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The road to recovery will be long

THE RATE OF contraction of the Slovak economy slowed slightly in the second quarter of 2009 compared to the first three months of the year. This brought some cheer to politicians in urgent need of good news on the state of economy, but market watchers remained cautious and counselled more patience. They say the economy’s recovery will take many more months – if not years – since the structure of Slovakia’s gross domestic product (GDP) was not particularly healthy in the second quarter.

THE RATE OF contraction of the Slovak economy slowed slightly in the second quarter of 2009 compared to the first three months of the year. This brought some cheer to politicians in urgent need of good news on the state of economy, but market watchers remained cautious and counselled more patience. They say the economy’s recovery will take many more months – if not years – since the structure of Slovakia’s gross domestic product (GDP) was not particularly healthy in the second quarter.

However, the statistics authority has detected a ray of light and predicts that the country’s economy should post some positive figures next year.

While in the first quarter of this year the economy shrank by 5.6 percent, GDP showed a real drop of 5.3 percent year-on-year in the second quarter of 2009, the Slovak Statistics Office announced in a statement confirming its flash estimate from August.

Lower foreign and domestic demand was behind the drop in GDP, the office said. GDP amounting to €15.640 billion was generated in the second quarter, which at current prices was 6.5 percent down year-on-year, the office said.

“In terms of its structure, the fall in GDP could be attributed to low investment activity,” wrote Eduard Hagara, senior research analyst with ING Bank.

“Even though the current economic situation, in which companies are using only a small part of their production capacities, does not bode well for investment capacities, we had expected a milder fall. Fewer investments will create lower economic growth in the upcoming years.”

UniCredit Bank analyst Ľubomír Krošňák pointed out that the creation of gross fixed capital had dropped 17.6 percent: its most significant slump since 2000. The volume of stocks, mainly of goods such as cigarettes, cars and electronics, has continued dropping.

According to Hagara, although household consumption again grew in August this probably happened only thanks to the government-sponsored car-scrapping bonus, which, according to his estimate, contributed 2 percentage points to consumption growth. Without the car-scrapping bonus, household consumption, in line with growing unemployment, would have dropped in the second quarter, he added.

Krošňák also attributed the mild year-on-year growth in domestic consumption of 0.7 percent to the car-scrapping bonus.

“The detailed structure of GDP has surprised, mainly on the side of household consumption, which along with the growing unemployment rate and the drop in retail revenues has increased by 0.7 percent compared to the same period last year, while in the first quarter it dropped by 1.2 percent,” VÚB Bank senior analyst Martin Lenko wrote.

Most probably a significant role has been played by state stimuli, Lenko added.

“It seems that the structure of GDP in the second quarter was less healthy than we had expected,” Hagara said. “We expect in the upcoming quarters that investments and household consumption weakened by growing unemployment will drag down the economy.”

However, Hagara said that the improving indicators of economic sentiment in the eurozone suggest that the shortfall in domestic demand could be partially compensated for by the improving results of foreign trade.

The statistics authority also expects that the country’s economy will contract by 3.5 percent year-on-year in 2009, according to its updated prognosis. However, the authority predicts some positive numbers for the economy next year.

“We expect that development in the third quarter could again show signs of improvement,” said František Bernadič, general director of macroeconomic statistics at the Statistics Office, as quoted by TASR. “Next year, we may record some positive figure in terms of year-on-year GDP in fixed prices.”

Bernadič sees something of a revival in foreign demand too.

“The question is how the domestic picture will unfold,” he said, adding that the prospects are largely unknown since the development in state expenditures is critical.

Hagara’s bank also expects a 3.5-percent year-on-year fall in GDP for 2009, while next year, in the opinion of his team, the economy should grow by 1.5 percent. Krošňák’s estimate stands at -5.4 percent.

The unemployment rate grew by 0.6 percentage points to 10.9 percent in the first half of 2009, the Statistics Office said, as quoted by TASR. The average number of jobless during that period stood at 291,600 in the first six months of 2009, a rise of 5.8 percent year-on-year.

The office also reported that the average nominal salary in Slovakia reached €732.50 per month in the second quarter of 2009, a year-on-year increase of 2.8 percent.


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