SLOVAKIA is not an isolated island. So when the economies of its most important trading partners slow, it can have a significant impact on the country’s own economic condition. In response to the possibility that a new recession could spread across the world, the National Bank of Slovakia has lowered its prognoses for the country’s economic growth. But even after this downward revision the central bank remains among the most optimistic forecasters: its 3.4-percent figure for GDP growth in 2011 compares to most bank analysts' predictions of around 2.9 percent. But economists concede that making prognoses while the future of the eurozone remains so uncertain is much like telling fortunes by using a crystal ball.
“The prediction [of economic growth] was decreased due to a drop in foreign demand and household consumption,” Jozef Makúch, the governor of the National Bank of Slovakia (NBS), said on September 27, as quoted by the Trend economic weekly.
The economy of Slovakia is quite dependent on exports and uncertainty in financial markets and worsening economic performance among Slovakia’s biggest trading partners can significantly impact growth here. Domestic demand has been dampened by cutbacks in government spending to reduce the budget deficit, by higher taxes and by rising energy prices.
After jacking up its prognoses earlier in the year, the NBS has now lowered its estimate of GDP growth for 2011 from 3.6 percent to 3.4 percent, as well as dramatically slashing its estimate for growth in 2012 from 4.7 percent to 3.8 percent, based on its perception of the likelihood of a global economic slowdown, the SITA newswire wrote.
By reducing its predictions the central bank joined other government institutions as well as bank analysts who had already cut their growth estimates. In late August the Finance Ministry reduced its growth estimate to 3.3 percent for 2011 and to 3.4 percent for 2012.
Most banks are now estimating economic growth at 2.9 percent for 2011 in contrast to their estimates of 3.6 percent in July. SITA wrote that the banks’ estimates for 2012 have been cut from 4.3 percent to 2.9 percent.
“The negative developments in financial markets and the drop in [economic] sentiment in Europe as well as in Slovakia over the last weeks led us to revise our predictions down,” Mária Valachyová, senior analyst at Slovenská Sporiteľňa, told The Slovak Spectator. “We expect that revival and growth in the eurozone, especially Germany, will continue, but at a pace slower than we expected at the beginning of the summer.”
Slovenská Sporiteľňa expects growth in the Slovak economy of about 2 percent next year and believes the condition of the German economy will have the biggest influence.
“At the moment growth in Slovakia is driven primarily by foreign demand and this will continue also during the next quarters,” said Valachyová. “Even though the income situation of households improved during the first half of 2011 and their disposable income grew solidly, households are cautious and are saving. For that reason we do not count on a growth impulse even from the side of household consumption next year."
UniCredit Bank Slovakia weighed in with a prediction of 2.9-percent growth in GDP for 2011 and estimated growth in 2012 of 2.8 percent, while Tatra Banka pegged next year’s growth at only 1 percent.
“We expect that Slovakia’s economic growth may slow down more significantly over the upcoming quarters,” Ľubomír Koršňák, analyst at UniCredit Bank Slovakia, told The Slovak Spectator, adding that growth in the country’s economy may start to accelerate only during the second half of 2012.
Boris Fojtík of Tatra Banka said his bank believes economic growth will hit its bottom at the beginning of 2012 and will recover only slowly because nearly all eurozone countries are adopting government austerity measures whose first effect is to reduce the growth dynamics of GDP.
The central bank expects that overall household consumption will decrease this year due to the persistently negative mood among consumers, even despite the gradual growth in employment that has been registered.
The most recent prognosis by the central bank is based on a fundamental scenario that foresees a gradual stabilisation of the rickety financial markets. But the central bank admits that there is uncertainty in this scenario.
“In our current prediction for gross domestic product, risks in the downward direction prevail over the whole horizon,” Makúch stated. “Continuation of the decline of the current economic sentiment, affected by the situation in financial markets in the eurozone and the subsequent slowdown of global economic growth, is the biggest risk.”
Nevertheless, Makúch is not predicting a recession in the eurozone, something that would cause a significant decline in foreign demand for Slovakia’s economic output.
“We are speaking about risks in the downward direction, not about a recession,” Makúch emphasised. “My personal opinion is that the threat of a ‘W-shaped’ recession is lower than it is sometimes said to be.”
Valachyová commented that the probability of a W-shaped recession has increased but noted that Slovenská Sporiteľňa still expects the most likely scenario to be continuing economic growth, albeit at a significantly slower rate than this year.
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.
Economic sentiment at a 16-month low
The economic sentiment indicator (ESI), reported by Slovakia’s Statistics Office on September 27, dropped by 1.3 points in September from 90.5 points in August, and hit its lowest point in the last 16 months. The economic sentiment indicator had begun to fall again in July.
The Statistics Office stated that it attributes the falling economic sentiment to a lower level of confidence among businesses in the industrial and service sectors, as well as among consumers. The only survey respondents who were more optimistic in September than in August were businesses in the construction sector. Overall, the economic sentiment indicator was 2.2 points less than September 2010 and now stands at 7.4 points below its long-term average.
Koršňák of UniCredit sees growing uncertainty about the development of the main European economies as being behind the falling ESI in Slovakia.
“The indicator has not reached the extremely low levels it recorded during the crisis period at the turn of 2008-2009 but it does confirm our expectations of a significant slowdown in economic growth at the end of this year,” Koršňák stated, adding that the development of the financial markets will depend upon a successful solution to the sovereign debt crisis in several eurozone countries.
Fojtík of Tatra Banka also believes the drop in the indicator in Slovakia shows nervousness about the developments in Greece and other countries with sovereign debt problems, but thinks this is not the only source of concern.
“From our point of view the repeated decline in consumer sentiment also leads to concerns over worsening prospects for domestic consumption,” Fojtík added.
3. Oct 2011 at 0:00 | Jana Liptáková