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ANALYSTS SAY NEXT GOVERNMENT WILL HAVE TO CAP STATE SPENDING

Unhealthy GDP structure to change after elections

WHILE SLOVAK economic growth has recently outpaced that in the traditionally stronger countries of central Europe, experts are warning that the surge is not based on long-term health, and that a new government will have no choice but to choke off the rise.
In the second quarter of 2002, Slovakia's gross domestic product (GDP) grew by 4 per cent, reaching Sk518 billion for the first half of the year, a 3.9 per cent increase year-on-year. During the same period, the Hungarian economy, next strongest in the region, grew by 3.1 per cent. The European Union average was 0.7 per cent.
Analysts said that Slovakia's growth was largely artificial, driven by increased state spending and delays in deregulating prices for gas and electricity, which have in turn fuelled an increase in household spending.

WHILE SLOVAK economic growth has recently outpaced that in the traditionally stronger countries of central Europe, experts are warning that the surge is not based on long-term health, and that a new government will have no choice but to choke off the rise.

In the second quarter of 2002, Slovakia's gross domestic product (GDP) grew by 4 per cent, reaching Sk518 billion for the first half of the year, a 3.9 per cent increase year-on-year. During the same period, the Hungarian economy, next strongest in the region, grew by 3.1 per cent. The European Union average was 0.7 per cent.

Analysts said that Slovakia's growth was largely artificial, driven by increased state spending and delays in deregulating prices for gas and electricity, which have in turn fuelled an increase in household spending.

Whatever government emerges from September elections, they add, will have to impose austerity measures and cap growth stimuli.

"Household consumption remains the biggest growth driver. This is no surprise, given the pre-election 'sweeteners' we have seen," said Ján Tóth from ING Bank.

Up 5.9 per cent year-on-year in the second quarter of 2002, household consumption was driven by the postponement of major price deregulation in 2002 and an increase in public sector wages, up as much as 11 to 16 per cent year-on-year in real terms, said Tóth.

In addition, public sector spending grew by 6.8 per cent in 2Q02, an increase which analysts attributed to an unexpected fall in inflation.

"Excessive growth in public sector spending resulted from original state budget estimates, which were based on expectations of 6.7 per cent inflation. However, inflation has reached record lows [of 2.7 per cent], so there is now a discrepancy," said Juraj Kotian, an analyst from Slovenská Sporiteľňa bank.

At the same time, domestic demand grew by 3.4 per cent and foreign demand by 0.6 per cent in the first half of the year, another factor driving Slovakia's GDP rise.

"Foreign trade has contributed to the acceleration of growth as well, by lowering the trade deficit in absolute prices," said Kotian.

However, analysts stress that the high figures reflect a pace of growth which cannot be sustained unless its driving force shifts from consumption to production.

While household and public sector consumption grew, business sector investments, which provide sustainable economic growth, fell by 0.3 per cent year-on-year in the second quarter of 2002, according to the Slovak Statistics Office.

"This structure of strong consumption - either by households or government - and a drop in gross investments does not represent a long-term sustainable source of economic growth," said Slávia Capital analyst Pavol Ondriska.

"Companies, especially foreign, have been hesitating to invest partially because of elections," he explained.

With elections now past, the country's economic health will almost certainly become the focus of the next administration.

Slovakia's GDP in the second half of this year should be influenced by a post-election cut in public sector spending, said Pavol Baláž of the Statistics Office.

The benefits of greater fiscal discipline could be mitigated by potentially higher foreign and domestic demand, fuelled by construction needs following the past summer's flooding, added Baláž.

Tóth also expected that public spending would be "hit by the fiscal austerity package [to be] introduced in January 2003 by the new government."

However, he continued, "we expect export growth to pick up further by the end of 2002, as well as consumption to stay strong throughout 2002. Exports should then re-take their leading growth support role," he said.

"The growth rate will be approximately the same, only its structure will be more healthy," he added.

While the Statistics Office expects annual GDP growth to reach 3.7 per cent for the full year 2002, analyst predictions range from 3.6 to 4 per cent.

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