulting consumption boom causing enduring trade deficit problems.

Blaščák explained that "lower inflation brings about higher consumption," pointing out that household expenditures had risen by 5.2 per cent in the first quarter over 1Q01.

"Households are spending much more than they used to," agreed Slávia Capital analyst Pavol Ondriska.

The analysts stressed that consumption was not the only way to grow an economy.

"Further support of consumption that the government has stimulated is beneficial in the short term but dangerous in the long term. It would be better to maintain continual growth from an investment point of view," said National Bank governor Marián Jusko.

Quarterly fixed investment fell for the first time since the end of 2000, an unfavourable development considering investment growth in recent years of up to 16 per cent annually, although the fall may have been due to the weakening of the global economy, said Ondriska.

Despite the need to raise inflation to realistic levels and cut public spending, economic forecasters warn of a continuation of the present trend, predicting GDP growth at 3.7 per cent for the year, and a growth in the average nominal wage by 9.6 per cent, matched against inflation of under 4 per cent.

"Such developments could create an imbalance in the mid-term and threaten the stability of the national economy," said Ódor, adding that increased consumption spelled bad news for Slovakia's foreign trade deficit, which last year hit a record Sk103 billion.

"Without measures like lowering public sector wages and deregulation of prices, a pessimistic scenario is to be expected," said the central bank in a recent statement.

"A high current account deficit would lead to a weakening of the Slovak currency, which would result in a reduction of domestic demand, with all the consequences like price level growth, a fall in living standards, weakening of economic growth and a lowered rating for the country. Slovakia would further lag behind the economic level of the European Union," said the bank.

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