Bounce in GDP growth forecasts

MARKETS get edgy whenever institutions expected to keep their fingers on the pulse of the economy fail to react to or reflect changing conditions. In a similar way, too-frequent changes in economic predictions can also cause nervousness, unless the modified forecasts show that recovery in GDP growth is based on actual improvement in economic fundamentals.

MARKETS get edgy whenever institutions expected to keep their fingers on the pulse of the economy fail to react to or reflect changing conditions. In a similar way, too-frequent changes in economic predictions can also cause nervousness, unless the modified forecasts show that recovery in GDP growth is based on actual improvement in economic fundamentals.

Shortly after the parliamentary election on June 12, the National Bank of Slovakia and the Finance Ministry predicted that Slovakia’s economy will grow faster than they had previously estimated. According to the Finance Ministry, Slovakia’s GDP is now expectedto expand by 3.2 percent in 2010 as opposed to its past estimate of 2.8 percent. For 2011, the ministry has increased its estimate of economic growth from 3.3 percent to 3.8 percent, while retaining its growth prognoses for 2012 and 2013 of 4.5 percent and 4.6 percent respectively.

The National Bank of Slovakia offered its estimate for GDP expansion for 2010 as 3.7 percent.

While most economists and private-sector market watchers agree that Slovakia is on a relatively good footing,they also advise treating these forecasts with caution, especially in regards o better development in the labour market.

The ministry was prompted to raise its projection by the 4.8-percent GDP growth recorded in the first quarter of 2010 and then by Slovakia’s Statistics Office raising its flash estimate for GDP growth in May by 0.2 percentage points. The Finance Ministry also wrote in its prognosis that household demand is expected to revive in 2011 but that certain risks may still exist in the development of financial markets and the external environment.

Faster recovery among trade partners and lower inflation are also fostering the more upbeat predictions. Investment growth should be helped by projects such as the public-private partnerships to build highways and investments by AU Optronics and Volkswagen, the ministry wrote.

The recovery of Slovakia’s economy in the first months of 2010 is progressing better than those of neighbouring countries, noted Vladimír Vaňo, the chief analyst with Volksbank.

“Export-driven industry in Slovakia is already benefiting from adoption of the euro, which brought more favourable interest rates, exchange-rate stability, lower transaction costs in foreign trade and more predictable development of export revenues, which no longer needed to be hedged against currency fluctuations,” Vaňo told The Slovak Spectator. “Despite the common statistical effect of having a lower base from last year, the recovery of Slovak industry runs ahead of that of similarly-open economies like the Czech Republic and Hungary."

In the first four months of 2010, Slovak industrial production was 20.5 percent higher than the same period last year but the annual recovery of industry in the Czech Republic was only 8.2 percent, and a meagre 6.4 percent in Hungary, said Vaňo, adding that these economies are similar to Slovakia’s with their exports geared towards the eurozone.

“Recovery of the real economy in Slovakia is running not only ahead of neighbouring countries, but also ahead of industrial recovery in Germany at 7.4 percent and the eurozone at 5.8 percent for the first four months of 2010,” Vaňo said. “This clearly demonstrates that the explanation for the recovery in the Slovak economy runs beyond the ‘stronger export demand’ argument, and is driven also by the ability of Slovak manufacturers to utilise the strong set of advantages associated with eurozone membership to strengthen their competitive position.”

Radovan Ďurana of the INESS economic think tank stated that it is not possible to consider foreign demand, which was a primary reason for increasing the GDP growth projections, as a continuously improving factor. According to Ďurana, there is a risk that Slovakia’s high volume of exports in the last quarter was a consequence of stimulus measures undertaken by the governments of other countries.

“This is why there is a risk that the growth in GDP this year may not necessarily reach the estimated numbers,” Ďurana told The Slovak Spectator.

According to Vaňo, improved competitiveness aided by eurozone membership is the reason why Slovakia is on a good footing for economic growth this year.



“One should keep in mind though that despite black (positive) figures, which might appear enviable for some of the western economies, this would still be just a mild recovery by the standards of emerging markets and well shy of the growth rates recorded in the year preceding the global recession," Vaňo said.

For that reason Vaňo said that with regards to the labour market and the outlook for creation of new jobs, one has to treat these GDP forecasts with caution because emerging economies can generate increases in output through greater productivity – that is, without a notable revival in new jobs.

Nevertheless, the economic growth recorded in the first months of 2010 have inspired private market watchers to pump up their predictions for the entire year as well.

“Our original, conservative outlook for 2010 growth in the range of 1.4 to 2.9 percent is becoming increasingly biased to the upside,” Vaňo said. “Recovery in export demand and the improved competitiveness of Slovak industry are contributing to the optimistic outlook, but especially in the second half of the year the need for more stringent fiscal consolidation might, on the other hand, hurt the growth picture.”


Get daily Slovak news directly to your inbox

Top stories

News digest: Slovakia to spend three Advent weekends with testing. President wants it to be voluntary

Seven candidates for the general prosecutor post approved. Acting general prosecutor steps down.

Installation of Christmas tree in Trnava

Who was behind the sale of one of the biggest banks in Slovakia

The largest law firms were involved in several innovative projects, too.

UK nationals in Slovakia advised to take action as end of transition period nears

UK Nationals should check the British Embassy's "Living in Guide" for the most up-to-date information.

Illustrative stock photo

Three rounds of testing should take place before Christmas

The first round will be nationwide and should take place in two weeks.