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Slovakia’s economy slows

THE GROWTH of the biggest European economies is decelerating, and appears to be pulling Slovakia down too. Slovakia’s GDP growth slowed to 3.3 percent in the second quarter of 2011 in annualised terms, compared to 3.5 percent in the first quarter, based on a flash estimate released by the Slovak Statistics Office on August 16. Since Germany, Slovakia’s biggest economic partner, and other eurozone members are also losing speed, observers say the outlook is pessimistic.

Illustrative stock photo(Source: TASR)

THE GROWTH of the biggest European economies is decelerating, and appears to be pulling Slovakia down too. Slovakia’s GDP growth slowed to 3.3 percent in the second quarter of 2011 in annualised terms, compared to 3.5 percent in the first quarter, based on a flash estimate released by the Slovak Statistics Office on August 16. Since Germany, Slovakia’s biggest economic partner, and other eurozone members are also losing speed, observers say the outlook is pessimistic.

“The slowdown in the economic growth of Germany, i.e. of the most important business partner of Slovakia, is not the best news for the Slovak economy,” Eva Sadovská, an analyst with Poštová Banka, told The Slovak Spectator, adding that compared with the first quarter, when the German economy grew by 4.6 percent year-on-year, the second quarter brought a slowdown to 2.8 percent, which was below market expectations.

The second biggest economy in the eurozone, France, experienced zero growth during the second quarter. The Czech Republic, another significant business partner of Slovakia, also reported slower economic growth, at 2.4 percent year-on-year.

The Statistics Office will release the detailed structure of GDP only in early September, but analysts believe that it was foreign demand in particular which propelled Slovakia’s economy during the second quarter. Domestic demand, especially from citizens, again failed to pick up. Slovaks remain cautious in terms of spending, even though data indicates strong growth in employment. When seasonally adjusted, employment grew by 2.1 percent compared to Q2 2010 and by 0.4 percent compared with Q1 2011, according to the Statistics Office.

“While industrial production and foreign trade undoubtedly grew, despite the slowdown in June, retail sales have not increased in any month so far this year in year-on-year terms,” Sadovská told The Slovak Spectator.

Retail sales decreased by 1.2 percent during the second quarter compared with the first three months and when seasonal effects were stripped out. Chief economist of UniCredit Bank Slovakia Vladimír Zlacký attributes this decrease to a fall in household consumption and decreasing expenditure by the Slovak government as part of its ongoing austerity programme.

The latest economic indicators, not only from Slovakia but also its biggest economic partners, suggest that there is a risk that economic growth could be slower than was originally forecast. Several banks now say they may cut their GDP growth estimates – and some already have.

“We assume that the Slovak economy’s growth will slow in a more significant way in the
forthcoming period,” Zlacký wrote in a memo. “Already the June data on industrial production and foreign trade have indicated a drop in economic growth dynamics.”

According to Zlacký, Q2 data about the German economy, which grew by only 0.1 percent when compared to the first quarter and cleansed of seasonal influences, demonstrate the decelerating economic growth of Slovakia’s main business partner. UniCredit Group’s analysts have reduced their estimate of German growth from 3.5 to 3.0 percent for 2011 and from 2.0 percent to 1.3 percent for 2012. Slovakia exports one fifth of its production, especially cars and electrical appliances, to Germany, according to the Hospodárske Noviny daily.

“Recent turbulent developments on financial markets may accentuate even more this slowdown of the real economy in eurozone countries, which will be reflected in demand for Slovakia’s exports after a certain time lapse,” said Zlacký. “For now we are keeping our estimate for economic growth at 3.1 percent for 2011, bearing in mind the start of production of a large electro-technical producer and a carmaker during the second half of 2011, but we stress that the risk remains that the estimate could still be deflected downwards.”

UniCredit Bank Slovakia, referring to the expected global slowdown, has adjusted its economic growth estimate for Slovakia for 2012 downwards by 0.6 percentage points, to 3.3 percent.

VÚB Banka is even more pessimistic.

“For the rest of the year [2011] we have halved our previous estimates,” Andrej Arady, macroeconomist at VÚB Banka, wrote in a memo. ”For 2012 we estimate annual economic growth at a level close to 2 percent.”

It will be necessary to wait and see what damage the current drop in stock markets causes to future growth estimates over the next few months, according to Arady. But he perceives the current situation as being similar to the initial phase of the last economic crisis.

“The scenario recalls very much the developments that occurred two years ago,” Arady told Hospodárske Noviny.

Since the state budget of Slovakia for next year assumes economic growth of 4.4 percent, a revision of macroeconomic prognoses by the Finance Ministry is now considered highly probable.


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