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Market takes a cold shower

ALTHOUGH the market had been expecting a poorer performance from Slovakia’s economy than during the record-breaking final quarter of 2007, when GDP growth hit more than 14 percent, the figure for the same period in 2008, 2.7 percent growth year-on-year, delivered a colder shower than anticipated.Slovakia’s GDP grew at 7 percent in the third quarter of 2008, at 7.9 percent in the second and at 9.3 percent in the first quarter year-on-year, the Slovak Statistics Office reported on February 13. Despite the slowdown, Slovakia is still one of the best performers among the crisis-affected economies of the European Union (EU).

ALTHOUGH the market had been expecting a poorer performance from Slovakia’s economy than during the record-breaking final quarter of 2007, when GDP growth hit more than 14 percent, the figure for the same period in 2008, 2.7 percent growth year-on-year, delivered a colder shower than anticipated.
Slovakia’s GDP grew at 7 percent in the third quarter of 2008, at 7.9 percent in the second and at 9.3 percent in the first quarter year-on-year, the Slovak Statistics Office reported on February 13. Despite the slowdown, Slovakia is still one of the best performers among the crisis-affected economies of the European Union (EU).

While a year ago, the term recession was almost absent from the vocabulary of market watchers the word is now being used regularly to describe the state of many EU member states’ economies. And these are closer to Slovakia than the map might suggest. Since Slovakia is a small, export-oriented economy the plummeting demand hitting major EU markets players is now directly affecting Slovak producers. Market watchers are no longer ruling out the possibility of recession for Slovakia’s economy, but they still hope for a slightly more optimistic outcome: feeble growth, but growth nonetheless.

Slovakia’s GDP in the final quarter of 2008 totalled €17.4 billion, reflecting the marked impact of the economic downturn, according to the Slovak statistics authority. GDP growth for the whole year stood at 6.4 percent.

“Even though the previously published numbers on December’s foreign trade and industrial production had sent signals about the slowdown of the economy, our expectations and also the expectations of the market were slightly more optimistic,” Zuzana Holeščáková, analyst with Poštová Banka, told The Slovak Spectator. “To a certain degree, the base effect stands behind the slowdown, since in the 4th quarter of 2007, Slovakia’s economy grew at a double-digit pace, at 14.3 percent.”

Market watchers had expected GDP in the fourth quarter of 2008 to grow at about 3.0 percent, VÚB Banka senior analyst Martin Lenko told The Slovak Spectator.

“The impact of the crisis on the slowdown is dominant,” Lenko said.

He also agrees with Holeščáková that “if there were no crisis, the slowdown in GDP growth would obviously relate to a larger degree to the base effect, while in 2008 there was no significant increase in production capacities.”

The detailed structure of GDP will be known only in early March but Holeščáková said she assumes that the drop in foreign demand lies behind the slowdown.

“The published data prove that Slovakia is a small open economy, which is significantly bound to international markets,” Holeščáková said.

A significant portion of Slovakia’s exports, about half, goes to euro area countries, while 85 percent of exports go to the wider European Union, she added.

“The falling consumption in the eurozone, but also across the whole EU, along with the slowdown and downturns in these economies negatively affect Slovakia’s economy,” Holeščáková said.

According to a flash estimate by Eurostat, the EU’s statistics unit, euro area economies shrank by 1.2 percent year-on-year, while the whole EU economy contracted by 1.1 percent, she noted.

However, Lenko also suggested that “overall, GDP growth in the last quarter of 2008 can in fact be characterised as good, partly because of the very weak economic sentiment which has been pointing towards negative GDP growth, but also in comparison with GDP growth in other European countries, which have posted weaker or negative growth”.

As for the impact that the economic slowdown might be having on the population, Lenko said that GDP growth for the fourth quarter of 2008 is already history, so some people will already have sensed a slowdown.

“They are mainly the ones who during the 4th quarter of 2008 lost their jobs or saw their incomes reduced,” Lenko said.

Lenko regards the reason for this phenomenon as being the drop in foreign demand and the subsequent loss of orders for Slovak producers, which has forced them to cut costs or even shut up shop.

Holeščáková agrees that the significant slowdown in foreign demand has already been reflected in production falls in Slovakia.

“Some companies have so far announced only a partial reduction in their production; others, as part of their rationalisation plans, have announced the most unpopular part in the form of layoffs and reduction in the number of employees,” she said.

According to Holeščáková, the growth of unemployment seems to be the most visible impact of the economic crisis for the population of Slovakia.

The economy will grow at 2.4 percent in 2009, the Finance Ministry predicted on February 4, trimming its previous 4.6 percent forecast made in late November 2008. The revision came a couple of weeks after the European Commission (EC) changed its autumn 2008 forecast for Slovakia, scaling back its 4.9 percent GDP growth prediction for 2009 to 2.7 percent.

Holeščáková said that her bank now expects Slovakia’s economy to grow at 2.6 percent. However, additional negative information might make the bank revise its forecast.

“We still do not expect the country’s economic growth to sink into red, negative numbers,” Holeščáková concluded. “However, it is important that domestic demand, which should be the driver of Slovak economic growth, does not record a significant slowdown.”

Lenko suggested that VÚB’s estimate for the growth of real GDP stands at 3.0 percent, though there are significant downside risks.

The index of economic sentiment is at an historical low, and based on comparisons with past development such levels signal the possibility of recession in Slovakia, he concluded. The mood in Slovakia’s economy is the bleakest since 1997, as measured by the Slovak Statistics Office’s economic sentiment indicator, which in January fell 3.1 percentage points from December 2008, to 79.1 points.

The statistics authority ascribes this to the sinking confidence indicators in industry and the construction sector, which dropped 21.5 percentage points year-on-year, pushing confidence 21.3 points below its long-term average, the SITA newswire wrote.

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