SLOVAKIA is the best reformer in the central European region according to the Organization for Economic Cooperation and Development (OECD).
In its two-year economic outlook for the country presented in Paris on November 30, the OECD predicted that Slovakia's gross domestic product (GDP) would grow about 5 percent from 2004 to 2006. Slovakia's GDP growth figure exceeds previous expectations.
GDP accelerated to almost 5.5 percent in the first half of 2004. Monthly indicators suggest that strong growth continued after the summer of 2004. The OECD estimates GDP growth at 4.9 percent this year, 4.8 percent in 2005 and 5.0 percent in 2006, the SITA news agency wrote.
Private consumption, benefiting from real income growth, and investment developed strongly and replaced net exports as the driving force for growth. The current account deficit is expected to widen temporarily as a result of projected increases in machinery and equipment imports following foreign direct investments (FDI) in the car industry.
Unemployment peaked in the first half of 2004, as a result of ongoing restructuring in industry and public services. The OECD expects Slovakia's unemployment rate to fall to 16 percent by the end of 2006.
Headline inflation was around 8 percent over the first three quarters of 2004, of which 4 percentage points resulted from administered price adjustments and the implementation of a uniform value-added tax (VAT) rate. Food price inflation as a consequence of the country's European Union (EU) accession in May exceeded expectations. On the other hand, real wage increases remained well below productivity growth in the first half of 2004.
However, recent collective agreements in several industries imply a marked acceleration in wage growth. Even so, the OECD expects headline inflation to decelerate markedly as the impact of temporary factors wanes.
With the health reform and fiscal decentralisation packages in autumn 2004, the Slovak government has continued to implement its ambitious reform programme, reads the report. The measures launched earlier in 2004 are aimed at providing a favourable business environment and stimulating FDI.
The OECD report also points out potential risks. Inflation might rise if second-round effects of one-off measures prevail. The fiscal target to get the fiscal deficit below 3.9 percent of GDP this year could be endangered by the cost of pension reform and the impact of tax reform, possibly requiring additional fiscal restraint.
GDP growth forecast in 2006 is sensitive to the advancement of the new manufacturing plant for the Hyundai/KIA carmaker. If administrative approval of the construction plans delays the onset of production, GDP growth in 2006 would have to be revised downwards.
- SITA news wire