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Caution urged despite third quarter growth

‘ONE SWALLOW does not a summer make – nor two’, would perhaps be the most fitting proverb to describe the responses of market watchers to Slovakia’s revised gross domestic product (GDP) numbers. Though the country’s economy contracted by 4.8 percent year-on-year in the third quarter, it grew by 1.6 percent when compared with the second quarter of 2009. Market watchers say that the revised Q3 numbers should be looked at with some caution since the results might turn less positive once the effects of government stimulus programmes evaporate.

‘ONE SWALLOW does not a summer make – nor two’, would perhaps be the most fitting proverb to describe the responses of market watchers to Slovakia’s revised gross domestic product (GDP) numbers. Though the country’s economy contracted by 4.8 percent year-on-year in the third quarter, it grew by 1.6 percent when compared with the second quarter of 2009. Market watchers say that the revised Q3 numbers should be looked at with some caution since the results might turn less positive once the effects of government stimulus programmes evaporate.

Employment rates in Slovakia continued their negative trend in the third quarter and observers agreed that unemployment rates are unlikely to return to pre-crisis levels any time soon.

The Statistics Office, in its December 3 release, slightly revised its Q3 flash estimate, which was of a year-on-year contraction of 4.9 percent. Over the first nine months of 2009, Slovakia’s GDP amounted to €46.828 billion, representing a year-on-year dip of 5.3 percent in constant prices and 6.7 percent in current prices.

The economy of the eurozone contracted 4.1 percent in the third quarter year-on-year, while that of the whole EU fell 4.3 percent year-on-year. Compared to the previous year, all eurozone states saw their economies decline in the year to the third quarter, according to Eurostat. In Q3, the eurozone grew by 0.4 percent quarter-on-quarter, Eurostat reported.

Meanwhile, the GDP of the EU27 grew by 0.3 percent compared to the previous quarter. In fact, Slovakia posted the second highest growth among EU member states, with 1.6 percent, following Lithuania, which in Q3 posted a leap in GDP of 6.1 percent.

“The growth of Slovakia’s economy, just like the growth of the economies of other European countries compared to the previous quarter, should be looked at with certain reservations, because these numbers are distorted by fiscal doping – or in other words, government stimulus programmes,” Richard Ďurana, director of the Institute of the Economic and Social Studies (INESS), told The Slovak Spectator.

According to Ďurana, the car-scrapping bonus and similar programmes apparently boosted economic growth but after they dissipate neither the Slovak nor the European economies are likely to be in a much better condition than before these programmes were started.

The economy’s decline since last year has been influenced by both foreign and domestic demand; the lower demand is taking its toll on Slovakia, which is a small and export-oriented economy, Poštová Banka analyst Eva Sadovská told The Slovak Spectator.

Companies have been forced to limit production, close down operations, or send people on forced holidays while freezing or even cutting employees’ salaries, she added.

“Slovakia still exports more than it imports and thus pure exports have a positive effect on the final GDP number,” Sadovská said. “The loss of employment or weaker income is pushing households to re-evaluate their purchasing habits and they are saving money.”

In the third quarter of 2009, public spending recorded a drop quarter-on-quarter, she added.

Sadovská noted that within the EU, year-on-year growth was posted only by Poland, while in a quarter-on-quarter comparison several other economies made an improvement.

The better performance of the economies of Slovakia’s main trading partners are documented by the preliminary estimates of GDP growth, in which Germany recorded quarter-on-quarter growth of 0.7 percent and the Czech Republic 0.8 percent quarter-on-quarter, while Slovakia posted as much as 1.6 percent quarter-on-quarter, Tatra Banka analyst Juraj Valachy told The Slovak Spectator.

Already, initial monthly indicators are suggesting an improvement in the economy, according to Valachy.

“Industrial production has been developing highly positively in comparison with the second quarter; its fall in Q3 has softened to -11.2 percent year-on-year from the previous -21 percent,” Valachy said.

According to Valachy, the continuing growth of unemployment and the slow growth of wages showed that domestic consumption in Q3 had not increased and he did not expect this to happen very soon.

“The development of employment in fact copied the growing number of unemployed and thus the year-on-year fall of 3.7 percent was expected,” Valachy said. “In the upcoming months this fall will continue.”

As for expected economic development, Ďurana said that he does not see any reason for prompt recovery in the Slovak economy and a return to summer 2008’s 7.4-percent unemployment rates.

“The performance of our economy is greatly dependent on the situation in strong economies, like for example our main trading partner Germany; and the view of the situation in the world’s largest economy, the USA, does not give much reason for optimism either,” Ďurana said.

However, Valachy suggested that the last quarter might bring some brighter year-on-year numbers. However, he does not expect the 1.6 percent quarter-on-quarter growth to be repeated, but instead growth of around 1 percent. Year-on-year GDP change might stand somewhere around -3.3 percent in the fourth quarter, he said.



The gloomy jobs rate



Employment in the third quarter fell when compared to the previous quarter by 1.5 percent and thus continued its unfavourable trend, said UniCredit Bank macro-analyst Dávid Dereník.

As far as people working abroad are concerned, the greatest number of Slovaks returned at the beginning of this year from the Czech Republic and Great Britain.

The Czech Republic is still Slovakia’s largest foreign employer, employing about 40 percent of Slovaks working abroad. Every third Slovak abroad works in the construction industry and every fourth in industry.

“Thus, these two significantly suffering branches in the Czech Republic have had the most noteworthy impact on the return of workers to Slovakia,” Dereník wrote in a memo.

In the third quarter, average monthly wages increased by 2.5 percent to €722.51 and, once cleaned of inflation, grew year-on-year by 1.3 percent.

However, Dereník warned that this growth was influenced partly by statistical deformation since in the economy there are now fewer people working at the minimum wage, as such workers were hit disproportionately by job losses at production companies.

Dereník expects that firms which sense a slow revival in the economy over the next few months will use their existing employees and thus increase productivity even at the cost of a moderate increase in salaries.


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