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FIRST SIGNS OF SLOWDOWN SHOW UP IN ECONOMIC DATA

Production hits a wall

AFTER months of intense talk about the global financial crisis, the negative financial tidings have started to materialise in Slovakia’s economic data: industrial production stagnated in the third quarter, while in October it fell significantly behind the projected 4-percent growth. Market watchers held back from issuing dire predictions, but admit that the number of unemployed could grow, especially in export-oriented sectors.

AFTER months of intense talk about the global financial crisis, the negative financial tidings have started to materialise in Slovakia’s economic data: industrial production stagnated in the third quarter, while in October it fell significantly behind the projected 4-percent growth. Market watchers held back from issuing dire predictions, but admit that the number of unemployed could grow, especially in export-oriented sectors.

Industrial production in October 2008 stagnated year-on-year, the Slovak Statistics Office announced. It came after a surge in growth in September, during which industrial production grew by an annualised 5.5 percent compared to 0.9 percent in August. A 0.6-percent increase in electricity, natural gas and water production and distribution had an influence on the growth, the Statistics Office reported.

In Slovakia the car industry has been under the closest scrutiny. The country takes pride from playing host to three major car producers: Korea’s Kia, France’s Peugeot-Citroen and Germany’s Volkswagen.

Market watchers agree that Slovakia, partly dependent on export-oriented industries, cannot remain immune to the decline in production in the eurozone.

They also say that while during the first half of 2008 industry was still upbeat, Slovakia should now get used to much lower growth numbers - if not zero growth - for at least the next two or three quarters.

“Slovak industry is export-oriented and stands on three basic pillars: car production, electro-technology and machine production,” ČSOB bank senior analyst Silvia Čechovičová told The Slovak Spectator. “With smaller imbalances, the car industry was doing fine, supported mainly by the existence of three carmakers in Slovakia. It was only in October 2008 that is started to witness red numbers.”

However, this development had been expected since car sales in Europe, where most of Slovakia’s production is targeted, have been dropping, said Čechovičová.

Ľubomír Krošňák of UniCredit Bank and Juraj Valachy of Tatra Banka agree that it was the automotive industry which propelled Slovak industry during the first three quarters of 2008.

“By contrast, the leather, textiles and glass industries - under the influence of the strengthening crown and strong Asian competition – as well as the food industry have been declining for a longer time,” Krošňák told The Slovak Spectator.

“In the first half of the year even the electro-technical industry fell behind despite the year-on-year growth in production,” he added.

Since production practically reached its maximum at the end of last year, year-on-year growth in the second half of this year hardly increased, Valachy told The Slovak Spectator.

Krošňák said that the electro-technical industry traditionally experiences a pre-Christmas boom and the launch of new production capacities in Slovakia have became an industry driver.

According to Čechovičová, development of the electro-technical industry has alternated between stronger and weaker months.

“Over the past two months the industry grew at a double-digit tempo, but it can also be seen as the quiet before the storm,” Čechovičová added. “Lower demand from the EU must logically affect this sector.”

No significant improvements can be expected in forthcoming months say market watchers, since the end of 2008 is already affected by the crisis and growth will be very slight.

Production has been dropping considerably all over Europe, said Valachy. While in Western Europe in fact there has been contraction, here we have only zero growth, he added.

Krošňák expects Slovakia’s economy to maintain its growth tendency: it is only that its growth will be slower than had first been predicted at the beginning of the year.

When compared to the eurozone and the wider European Union, Slovakia is still moving in positive territory. Elsewhere in the EU the situation has been worsening since May and since then industrial production has been in the red, said Čechovičová.

“Most EU countries, because of the crisis, are recording a year-on-year drop in industrial production,” Krošňák said. “Thus Slovakia even in this respect remains a leader of the European Union.”

For example, in September Slovakia recorded the second highest growth (after Lithuania) in industrial production among all the countries which have so far published their data, Krošňák said.



Mixed outlook for employment



Employment growth in Slovakia may stagnate or remain approximately at current levels, analysts estimate.

“Obviously companies, in their efforts to overcome the crisis, will reach for other forms of labour reduction such as a higher share of part-time labour or by offering early retirement,” Krošňák said.

Čechovičová too expects a slowdown in employment growth – which she estimates at 1.0 percent - and a slight increase in the unemployment rate.

“Unemployment in Slovakia should grow moderately, despite the fact that we do not expect a fall in the number of employed people,” Krošňák said. “This growth in unemployment will be supported by the return of labour from abroad, where 165,000 Slovaks currently work.”



Potential healing effect?



However, the market is also pondering what potential healing effects the crisis might have on Slovak industry.

Each crisis can have such an effect by preparing people for future changes, said Čechovičová.

“[The crisis] will help to clean the market faster by hastening the irreversible fall of weaker firms who are unable to face its challenges,” Krošňák said.

Krošňák added that this could potentially stabilise the labour market, for example, which in some regions and professions has reached the limits of its capacity.

“It can lead to pressure to cut expenses and increase labour productivity or install new technologies,” Čechovičová said. “Maybe it will teach us that the structure of industry or the whole economy should be more diversified and should be directed at branches with higher added value. It is precisely greater diversification which could ensure that the economy survives future crises with lesser effects.”

According to Valachy, the crisis has increased the pressure to be competitive, to innovate and to cut expenses.


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