Growth sags, but still impresses

AUTUMN has cooled down the heated expectations of market watchers who were anticipating that Slovakia’s economy would perform better in the third quarter than the figures released by the statistics authority actually show. Nevertheless, analysts say there is no reason for mourning because Slovakia still recorded one of the best rates of economic growth among all the countries in the European Union.

The NBS The NBS (Source: TASR)

AUTUMN has cooled down the heated expectations of market watchers who were anticipating that Slovakia’s economy would perform better in the third quarter than the figures released by the statistics authority actually show. Nevertheless, analysts say there is no reason for mourning because Slovakia still recorded one of the best rates of economic growth among all the countries in the European Union.

Analysts are comforting anyone worried about the slight sag in the third quarter growth rate by reassuring that part of the difference is merely of a statistical nature and can be attributed to the fact that during the third quarter of 2009 the Slovak economy was no longer falling as steeply as it did in the first half of that year.

In contrast to the predicted year-on-year GDP growth of 4.2 percent for the third quarter, the country’s economic output actually grew by only 3.7 percent in constant prices according to the flash estimate released by Slovakia’s Statistics Office on November 12.

The country’s GDP stood at €17.465 billion in current prices for the period between July and September, an increase from the previous year of 5.9 percent in current prices. In constant prices and after adjustment for seasonal effects GDP stood at €12.524 billion for the third quarter of 2010, a 4.1 percent year-on-year increase, the statistics authority reported.

“The current revision of annual and quarterly data of GDP stands behind the gap between the estimate and the reality,” Sadovská told The Slovak Spectator. “Analysts built their estimates on the original unrevised data.”

Sadovská added that the Statistics Office will publish its complete revision of GDP figures in early December 2010.

Sadovská said that measuring against last year’s third quarter period is responsible for some part of the lowered annual growth in 2010 because GDP in the third quarter of 2009 did not fall as steeply as it had during the first half of 2009.

Vladimír Vaňo, chief analyst with Volksbank, noted that the Slovak economy is continuing to grow and its real annual growth rate is among the highest in the EU.

“The gradual softening of the pace of expansion from a remarkable 4.7 percent at the beginning of the year is in line with expectations, influenced in the first place by the gradual rise in last year's base for comparison, as the Slovak economy experienced a gradual recovery already in the second half of last year,” Vaňo told The Slovak Spectator. “Despite softening of the annual growth figure, we still see continued and very solid annual expansion of the Slovak economy.”

Both Vaňo and Sadovská suggest that the recovery and expansion of the Slovak economy will continue to be driven by external demand.

“High unemployment and continuing uncertainty in the labour market will continue to act as a drag on final household consumption and an urgent need for fiscal consolidation will continue to curtail government expenditures,” Vaňo said. “Apart from last year's high base for comparison, which is only a statistical effect, Slovakia’s external demand felt some softening in the German and eurozone growth rate in the second half of this year.”

External demand, net exports, and gradual recovery in investments are expected to be the major growth drivers in the third quarter, Vaňo added.

Sadovská said that based on the change in retail revenues, which in the third quarter were weaker than last year, she does not assume that household consumption could have grown significantly in the third quarter.

“We also expect moderate growth in public administration consumption,” Sadovská added.

Sadovská expects a continuing slowdown in the pace of economic growth in the fourth quarter under the impact of the same factors as in the third quarter.

“Currently we are waiting for the revision of the annual GDP figures between 1995 and 2009 which the Statistics Office will publish on November 16, 2010 and for the revision of the individual quarters which the office should publish in early December,” Sadovská said. She also noted that her bank “expects that the government will manage to consolidate [the public budget] next year to the same degree it forecasts and this will be reflected in the economy as a slowdown in growth.”

“So far we expect the economy to grow next year at 3 percent, however, the cards might be mixed up by the aforementioned revision of data by the Statistics Office,” Sadovská said.

Vaňo said the urgently needed fiscal consolidation by the state will become a negative drag on economic growth, adding that nevertheless it should be kept in mind that growth in Slovakia’s economy depends predominantly on external demand.

“Government spending is not a factor that could either avert recession, as seen last year, or reverse an ongoing recovery, though [its reduction] would choke a bit of growth in the range of a few tenths of a percentage point,” Vaňo said. “Speedy and decisive fiscal consolidation is the best contribution that the government can make to ensure Slovakia’s high rating, healthy public finance and also the perceived stability of its tax system, which all play a role in investment allocation decisions of potential foreign direct investors.”

Vaňo stressed that Slovakia is continuing to outperform its regional peers and has one of the highest rates of economic growth among all EU countries.

“The comparison of Slovakia’s recovery with those of its similar, open-economy neighbours as well as with its major export markets corroborates our earlier conclusion that the lucky timing of the euro adoption was a major contributor in fostering Slovak competitiveness, resulting in faster growth within the CEE as well as in the EU,” said Vaňo. “Nevertheless, one should keep in mind that the burst of a strong recovery this year will contribute to a statistical lowering of annual growth figures next year.”

Sadovská agreed with Vaňo and said that based on GDP growth figures prepared by Eurostat, Slovakia is among the top three countries in economic growth, with only Estonia, which recorded growth of 4.7 percent, and Germany, which notched up growth of 3.9 percent, besting Slovakia. She added that when Eurostat reports growth figures for Denmark, Luxembourg, Sweden and Poland their results should be similar to Slovakia’s.

Sadovská emphasised that it is important to focus on the year-on-year growth of the German economy since that country is Slovakia’s main trading partner.

In mid November, the Statistics Office stated that the decline in the Slovak economy in 2009 was deeper than it had originally reported and it revised its GDP figures for last year, now calculating the 2009 annual decline in GDP at 4.8 percent, the SITA newswire reported. The Statistics Office also reduced the positive annual GDP growth reported for 2008 from 6.2 percent to 5.8 percent.

In September, the Finance Ministry revised its estimate of the country's economic growth for 2010 upwards to 4 percent. In its previous prognosis, released in June 2010, it forecast growth of 3.2 percent. The ministry at the same time decreased its estimate of GDP growth in 2011 from 3.8 percent to 3.3 percent, the SITA newswire reported.

The central bank, the National Bank of Slovakia, is forecasting 4.3 percent growth while the International Monetary Fund expects Slovakia’s economy to grow at 4.1 percent year-on-year in 2010. Before the crisis year of 2009, Slovakia’s economy was recording annual growth of around 6 percent.

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