Slovak economy slows

GROWTH in Slovakia’s economy slowed in the third quarter of 2011 even though it remained higher than in most other countries of Europe. Nevertheless, the outlook for economic growth in Slovakia is rather gloomy as significant slowdowns in the economies of its major trading partners could continue to put a brake on exports – as already indicated by a drop in new industrial orders received in September.

GROWTH in Slovakia’s economy slowed in the third quarter of 2011 even though it remained higher than in most other countries of Europe. Nevertheless, the outlook for economic growth in Slovakia is rather gloomy as significant slowdowns in the economies of its major trading partners could continue to put a brake on exports – as already indicated by a drop in new industrial orders received in September.

Slovakia’s economy recorded annual growth of 2.9 percent in the third quarter, according to a flash estimate released by the Statistics Office on November 14, less than the 3.5-percent growth in GDP recorded in the second quarter. Third-quarter growth was relatively sound as it increased by 0.7 percent from the second quarter on a seasonally-adjusted basis, only slightly less than the three previous consecutive quarters of 0.8-percent growth.

Though detailed data on gross domestic product for the third quarter will be announced only on December 6, analysts expect that reduced foreign demand, dampened household consumption and lower public expenditures are behind the slower growth.

The 3Q11 economic growth was in line with the expectations of Mária Valachyová, a senior analyst at Slovenská Sporiteľňa.

“The quarter-to-quarter growth of 0.7 percent was relatively strong,” Valachyová told The Slovak Spectator, adding that the economies of Germany and France had also reported good quarter-to-quarter performance even though their year-on-year growth had slowed.

Seasonally-adjusted data indicated that Germany’s GDP increased by 0.5 percent in the third quarter compared with the second quarter while quarterly growth in France was 0.4 percent, improvements from the second quarter when Germany recorded only 0.3-percent growth and France recorded a 0.1-percent decline. On an annual basis, Germany’s third quarter growth was 2.5 percent, compared to 3 percent in the second quarter.

Valachyová attributes the year-on-year decline in Slovakia’s rate of GDP growth to the economic slowdown in Slovakia’s European trading partners.

“The structure of growth is not known yet, but we expect that especially foreign demand kept propelling the economic growth while consumption of households has been stagnating for two years now,” Valachyová stated.

Eduard Hagara, a senior research analyst at ING Commercial Banking, added that a continuing decline in retail sales is a clear signal that Slovaks are more cautious when it comes to spending. Andrej Arady of VÚB bank wrote that public spending is constrained by the government’s fiscal consolidation measures, while Boris Fojtík, an economic analyst with Tatra Banka, said the main reasons behind Slovakia’s slowing economic growth are a fall in growth dynamics in the industrial production sector and weakening domestic demand.

“Industry registered a drop in growth from roughly 8 percent in the second quarter to less than 5.5 percent,” Fojtík wrote in a memo, adding that “retail sales growth decreased to 3.9 percent.”

Vladimír Zlacký, chief economist at UniCredit Bank Slovakia, wrote that net exports and, to a certain extent, investments were the driving force behind Slovakia's economic growth during the third quarter, but the outlook is gloomy.

“We expect that economic growth in the eurozone, where about one-half of Slovakia’s exports are destined, will continue to slow during the final quarter of 2011, in which even a small contraction of up to -0.2 percent quarter-to-quarter cannot be ruled out,” Zlacký wrote in his memo. “This is why we forecast stagnation in Slovakia’s economy on a quarter-to-quarter basis for the fourth quarter and growth of 2.0 percent on a year-to-year basis.”

UniCredit Bank Slovakia has kept its growth forecast for 2011 at 2.9 percent but has reduced its expectations for 2012.

“In spite of relatively strong growth in 3Q11, increasing risks for the Slovak economy during the forthcoming period, for example from a possible moderate credit crunch in the banking sector or potential movement of parts of industrial production eastwards from Slovakia’s borders, led us to revise our growth prognosis for 2012 down to 1.9 percent,” wrote Zlacký.

Valachyová of Slovenská Sporiteľňa also expects a more significant slowdown next year, estimating 1.8-percent growth compared to the 3-percent growth she foresees for 2011 while expecting that foreign demand will continue to support economic growth in Slovakia. ING, Tatra Banka and VÚB are more pessimistic, with prognoses of only 1-percent growth in 2012. The Finance Ministry has retained its forecast of 1.7-percent growth in its draft state budget for 2012.

Slovakia’s GDP growth in both quarter-to-quarter and year-on-year comparisons was better than the averages recorded across the entire EU and in the eurozone, which recorded quarterly growth of only 0.2 percent in the third quarter, according to Eurostat. Eurostat also reported that third quarter seasonally-adjusted year-on-year GDP growth in the entire EU and in the eurozone was 1.4 percent while Slovakia’s GDP had grown by 0.7 percent quarter-to-quarter and 3.2 percent year-on-year.

The slowing economies of other countries in the EU and the eurozone portend a difficult 2012 for Slovakia.

New industrial orders in September already indicate that Slovakia might face difficulties next year. Even though these orders grew by 11 percent in September compared with the same month in 2010 they were 0.7 percent less than in August on a seasonally-adjusted basis.

Employment expected to fall

The slowdown in economic growth means that it is unlikely that new jobs will be created in the foreseeable future.

“Work positions in Slovakia are usually created when annual GDP growth is at 3 percent or more,” Vladimír Baláž, an economist at the Slovak Academy of Sciences, told the Hospodárske Noviny daily. “Because growth will be lower, we can expect that no new jobs will be created. Logically, this indicates that some jobs might even disappear. Employers will endeavour to replace labour with better organisation of work.”

Employment statistics so far are rather positive, as the number of those with jobs in the third quarter grew to 2.216 million, an increase of 1.7 percent compared with the same period in 2010. But analysts expect that employment may begin to fall next year.

“The development of employment sounds encouraging but based on our predictions it will fall into red numbers again during the next quarters,” Fojtík wrote.

Hagara of ING was positively surprised by the growth recorded in employment in the third quarter but regards it as being at odds with other labour market data.

“Preliminary statistics for employment in the private sector have signalled stagnation in the labour market and growing unemployment,” Hagara wrote in his memo. “The outlook is not very positive. With the expected slow growth in the economy there is a significant risk that companies will be forced to oust employees. Our estimate is that employment will decrease by 0.7 percent or by about 15,000 jobs.”

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