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Spurt in Q4 GDP growth surprises

SLOVAKIA’S Statistics Office released some rosier-than-expected numbers for the country’s economic growth for the last three months of 2011, surprising and puzzling economic analysts who are now looking for the reasons behind the 3.4-percent year-on-year GDP growth recorded in the fourth quarter. Much more modest growth had been widely predicted.

SLOVAKIA’S Statistics Office released some rosier-than-expected numbers for the country’s economic growth for the last three months of 2011, surprising and puzzling economic analysts who are now looking for the reasons behind the 3.4-percent year-on-year GDP growth recorded in the fourth quarter. Much more modest growth had been widely predicted.

Slovakia’s better-than-expected results come at a time when other countries within the European Union recorded a quarterly fall in their GDP in the fourth quarter or had successive quarters of decline and met the definition of recession. Analysts are expected to carefully review the more detailed information on GDP structure that will be released by the Statistics Office on March 6.

The Slovak economy grew by 3.0 percent in the third quarter of 2011 and continued that solid pace in the fourth quarter as well posting growth of 0.9 percent quarter-on-quarter, the highest quarterly growth in the European Union. Slovakia’s GDP reached €17.809 billion in current prices in the final quarter of 2011 and, after adjustment for seasonal influences, GDP growth in the fourth quarter was calculated at 3.3 percent year-on-year and 0.9 percent from the previous quarter, according to the Statistics Office.

“The highest growth among the EU countries that have released their results so far was posted by Slovakia at 0.9 percent,” stated Martin Jaroš, spokesman for the Finance Ministry, on February 15. “The so-called soft indicators suggest that confidence in the German economy is improving for the future, which also serves as reason for moderate optimism.”

An earlier Finance Ministry prognosis had forecast quarterly growth of only 0.3 percent in the fourth quarter, while the European Commission had expected no growth in Slovakia. Jaroš added that the flash estimate released by the Statistics Office introduces some positive factors to the ministry’s current estimate of GDP growth of 1.1 percent for 2012, which was recently reduced from its earlier prognosis of 1.7 percent.

The finance minister noted that Slovakia has a real chance of meeting its plan to reduce the public finance deficit to beneath 3 percent in 2013, which will be an important factor in the eyes of rating agencies.

“It means there are preconditions this year for the economy to post moderately better results,” Jaroš added, as quoted by TASR.

The economies of eurozone countries recorded an average quarterly decline in GDP of 0.3 percent for the fourth quarter and Germany and the Czech Republic, Slovakia’s primary trading partners, also recorded quarterly falls in their GDP.

“The flash estimate for the end of the year brought a big surprise,” said Boris Fojtík, an analyst with Tatra Banka, suggesting that most analysts had expected growth to be about 2.1 percent year-on-year.

Fojtík also found Slovakia’s quarter-on-quarter growth surprising since the Czech Republic had reported a decline in GDP of 0.3 percent and Germany posted a drop of 0.2 percent.

“Considering [previous] monthly statistics, the growth of GDP in the last quarter is hard to explain,” Fojtík commented. “Growth in industrial production almost stopped as in November and December it was almost at zero. Explaining the growth from household consumption is also problematic. The more than three-percent drop in retail revenues in the last quarter does not indicate this either.”

Fojtík added that consolidation of Slovakia’s public budget last year could not be viewed as an impetus for growth either.

“The most probable source of the growth, as in the previous quarters, was exports”, Fojtík suggested.

The chief economist with Volksbank Slovensko, Vladimír Vaňo, believes the contribution of net exports is behind the growth in fourth-quarter GDP, but urged some caution in evaluating the statistics.

“One should be careful about reading too much into this figure, especially since it is chiefly a result of a positive contribution by net exports, which were boosted by a more significant slowdown in imports than the more gradual but still notable slowdown in exports,” Vaňo told The Slovak Spectator. “Nevertheless, the dynamic of weaker imports, which helped to increase this statistical result, is in line with other partial signals from the economy.”

Vaňo noted that retail sales in constant prices declined by over 3 percent in the last quarter, pointing towards a continued fall in household consumption in the last quarter, as was reported in the three previous quarters.

A better-than-planned decrease in Slovakia’s budget deficit to 4.6 percent of GDP was achieved through more decisive restraint in current state expenditures as well as capital investments, Vaňo said, noting that these were cut more than planned to compensate for the slightly worse outlook for state revenue in the second half of 2011.

“Hence, [lower] public sector spending would have been a negative drag on growth in the last quarter,” Vaňo stated. “A notable slowdown in export dynamics, as well as in industrial production, might hinder the strength of corporate investments as has been indicated by quarterly stagnation in employment.”

Vaňo noted that fixed capital formation along with growth in net exports were the two most important positive contributors to Slovakia’s economic performance last year.

“Weakness in domestic demand hit imports of consumer goods in a more pronounced way than the gradual slowdown in exports and helped to generate the record-high foreign trade surplus, which in Q4 amounted to almost 40 percent of the full-year trade surplus,” Vaňo stated. “This helped to generate the impressive GDP figures despite pronounced weakness in two important components, household and government consumption, and quarterly stagnation in employment.”

UniCredit Bank Slovakia’s chief economist, Vladimír Zlacký, also believes exports were the drivers of the fourth quarter economic growth while agreeing that both lower household consumption and cuts in public spending had a negative effect on the economy.

“The published figures show relative resistance by the Slovak economy to deceleration of growth in western Europe during this economic cycle,” Zlacký stated, adding that the latest economic sentiment indicators in the eurozone indicate a positive turn in the economic cycle and it is possible that a slowdown in Slovakia’s economic growth will not be significant.


The predictions


Despite certain risks in macro-economic developments in Slovakia, the flash estimate for the fourth quarter brings a moderately more optimistic outlook for GDP growth in 2012, according to a statement prepared by Slovakia’s central bank, the NBS, on its website.

“When hypothetically counting on maintaining the GDP output of 4Q 2011 throughout 2012, with the quarter-on-quarter dynamics staying zero, Slovakia’s economy may rise by 1 percent year-on-year in 2012,” the NBS stated, as quoted by TASR.

Zlacký expects a further recovery in economic growth after a weak first quarter of 2012 and his bank raised its estimate for GDP growth for all of 2012 from 1.9 percent to 2.4 percent.

“We expect slight but positive real GDP growth for the full year 2012,” Vaňo said. “Numerous fundamental signals from Germany and the eurozone have raised hopes for tentative stabilisation of the economic weakness seen at the turn of the year.”

Barring adverse negative events, such as a worst case scenario in peripheral eurozone economies, Vaňo said “fundamental signals from several forward-looking economic indicators create potentially fertile soil for recovery in the eurozone in the second half of 2012”, while again advising caution.

“However, given the massive Damocles’ sword of potential escalation in the eurozone sovereign debt turmoil, the outlook for 2012 is subject to significantly higher event risks than is usual in macroeconomic forecasting,” Vaňo told The Slovak Spectator. “In other words, the outlook indicated by economic fundamentals still hinges on the eurozone’s ability to defend its credibility intact and to avoid potential turmoil that could well overshadow the tectonic shift on Wall Street in September 2008.”

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