Recovery isn't speedway sprint

THOUGH production in industry blessed the Slovak economy with some good numbers last December, analysts advise keeping one’s optimism in check, saying the road leading out of the economic crisis will still be long and rocky.

THOUGH production in industry blessed the Slovak economy with some good numbers last December, analysts advise keeping one’s optimism in check, saying the road leading out of the economic crisis will still be long and rocky.

They say industrial production will continue getting back on the highway to health in 2010 but that it will be a slow step-by-step trek, with likely traffic jams and detours rather than a straight speedway sprint.

One of the most watched sectors, the automotive industry, expects to have some tough times ahead since the crutches that Slovakia and other countries gave to the auto sector last year no longer are available and will not give any support in 2010. And developments within the construction sector in Slovakia cannot be characterised with any optimistic word – it still remains nearly collapsed. Slovak industrial production recorded year-on-year growth of almost 12 percent in December 2009, which is only the second monthly year-on-year growth since September 2008, when the global downturn began to seriously impact the Slovak economy, Eva Sadovská, an analyst with the Poštová Banka, told The Slovak Spectator.

“The effect of a lower base, the basis effect, has greatly underpinned the recorded year-on-year growth,” Sadovská said. “That is because industrial production started to fall more significantly at the turn of 2008. On the other hand, compared with the beginning of last year, there was some revival visible.”

Michal Mušák, a senior analyst with Slovenská Sporiteľňa bank also attributes the year-on-year growth recorded last December to the basis effect because of the falling industrial production by the end of 2008.

In December 2009 seasonally adjusted industrial production dropped month-on-month, Mušák explained.

“In other words, industrial production grew over the course of the year, but not in December itself,” Mušák told The Slovak Spectator.

Industrial output in December 2009 was 11.9 percent higher than December 2008, after recording 1.5 percent year-on-year growth in November, according to data from the Slovak Statistics Office. Developments in December were influenced by a 16.4 percent y-o-y increase in manufacturing output, a 7.3 percent increase in mining and extraction of raw materials but were limited by a 5.6 percent decline in generation and distribution of electricity, natural gas and water, the SITA newswire wrote.

Both Sadovská and Mušák expect industrial production to grow in 2010. Sadovská thinks that industrial growth might exceed 5 percent but will not overstep 10 percent.

“The year-on-year growth should remain in significant plusses during the upcoming months,” Mušák said.

However Sadovská warns that over-optimism is not justified because industrial production has not yet fully recovered from the crisis.

“We cannot speak even about having reached pre-crisis levels yet,” Sadovská told The Slovak Spectator.

According to Sadovská, the revival of the Slovak economy is conditioned on a takeoff by the larger European economies. Germany is one of Slovakia’s most important trade partners since one-fifth of its total exports head to this western European country. This is why the economic situation in Germany has such an important impact on the developments in Slovakia, Sadovská said. Other important trade partners are the Czech Republic, Hungary, Poland and Austria.

Slovak companies which are able to innovate, upgrade their products, or change their specialisation can gain competitive advantage, Sadovská said.

“After the crisis it will be important to lure the revived consumer demand, and leave the competition behind,” Sadovská said.

In upcoming months Sadovská expects the basis effect to continue influencing the statistics reported about the growth in industrial production. She also sees a risk in the evaporating effect of stimulus measures that were taken by many European governments to ease the impacts of the crisis, ones such as the car-scrapping bonuses.

As for the automobile industry, Mušák suggests that this industry will experience some “tough times” and may not be able to keep pace with last year’s production since part of that demand, which might have developed in 2010, was already satisfied in 2009 because of the scrapping bonuses.

“Of course the revival of the economy is good news also for this sector, after all, not every country offered the scrapping bonus,” Mušák told The Slovak Spectator. “And several other branches are linked to the car industry through its sub-suppliers.”

It appears to Mušák that the Slovak electro-technical industry may see some expansion.

“Along with the large investment of AU Optronics, which probably won’t start its production this year, other firms such as Samsung, Sony and UMC have also announced new investments or new products over the past months,” Mušák said.

The industrial sectors making the largest contributions to growth in total output recorded in December 2009 were production of transport vehicles, jumping by 71.1 percent; production of chemicals and chemical products, increasing by 66.6 percent; and production of machines and equipment, growing by 31.1 percent.

The biggest declines were reported in the repairs and installation sector, dropping by 16.3 percent; in production of rubber, plastic products and other non-metal products, falling by 15.1 percent; in wood and paper products and print materials, dipping by 6.2 percent; in production of electricity, steam, gas and cooled air, dropping by 5.6 percent; and in the production of coke and refined oil products, declining by 5.2 percent, the SITA newswire reported.

Construction is still collapsing

The construction sector saw its production results fall significantly for December 2009, with a year-on-year decline of 18.2 percent.

Mušák said that construction projects often have a longer duration and that the effects of the economic crisis emerged later in this sector than in others and therefore revival in construction will also come later.

“There will probably be only a few apartment projects, but highway construction might help the sector,” Mušák added.

Only every sixth firm taking part in the survey of economic sentiment said that it expects increased construction activity in the upcoming three months, according to Dávid Dereník, a macro-economy analyst with UniCredit Bank.

Dereník also thinks that Slovakia’s highway construction programme might provide some cushion for the construction industry and its employees while the crisis is winding down. Currently, construction of buildings accounts for 70.4 percent of the construction sector’s total production and infrastructure projects cover 28.8 percent. In 2010, this ratio should swing in favour of infrastructure improvements, Dereník wrote in an analysis memo.

Dereník also wrote that he expects that the fall-off in the construction industry will be reflected in further growth of unemployment for this sector in coming months.

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