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PRICES ARE UP AND CONFIDENCE IS DOWN AS COST-CUTTING MEASURES TAKE EFFECT

Consumers feel sting of austerity

CONSUMER confidence was shaken in Slovakia in the first month of 2003, as government austerity measures, utility-price deregulation, and changes to the country's value-added tax regime took effect, raising household costs in nine of 12 categories monitored by the Statistics Office (SÚ).
In the SÚ's most recent Consumer Barometer poll, 55 per cent of respondents reported feeling the country's economic situation had worsened in the past year, four percentage points higher than the year before. Over 64 per cent of respondents thought the economic situation would worsen in the coming year, a 19 point increase over the previous year.
While the utility-price and tax changes were a driving force behind January inflation, at 5.3 per cent month-on-month and 7.3 per cent year-on-year, analysts say the inflation figures are lower than expected. Core inflation, which excludes price deregulation, grew by only 0.9 per cent on the month and 1.9 per cent on the year.

CONSUMER confidence was shaken in Slovakia in the first month of 2003, as government austerity measures, utility-price deregulation, and changes to the country's value-added tax regime took effect, raising household costs in nine of 12 categories monitored by the Statistics Office (SÚ).

In the SÚ's most recent Consumer Barometer poll, 55 per cent of respondents reported feeling the country's economic situation had worsened in the past year, four percentage points higher than the year before. Over 64 per cent of respondents thought the economic situation would worsen in the coming year, a 19 point increase over the previous year.

While the utility-price and tax changes were a driving force behind January inflation, at 5.3 per cent month-on-month and 7.3 per cent year-on-year, analysts say the inflation figures are lower than expected. Core inflation, which excludes price deregulation, grew by only 0.9 per cent on the month and 1.9 per cent on the year.

"Despite its value, year-on-year inflation at 7.3 per cent was slightly lower than average expectations on the market and is in line with the central bank's expectations," said UniBanka analyst Viliam Pätoprstý.

"Almost 70 per cent of the total growth was caused by administrative price changes, and a further 20 per cent by changed indirect taxes in deregulated prices," said Pätoprstý.

The most marked growth in household expenses was seen in the category of housing, electricity, gas, and water (see box, this page). Prices rose by 14.4 per cent in the category, or around Sk600 (14.25 euro) per month for an average Slovak family of four.

Higher utility bills have also started to mean higher prices at cash registers.

"[Price deregulation] mainly affected prices of foodstuffs, which grew by 4.3 per cent compared to December 2002. Without them, these prices would have grown only by 1 per cent, which is less than average growth for January," said Poštová banka analyst Michal Džačovský.

Officials from Slovakia's central bank (NBS) say they have already noticed secondary effects in the prices of foodstuffs, but that it will take time to gauge the effects more deeply.

Besides higher utility bills for producers, the country's changed VAT structure has affected prices. From the first of the year, VAT on most basic goods rose to 14 per cent from 10 per cent, while tax on other goods fell from 23 per cent to 20 per cent.

"This development was chiefly visible in processed foodstuffs, while prices for unprocessed foodstuffs, like fruits and vegetables, were influenced by seasonal factors or by the situation on the market," said NBS officials in a prepared statement.

Producers of foodstuffs say that prices will continue to rise as contracts signed according to previous cost estimates are revised and higher utility expenses are factored in.

"Food producers could not reclaim their higher costs under older contracts. In February and March, however, food prices may go up more markedly," said Stanislav Nemec, spokesperson for the Slovak Food and Agriculture Chamber.

While the NBS is expected to revise its estimates on food-price increases in the coming months, ČSOB analyst Marek Gabriš thinks the bank will be looking more closely at foreign trade figures, with an eye on cutting interest rates.

"The NBS will probably wait for the secondary influence of deregulation in February or March. But these will still be factors over which the NBS has no influence and the bank will prefer to focus on foreign trade," said Gabriš.

"If the deficit in the foreign trade balance improves in the first few months of 2003 and the crown's exchange rate is strengthening, it could make the central bank further cut interest rates by 100 to 150 basis points within the next three to six months," he said.

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