NO OMINOUS economic predictions for Slovakia are being offered by market watchers for 2011. A slight slowdown in the economic growth rate from last year, a moderate improvement – but no miracles – in the job market, lower public spending and other effects of fiscal consolidation are likely to be the main characteristics of 2011, according to the analysts, who remain rather cautious about bold forecasts. They agree that this year might provide fertile soil for economic reforms, though the austerity measures intended to restore the public finances may dampen reformers’ zeal.
Nevertheless, Slovakia will continue depending on the vigour of its largest trading partners and on whether these can supply sufficient demand. This is because the economy in 2011 will be
propelled by foreign demand, Poštová Banka analyst Eva Sadovská told The Slovak Spectator.
Domestic demand might be somewhat stronger than in 2010 but unemployment will remain relatively high, and this will be reflected in consumer behaviour, she added.
“There is a positive aspect as well: unemployment will show a declining tendency, albeit gradual and slow,” Sadovská said. “But it will not return to pre-crisis levels; at least three to five years will be necessary.”
What will really slow the economy is the trumpeted consolidation of public finances, she said. The economy should still continue to grow by more than 3 percent, a rate at which the economy is still able to create new jobs, according to Sadovská.
The central bank expects economic growth to be 3 percent this year, and the Finance Ministry’s prediction is 3.3 percent growth, compared to last year’s 4 percent.
“I consider the slowdown in the growth of the economy by some tenths of a percent a smaller threat than the fact that the country would otherwise take the road of inappropriate indebtedness,” Sadovská said.
She expects prices to grow by 3.2 percent in 2011, while in some months food prices might jump by as much as 7 percent. Consolidation measures, such as higher VAT and excise taxes, will take less than 1 percent of the share of this development, Sadovská said. The higher taxes will not be fully reflected in prices since merchants will carry part of the burden in the form of lower margins, she explained, adding that this practice could be ascribed to the relatively high unemployment rate.
“Higher prices for commodities or oil on world markets will impact more expensive food products” Sadovská said. “However, the comparison basis from last year will make a contribution, since prices in many cases over the past year fell or climbed only very slowly.”
Sadovská considers the greatest challenge the government might face in 2011 as being to keep to its plan of consolidation and to push the public finance deficit under 5 percent of GDP.
“There are certain risks, however,” she said, adding that Slovakia is a small and export-oriented economy dependent on foreign partners. “As well as tax incomes, real savings via spending or the drawing of EU funds might lag behind.”
Good ground for reforms?
Referring to economic theory, the Financial Policy Institute at the Finance Ministry suggested that 2011 might serve as a good foundation for reforms, but said this would not depend on political will alone. Higher public support as well as the effect of the economic and election cycles might have a positive contribution, the institute suggested, referring to a Eurobarometer survey showing that more than 80 percent of respondents believe reforms are necessary for Slovakia’s economy.
“In addition to that, the best time for reforming is two years after a recession and in the first two years of the election cycle,” wrote the Financial Policy Institute. “On the other hand, the ongoing healing of the public finances might to a certain degree hold back [the reforms].”
Vladimír Vaňo, chief analyst with Volksbank, suggested that any structural economic reforms are initially followed by higher perceived costs, which in the early stages outweigh the immediate perceived benefits.
“This so called ‘vale of tears’ can hardly be avoided, as only later do the ongoing and gradually increasing benefits of past decisions exceed the gradually receding perceived disadvantages of such structural changes, i.e. reforms,” Vaňo told The Slovak Spectator. Vaňo noted that the drawbacks of reforms are viewed as less painful during a period of recovering economic growth.
“On the other hand, we should keep in mind that a peculiar feature of this recovery is that the decline in unemployment cannot be expected to be as fast as it used to be in the past,” Vaňo said.
Since unemployment is the most important economic metric for households, one should not overestimate taxpayers’ optimism when it comes to unpopular measures, according to the analyst.
“Hence, reforms should be done when necessary, not when they become palatable, since by definition the sweet fruit of reforms always follows the bitter sweating at the beginning, shortly after they are implemented,” Vaňo said. “The theory of political economy argues that important reforms should be done as soon after elections as possible so that the palatable fruits manage to ripen before the next elections.”
Already, negotiation over the 2011 budget and discussion about fiscal consolidation has shown that the diverse composition of the governing coalition can pose major challenges to necessary but unpopular measures, Vaňo concluded.
10. Jan 2011 at 0:00 | Beata Balogová