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STRONG Q1 RESULTS TRIGGER OPTIMISM

Ministry gives rosier economic outlook

ROSY financial results, climbing real wages and a shrinking unemployment rate inspired the Finance Ministry to revise its economic growth prognosis.

ROSY financial results, climbing real wages and a shrinking unemployment rate inspired the Finance Ministry to revise its economic growth prognosis.

In January 2004, the ministry expected the country's gross domestic product to grow by 4.9 percent. After first quarter results exceeded expectations, however, the Finance Ministry revised its GDP growth figures to 5.1 percent.

The ministry maintains its optimism for 2007, expecting GDP growth to climb to 6 percent.

Analysts share the ministry's confidence in the Slovak economy.

"I think the estimate revisions are realistic. We have also increased our estimate to 5.2 percent in response to first quarter results. We also assume that in the second half of the year, investment activities will intensify along with exports, which, over the first three months of 2005, were not as strong as we had expected," Róbert Prega, an analyst with Tatra banka, told The Slovak Spectator.

The ministry assumes that citizens will sense the improving economic performance of the country through an increase in the average wage growth. Wages are now expected to grow 5.2 percent, compared to January's estimates of 4.1 percent. Annual price increases should dip to an historical low at 2.8 percent.

Finance Minister Ivan Mikloš says that by 2008, wages should increase by 17.5 percent, pensions by 13.7 percent, and household consumption by 20 percent over last year's figures.

The average year-end inflation rate has been changed, down from 3.3 percent to 2.8 percent. The average annual inflation rate should fall to 2.5 percent in 2006 and keep at 2 percent for the next two years.

According to a general labour force survey, Slovakia's unemployment rate should level off at 16.8 percent this year.

Mikloš expects that 100,000 new jobs will be created by 2008.

The ministry's prognosis of the labour market also appears realistic to analysts.

"I would not evaluate the creation of 100,000 jobs as unrealistically optimistic. However, all the decisive institutions seem to agree that despite the improving development, the unemployment rate will be relatively high during the upcoming years, mostly due to other influences such as demographic development," Prega told the Spectator.

A higher GDP could potentially help lower the public finance deficit, but the Finance Ministry was careful not to promise that the deficit would dip.

The ministry is expected to release its prognosis on tax collection soon.

According to the ministry, positive macroeconomic data do not necessarily create conditions for further tax cuts.

"As long as we have excessive public finance deficit, any reduction of taxes would only make the debt greater for future generations," stressed Mikloš. However, the minister did leave hope that the government would ease the payroll tax burden in the medium- to long-term.

Analysts share the ministry's reserve. They are sceptical that optimist economic predictions will result in tax reductions.

"The increase itself (GDP growth) is not that decisive that it alone would create a space for tax reductions," Prega said.

Producer prices (as opposed to consumer prices) should increase by 3.1 percent. Slovakia's current balance of payments should end this year with a deficit of 4.5 percent of GDP, the news wire SITA wrote.


Magdalena Macleod

contributed to the report.

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