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GDP INCREASE WAS MAINLY DRIVEN BY EXPORTS; HOUSEHOLD CONSUMPTION REMAINED WEAK

2003 economy sees highest growth in central Europe

ECONOMIC growth in Slovakia keeps posting optimistic numbers. The gross domestic product (GDP) surpassed analysts' expectations and rose by 4.2 percent in 2003 compared to the previous year, which made Slovakia the fastest growing economy in central Europe.
The Slovak economy generated a GDP of Sk1.2 trillion (€29.6 billion) last year, of which Sk316 billion (€7.8 billion) was in the fourth quarter of 2003. The year-on-year growth at 4.7 percent in the last quarter of 2003 was the highest for all of last year.
"We were positively surprised as the fourth quarter exceeded market expectations of a 3.9 - 4.0 percent GDP growth for 2003," Ján Tóth, analyst with ING Bank, told The Slovak Spectator.

ECONOMIC growth in Slovakia keeps posting optimistic numbers. The gross domestic product (GDP) surpassed analysts' expectations and rose by 4.2 percent in 2003 compared to the previous year, which made Slovakia the fastest growing economy in central Europe.

The Slovak economy generated a GDP of Sk1.2 trillion (€29.6 billion) last year, of which Sk316 billion (€7.8 billion) was in the fourth quarter of 2003. The year-on-year growth at 4.7 percent in the last quarter of 2003 was the highest for all of last year.

"We were positively surprised as the fourth quarter exceeded market expectations of a 3.9 - 4.0 percent GDP growth for 2003," Ján Tóth, analyst with ING Bank, told The Slovak Spectator.

"However, no significant changes were seen in the structure of GDP if one compares it with the first three quarters of the year, though some little surprises appeared."

Growth continued to be driven solely by foreign demand (exports), which grew by 26.1 percent year-on-year, thus outpacing imports, which recorded a growth of 11.9 percent.

Most analysts were disappointed that gross capital formation fell year-on-year by 1.8 percent. Investment demand went down by 21.9 percent. On the other hand, public consumption was surprisingly strong in the fourth quarter of the last year; it grew by 10.4 percent.

However, household consumption repeatedly finished in the red. Its 2.3 percent decrease followed a negative real wage development.

Robert Prega, analyst with Tatra banka explained: "The net export [the difference between export and import] was the main factor of the growth, accompanied by the drop of domestic demand - mainly the consumption of inhabitants.

"The strong export growth was dragged by a few strong industrial branches, in which the automotive industry dominated," he said.

In February this year there were concerns that a statistical mistake, which appeared in customs declarations and negatively effected the foreign trade numbers for the last quarter of 2003, could also have an impact on the final GDP figure.

The false declarations input data raised the foreign trade deficit by about Sk9 billion (€222 million). However, the overall strong yearly increase of exports in 2003 swallowed the mistake and maintained the GDP's good figure.

It is evident that foreign trade is important for Slovakia's whole economy. From 1993, when Slovakia was established, to 2003, the volume of exports has increased by 158 percent and imports by 132 percent, the business daily Hospodárske noviny wrote.

Although insiders kept emphasising during the last year that a healthy economy needed a stronger domestic demand, this part of GDP did not enliven in the fourth quarter.

"Domestic demand did not recover. Limited purchasing demand caused a decrease in the final consumption of households; real wages dropped by 3.3 percent," said Silvia Čechovičová, an analyst with ČSOB bank.

However, other recently released data on the labour market confirmed that the economy had finally started to create new jobs, which could encourage household consumption in the future.

"Overall employment in the economy rose by 1.8 percent in 2003, forming nearly 38,000 new jobs," said Štefanides.

In spite of the fact that Slovakia is becoming more attractive for investments, in the structure of the GDP there is no evidence of an improving demand for investment. The main reason is that most investors have already announced entrance into Slovakia but actually establishing the new companies is expected in forthcoming years.

"During the whole year, investments in buildings mainly decreased. However, we saw increasing investments in machinery and vehicles," said Čechovičová.

Štefanides suggests that the strong gains in output and productivity, yet very subdued wage increases implied strong profit gains for businesses.

"In fact, non-financial corporations last year posted a profit of Sk153 billion (€3.77 billion), which was up 9.9 percent over [the figure] a year ago. The strongest year-on-year profit increases were recorded in the transport, post, and telecom sectors (up 173 percent), utilities (29 percent), and manufacturing (25 percent)," he said.

Government consumption posted an unusual 10 percent growth in the last quarter of 2003. However, this figure saw a 2.9 percent increase in the whole of last year.

A more relaxed policy by the ministries in the fourth quarter came after very tough restrictions that were applied from January until September 2003. "In addition, a debt repayment to pharmacies partially spoiled the figure," said Tóth.

Additionally, recently released numbers on public finances showed that they posted much better results than was previously expected. The public finances deficit recorded 3.6 percent of GDP instead of the predicted 4.9, which meant Sk17 billion (€420 million) in savings.

"The low deficit was mainly caused by an unexpectedly great under-use of budget chapter sources," said Finance Minister Ivan Mikloš to the daily SME. Ministries and other state organisations did not draw all the money they were entitled to use from the state budget and pre-accession EU funds.

The ministry said that such results would not help the deficit planned for 2004, as they were unique. "Better figures will not automatically mean a lower deficit this year," the minister added.

In a poll by The Slovak Spectator, analysts predicted an average 4.3 percent growth of GDP in 2004.

Most analysts foresee a slight further acceleration of the economy as they expect external demand to stay strong thanks to export-oriented foreign direct investments (FDI) as well as from the ongoing recovery in global and EU industrial growth. They also hope for a revival of domestic demand.

"After all, the improved financial results of the corporate sector bode well for new investments. Also, several major FDI projects, hitherto mainly in the commitment or preparatory stage, e.g. PSA Peugeot and Kia, will be implemented in the near future, implying greater demand for engineering and construction works," explained Štefanides.

"And a greater availability of EU structural funds after Slovakia's entry into the union in May will most likely boost public investments, especially in infrastructure," he said.

Tóth suggests that net real wage growth will come back into positive territory due to the 19 percent flat tax rate and he expects a slight recovery in household consumption.

Pavol Ondriska, an analyst with Slávia Capital, is a bit less optimistic about the pace of economic growth: "Although an increasing influx of FDI will help gross investments recover, today's pace is not sustainable without the recovery of household consumption and middle and small entrepreneurs' activities. Thus we expect a lower dynamism of growth."

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