GDP growth forecast cut back again

RESPONDING to worsening economic news in the eurozone, Slovakia’s Finance Ministry cut its forecast for the country’s GDP growth in 2012 to 1.1 percent, backing off from its earlier prediction of 1.7-percent growth made in November.

RESPONDING to worsening economic news in the eurozone, Slovakia’s Finance Ministry cut its forecast for the country’s GDP growth in 2012 to 1.1 percent, backing off from its earlier prediction of 1.7-percent growth made in November.

The ministry said it was hopeful that Slovakia would continue to enjoy economic growth this year and would not follow some of the other eurozone countries that now appear to be sliding into recession.

The ministry also stated that its revised projection for economic growth should not pose any further risk to consolidation of the public budget and that the planned deficit of 4.6 percent of GDP for 2012 can be achieved.

“The good news is that Germany’s economy is not expected to contract either; it estimates growth of 0.5 percent,” Finance Minister Ivan Mikloš stated on February 9, as quoted by the TASR newswire,
referring to the links between the German and Slovak economies.

Slovakia and Germany might be among only a handful of countries in the eurozone that record positive economic growth in 2012, as overall economic output within the eurozone is now expected to contract by 0.5 percent this year.

The ministry maintained its previous prognoses for growth in 2013 and 2014, at 2.7 percent and 3.6 percent, respectively and said that its prognosis for 2013 already incorporates the government’s commitment to pursue additional measures that will bring the budget deficit below 3 percent of GDP.

Even if the lowered forecast for economic growth is not seen as a particular risk to the state budget, Mikloš admitted that some further consolidation measures may be necessary depending on updated tax and revenue prognoses scheduled to be released next week.

The ministry expects the slower economic growth will cause turmoil in the labour market, saying that economic growth of 1.1 percent is insufficient to generate new jobs and that more layoffs in public administration and in state-owned railway companies are expected. The ministry increased its prognosis for the average unemployment rate for 2012 by one percentage point to 13.8 percent, while predicting that the unemployment rate will then decrease to an average of 13.7 percent in 2013 and to an average of 13.5 percent in 2014.

The ministry also reduced its prediction for growth in real wages by 0.2 percentage points to 0.6 percent for 2012 but upped its prediction for real-wage growth in 2013 by 0.4 percentage points to 1.9 percent. The ministry projects inflation, as measured by the harmonised EU index, to increase to 2.8 percent this year (its previous estimate was 2.6 percent) and for inflation to then fall to 2.3 percent in 2013 (its previous estimate was 3.0 percent).

Differing views from analysts

Economic analysts’ opinions differ somewhat from those of the ministry. Boris Fojtík, an analyst for Tatra Banka, viewed the changes the Finance Ministry made in its projections as an effort to incorporate worsening external conditions but said he is more pessimistic and expects output in the Slovak economy to decline this year.

“We expect a decline of 0.5 percent in Slovakia’s GDP this year,” Fojtík told The Slovak Spectator. “The main factors will be persistent weak domestic demand and a significant worsening in foreign demand.”

By contrast, Vladimír Zlacký, chief economist at UniCredit Bank Slovakia, said his bank was sticking by its previous prediction of 1.9-percent growth in GDP for 2012.

“Contrary to the Finance Ministry, we believe that most indicators in the eurozone as well as in Slovakia signal improvement in the economic situation,” Zlacký told The Slovak Spectator. “We expect that in the upcoming period several institutions will revise their prognoses rather upward,” and noted that his bank also foresees faster growth in the German economy than expected by the Finance Ministry.

“We also believe that a calming in the financial markets, in combination with moderate growth in real wages in Slovakia, will lead to a moderate recovery in household consumption,” Zlacký stated. “The negative risks are especially developments in Greece and equally the potential post-election development in Slovakia.”

Slovakia’s Statistics Office will release its flash estimate of GDP for the last quarter of 2011 on February 15 and most analysts believe it will show that economic growth slowed down. Fojtík estimates fourth quarter GDP growth to have been 2.5 percent year-on-year while UniCredit Bank estimates that the year-on-year GDP growth for the quarter will come in at 1.9 percent.

Manufacturing still a bright spot

Slovakia’s index of industrial production rose by 0.9 percent in December 2011 compared with December 2010, the Statistics Office reported on February 8, led by a 2.8 percent increase in manufacturing output that compensated for a 6.8 percent decrease in production of electricity, gas, steam and cooled air and an 8.4 percent decline in output in mining and quarrying. The industrial index increased by 6.9 percent over all of 2011, propelled by an 8.9-percent rise in manufacturing output that compensated for declines of 2.2 percent in production of electricity, gas, steam and cooled air and 3.6 percent in mining and quarrying.

Andrej Arady, a macroeconomist at VÚB Banka, viewed the December year-on-year growth in manufacturing output as a surprise in light of the sharp decline in German industrial output in that month. Reuters reported on February 7 that German industrial output posted its biggest fall in December since the depths of the financial crisis at the start of 2009. Industrial output plunged 2.9 percent in December after remaining flat in November, surpassing even the worst forecasts and signalling that Europe’s biggest economy may be cooling more than previously expected. Reuters added that preliminary estimates show that Germany’s economy contracted by 0.25 percent in the final three months of 2011.

“Data from Germany had indicated that its domestic industry would record a significant decrease in December and this has come true,” Arady told The Slovak Spectator. “This is a significant brake on Slovakia’s manufacturing sector.”

Arady said that new industrial orders in Slovakia indicate that these may not be enough to maintain year-on-year growth in manufacturing, adding that mining and network industries, i.e. utilities, had ended 2011 in line with his expectations but that manufacturing did much better than he expected in 2011 and had propelled the entire industrial sector, adding that the automotive industry brought the most positive surprises.

Output in the sector of production of means of transport recorded a 10.4 percent year-on-year increase in December while growth for this sector in all of 2011 was 17.3 percent. Nevertheless, Arady does not expect Slovakia to entirely escape negative developments in other parts of Europe or in the global economy.

“The negative developments abroad may catch us during months to come,” Arady stated. “We expect that the index of industrial production will decrease significantly from last year’s increase of almost 7 percent to less than 3 percent for all of 2012 and the first half of the year will be especially weak.”

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