SLOVAKIA is now a small island of growth amid a European sea of stagnating economies. The eurozone as a whole posted zero growth for the first three months of this year but Slovakia’s economy grew during the same period at a rate of 3.1 percent year-on-year, a slight fall from the 3.4-percent growth recorded in the last quarter of 2011. Gross domestic product (GDP) grew at a brisk 0.8 percent from quarter to quarter, according to data released by the Slovak Statistics Office on May 15.
Market watchers polled by the country’s central bank had originally expected the economy to grow by just 1.5 percent year-on-year, a number which they revised upwards to 1.8 percent after growth data from the last quarter of 2011 was confirmed along with news of more upbeat developments in industrial production. The higher growth number therefore came as a pleasant surprise.
“In fact, considering the development of economies in the eurozone we consider the reported GDP growth to be a positive surprise,” said Andrej Arady, an economist with VÚB Banka.
The country’s economy owes its rosier growth numbers to new projects in the automotive industry, according to Volksbank Slovensko chief economist Vladimír Vaňo. These, he said, “are a reflection of the ongoing process of geographical optimisation of production capacities of multinational corporations”.
The country’s economy grew at 3.3 percent last year, compared to the 4.2-percent growth recorded in 2010. Bank analysts polled by the National Bank of Slovakia (NBS) forecast 1.4-percent growth for all of 2012, the SITA newswire reported.
Elsewhere in the EU, Germany also posted stronger-than-expected growth: 0.5 percent quarter-on-quarter, compared to predictions of 0.1 percent, Arady noted. By contrast, the Czech Republic slipped into recession, with a 1-percent contraction in both year-on-year and quarterly comparisons.
“The Slovak case is special, as there was a continuing build-up of production at new car lines in the first quarter of 2012,” said Mária Valachyová, head of market research at Slovenská Sporiteľňa, one of the main Slovak retail banks. She added that in addition to higher demand from Asian markets, this helped maintain industry’s upward path.
The drivers of growth
Investment in key export sectors has kept industrial production growing compared to last year, at 9.7 percent year-on-year, Vaňo told The Slovak Spectator, noting that a handful of new corporate investments had come into operation at around the start of this year.
“At the same time, growing competition from locally-produced goods, ranging from electronics through cars, that used to be predominantly imported in the past, as well as still-fragile domestic demand, helped to restrain the volume of imports,” said Vaňo.
A slowdown in import growth – 4.3 percent in Q1, compared to 13.6 percent during 2011 – was accompanied by solid growth in exports, up 7.3 percent in Q1, compared with 17 percent for all of 2011. This resulted in a significant increase in Slovakia's foreign trade surplus, which in Q1 increased by 72 percent compared with the same period a year ago, according to Vaňo.
“Hence, gross fixed capital formation as well as net exports are expected to be the major positive contributors to the first-quarter GDP result,” Vaňo added.
The risk factors
The most significant risk factor for Slovakia’s economy lies in the wider eurozone, which appears to be slipping back into recession amid growing concern about the ability of members of the single currency to service their debt levels, Valachyová told The Slovak Spectator.
Vaňo also suggested that the eurozone, which is Slovakia’s major export market, is heading for a significant slowdown in economic activity in the first half of the year, as shown by several forward-looking indicators, including the purchasing managers’ index for both the manufacturing and service sectors.
“Thanks to the advantages of euro adoption, Slovak export-driven manufacturing is faring notably better early this year than competitors in similar neighbouring countries: while in March industrial production grew by 12.7 percent year-on-year, in Hungary it improved by 0.6 percent after two preceding negative results and in the Czech Republic it declined by 0.7 percent from the previous year,” Vaňo stated.
However, the analyst also indicated that investments by multinational corporations and improved competitiveness brought about by having the euro can only mitigate, or perhaps delay, the consequences of a slowdown in activity in Slovakia’s major export markets, especially those within the eurozone.
Arady noted that, hand in hand with stronger economic growth compared to the European average, sentiment in the Slovak economy is improving “despite the pan-European decline”, but that downward risks remain strong in terms of foreign demand as well as domestic demand, “where the mood of consumers to spend is being burdened by the high unemployment rate”.
Nevertheless, 2012 is likely to go down as a year of fiscal consolidation, given the government’s commitment to push the public finance deficit under 3 percent of GDP to meet the country’s eurozone obligations.
“The efforts of the government to push the deficit under 3 percent might have an impact on growth in the economy, mainly through the method of consolidation the government chooses,” said Valachyová. “In general, cutting regular spending by the state harms growth the least; on the contrary, increasing taxes could lead to lower investments and lower future growth.”
She added that the government, based on its previous statements, prefers the road of higher taxes, which in terms of their effect on future economic growth is perhaps not the optimum way.
“A brief glimpse at the composition of Slovakia’s real GDP tells it all: in a country where foreign trade turnover exceeds 175 percent of GDP, while government spending amounts only to 18 percent of GDP, it would be outright self-deception to even pretend that altering the inevitable path of fiscal consolidation would provide any significant instrument against the forecast slowdown in growth, which will mimic that of our major trading partners,” stated Vaňo.
The chief economist added that given the eye-catching increase in the public debt over the past year, which has fed into a significant increase in the spread on Slovak sovereign debt, it is apparent that hesitation in fiscal consolidation would be associated with significantly more pain – through widening of sovereign spreads, and negative pressure on debt ratings and the confidence of foreign portfolio as well as direct investors – than would be outweighed by any benefit in terms of a fractional contribution to the national GDP in the case of a less restrictive fiscal policy.
“Fiscal consolidation must be the first and foremost priority of the Slovak government even in the face of a slowdown in economic activity,” Vaňo stated, adding that maintaining the confidence of portfolio and direct investors in the credibility and stability of the Slovak public finances and economic environment is crucial not only to avoid an increase in interest expenses for refinancing the public debt, “but is also important for maintaining the encouraging trend of multinational direct investors still placing new corporate investments in Slovakia even amid an increasingly gloomy overall picture in Europe”.