OPTIMISM swept through Slovak markets last year after the European Commission (EC) released an economic spring forecast for 2008 and 2009 predicting 7-percent GDP growth, a move which helped open the gates to the eurozone for Slovakia. The country adopted the euro on January 1. This year, however the spring tidings from Brussels have only served to confirm what Slovaks had already learnt from the country’s central bank, market watchers and, in many cases, their own experience: the economy will dip into recession in 2009, unemployment will grow and the public finances will come under increasing strain.
These bleak local developments, however, are part of what the EC in its spring economic forecast released on May 4 called the “deepest and most widespread recession in the post-war era” to affect the European Union (EU) economy.
The commission has forecast a sharp contraction in the EU economy, by 4 percent in 2009.
The commission has also confirmed that almost all the EU’s member states are being severely hit by the worsening global downturn.
The tone of the predictions for Slovakia is not much rosier.
“After several years of sustained expansion in economic activity, GDP growth is expected to contract by around 2.6 percent in 2009 and to slightly rebound, by some 0.7 percent, in 2010,” writes the European Commission in its forecast for Slovakia.
While fixed investment was the strongest GDP component in 2008, the overall slowdown in economic activity, tightening credit conditions and deteriorating investor sentiment are likely to induce a sizeable contraction in investment in 2009, said the EC. According to the EC, the launch of the public-private partnership projects for highway construction may limit the downward trend in 2009 and may induce a rebound in fixed investment in 2010.
The pain of the exporter
“The fall in global trade is dragging down export-oriented states with a greater share of industry, like for example also Germany,” chief economist of UniCredit Bank Ján Tóth told The Slovak Spectator. “And it is exactly the 5-6 percent recession in Germany which is a key factor for Slovakia. Germany is our main trading partner. The Czech Republic, our second largest trading partner, is also pulling back in the same way.”
These developments are causing a drop in industrial production of approximately 10 percent in 2009 and pulling the economy into recession, Tóth added.
In revised GDP figures released on April 7, the National Bank of Slovakia (NBS) confirmed that Slovakia’s economy would contract by 2.4 percent in 2009. Its previous estimate had projected growth of 2.1 percent.
Both Tóth and Poštová Banka analyst Eva Sárazová said that the estimates of their banks fell very close to the EC’s forecast.
Mária Valachyová, an analyst for Slovenská Sporiteľňa, Slovakia’s largest bank, predicts the economy will contract by 1.2 percent in 2009, “though at the beginning of the year we had still been expecting feeble growth”.
Sárazová agrees that lower foreign demand, which is also reflected in lower exports of Slovak products, has been putting a brake on economic growth along with weaker investment and feebler-than-expected domestic consumption.
“We expect a certain revival, [with] positive growth of the economy in 2010 of 1.4 percent,” Sárazová told The Slovak Spectator.
Regarding changes to the structure of Slovak GDP, Tóth expects the share of exports, which are forecast to drop by 10 percent, will shrink.
“In the same way, we expect a drop in investments mainly directed to the real estate market,” Tóth told The Slovak Spectator.
The decline in investment is also linked to the higher cost of financing because of the financial crisis.
The weakening of the currencies of neighbouring countries which have not yet adopted the euro has also made shopping abroad more attractive for Slovaks.
“According to surveys, for almost 80 percent of Slovaks price plays a crucial factor when they do their shopping,” Sárazová said. “So Slovaks are now monitoring the development of currencies as never before and can very well compare and calculate which buy is the most advantageous.”
However, Sárazová said that cross-border shopping is not good news for Slovakia’s economy.
“Consumption by the public is part of GDP,” she said. “It is true that goods bought abroad are consumed in Slovak households, but these are not included in our economic numbers and since we are positively influencing their retail revenues, we are allowing our neighbours to make money.”
Valachyová said that the fall in demand and profits is forcing Slovak firms to cut wage expenses, which then impacts domestic consumption in Slovakia.
“The growth in unemployment and concerns about future incomes are affecting the population’s willingness to spend money,” Valachyová told The Slovak Spectator.
Jobless outlook downbeat
“On the back of the economic downturn, the unemployment rate is anticipated to rise significantly to above 12 percent in 2009 and to remain flat in 2010,” the European Commission said.
In 2008, total employment grew by 2.9 percent, mainly due to a strong increase in employment in the construction sector, while the unemployment rate fell significantly to 9.5 percent, said the commission.
“However, we expect an even higher unemployment rate of 13 percent, which is 95,000 people joining the army of jobless in one year,” said Tóth. “The positive [economic] growth next year should not be interpreted as a return to the pre-crisis period. Like the EC, we also expect the unemployment rate to remain high and to not fall next year. However, we still believe that production could start gradually shifting from Western Europe as early as next year. And [in this area] reforms could help us to increase the attractiveness of Slovakia.”
Price inflation subdued
Average annual inflation, measured according to the European Central Bank’s harmonised index of consumer prices (HICP), is expected to continue its downward trend and to fall to some 2 percent this year, against a background of further declines in food and energy prices; it is expected to rebound to just above 2.4 percent in 2010, due to increasing goods and services prices, the commission said.
The inflation numbers have recorded a declining trend since September 2008, said Sárazová adding that this trend would probably continue across the whole eurozone.
The crisis is forcing people to revise their shopping habits, resulting in an easing of inflationary pressures on the demand side. In times of financial comfort, this pressure usually pushes the prices of goods and services up, according to Sárazová.
“In the case of Slovakia, the weakening of the currencies of the surrounding countries against the euro is pushing the price of imported goods down,” Sárazová said.
Also shopping tourism, which is becoming very popular in Slovakia, puts pressure on domestic retailers, mainly in the border regions, she added.
“In the upcoming months we expect a further slowdown in the growth of prices of goods and services in Slovakia,” Sárazová said. “We estimate that the level of inflation measured by the national CPI [Consumer Price Index] in 2009 will be 2.3 percent and harmonised inflation measured by HICP to be 1.5 percent.”
The estimate by Tóth’s bank matches the EC forecast, he confirmed.
“We also expect the drop in inflation to moderately help the purchasing power of households, which will face low wage growth this year,” said Tóth. “Household consumption thus might remain slightly positive, but it might be the only item of GDP together with government consumption, which holds back the recession.”
The European Commission said that in 2009 Slovakia’s general government deficit is expected to widen to some 4.7 percent of GDP, compared to the deficit target of 2.1 percent foreseen in the 2009 budget. (For more information on the government deficit please see the article on pg 1)