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CONTINUING ECONOMIC GROWTH FUELED BY REAL WAGE INCREASES AND HIGH DOMESTIC CONSUMPTION

Q1 results preserve Slovakia's lead

THE SLOVAK economy has so far lived up to the expectations of the country's leaders. Now it is sending positive signals to those hit hardest by the government's aggressive economic reforms.

THE SLOVAK economy has so far lived up to the expectations of the country's leaders. Now it is sending positive signals to those hit hardest by the government's aggressive economic reforms.

Slovakia maintained its position in Central Europe as the leader in economic growth, leaving behind its neighbours in the gross domestic product (GDP) race. Only the Baltic states, with Estonia posting a 7-percent year-on-year growth, can take pride in a better performance.

The country's GDP grew by 5.1 percent year-on-year in the first quarter of 2005 to Sk332.5 billion (€8.6 billion). The growth is faster than what the Statistics Office predicted in its mid-May outlook.

The main driver of Slovakia's economic growth in the first quarter of 2005 was similar to 2004: domestic demand.

Mária Valachyová, a research analyst with VÚB Bank, told The Slovak Spectator: "Domestic demand is a slightly bigger contributor to Slovakia's GDP growth than investments during the first quarter of 2005, even though investments increased by 8 percent year-on-year during the same period. Household consumption, which rose 5.5 percent year-on-year, was fuelled by strong real wage growth and a gradually improving labour market," she said.

According to Sylvia Čechovičová of ČSOB Bank, the positive news is the growth of the country's gross fixed capital, which is likely the result of the continuing influx of foreign investments. However, the analyst says that exports remain a weak link in the economy.

"The slower growth of exports is what slows down the economy," Čechovičová told The Slovak Spectator.

Compared to the results of the last quarter of 2004, when the economy posted a 5.8 percent growth, the latest GDP results indicate a mild slowdown. Analysts agree that the slowdown is not a reason for concern.

"The fourth quarter GDP growth was very strong. Taking into account seasonal factors and fewer working days in quarter one, GDP growth decelerated to only 5.3 percent year-on-year from one quarter to the next. Deceleration was caused mainly by a smaller inventory contribution to the overall year-on-year GDP growth. Both household consumption and gross fixed investments accelerated since the fourth quarter. On top of that, net exports (exports minus imports) were less detrimental to first quarter growth than in the fourth quarter of 2004," Valachyová explained.

Čechovičová agrees with her colleague "the lower number of working days contributed to the mild slowdown, but it is still a very good result."

In terms of GDP creation, growth was inspired by the rise in value-added commerce (14.6 percent), agriculture (14.2 percent), construction (10.8 percent), industry (7.9 percent), transport, postal services and telecommunications (4.7 percent), other services (3.9 percent), real estate and rentals (3.8 percent), public administration and defence (2.8 percent) and financial services (0.6 percent).

On the other hand, added value fell in health (12.4 percent), education (11.2 percent) and hotels and restaurants (1.6 percent), based on the Statistics Office data.

What makes a difference to the average Slovak is not necessarily positive GDP growth rates but the fact that they are taking home more pay.

Finance Minister Ivan Mikloš proudly reported that Slovakia is catching up with the living standards in other European Union countries.

"GDP growth is gradually starting to make a difference to citizens' purses. Real wages (nominal growth adjusted for inflation) rose in all sectors by a total of 7.2 percent, which is extremely strong," said Mikloš.

"That means that people were able to buy, out of their wages, 7.2 percent more goods and services than one year ago," he explained.

The average monthly wage in Slovakia now exceeds Sk16,022 (€421), which boosts Slovaks' purchasing power.

While real wages increased, analysts say that the nominal wage growth of 10.2 percent year-on-year was not so different from previous quarters.

"What differed was significantly lower inflation in the first quarter of 2005 than in the fourth quarter of 2004. Real wage growth, which matters to households, increased by 7.2 percent year-on-year in the first quarter of 2005 as compared to 4.4 percent in the last quarter of 2004. We expect a slight deceleration in real wage growth during the course of the year, probably averaging a 5.3 percent year-on-year growth for the whole 2005," Valachyová said.

Some feared that growth led by consumption and real wage increases would deform the structure of the economy. However, analysts think that wages are not likely to maintain their sharp trajectory upward.

According to Čechovičová, a one-time event is behind the sharp increase in nominal wages: a large industrial firm paid bonuses to its management.

"Though wages will continue rising, April data indicates that the increase will return to normal, " Čechovičová told the Spectator.

Valachyová sees potential risks behind economic growth supported by household consumption and the increase of real wages.

"The potential risk from a strong wage increase is demand-driven inflation pressure (high demand increases the purchasing power of a seller), which could endanger the central bank's target inflation rates. Judging by monthly inflation data released by the Statistics Office, however, demand-driven inflation pressures remain contained," she said.

Those sectors with the highest average nominal wages are the financial sector (Sk34,132/€898); electricity, gas and water (Sk23,262/€612); real estate and rentals (Sk19,349/€509); public administration and defence (Sk18,460/€485); transportation (Sk18,304/€481; mining (Sk17,958/€472); and industrial production (Sk16,941/€445).

The lowest wages were paid in social services (Sk11,671/€307); hotels and restaurants (Sk11,905/ €313); healthcare and social work (Sk12,496/€328); and construction (Sk12,507/€319), the news agency TASR wrote.

What is particularly positive for Slovakia is that unemployment rates are continuously dropping. Slovakia's unemployment rates are among the worst in the EU.

Over the first quarter of 2005, about 462,000 people were out of work, which is 50,000 less than for the same period last year.

The jobless rate calculated by the Slovak Statistics Office has dropped from 19.3 percent to 17.5 percent over one year.

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