THE AUTOMOTIVE industry continues to be the driving force behind Slovakia’s industrial production, growing at a solid double-digit pace. But declines reported by the biggest European economies, including Germany, are not a good signal for Slovakia. Analysts estimate that Slovakia will feel the impact in the coming months.
“Similarly to previous months, only car manufacturers propelled the industry, thanks to the launch of new production capacities,” Eduard Hagara, a senior research analyst at ING Commercial Banking, wrote in a memo. “Worse news is that other sectors feel the impact of continuing problems in the eurozone and the weakening demand to a much larger extent. When the significantly positive influences of car factories are not taken into consideration, the cumulative production in remaining industrial sectors moderately decreased.”
In June, Slovakia’s industrial output rose 11.3 percent year-on-year net of the influence of the number of working days. Manufacturing, going up by 14.1 percent year-on-year, was again the sole driving force of industrial output in June. Mining and quarrying dropped 20.7 percent year-on-year while electricity, gas, steam and cooled air supplies went down by 4.2 percent year-on-year, the Statistics Office reported on August 9.
The Statistics Office, as well as economic analysts, credits the output of car factories with the positive results achieved in the industry. Car production grew by 50.9 percent compared with the same period of 2011.
Mária Valachyová, the senior analyst for Slovenská Sporiteľňa (SLSP) pointed out that after taking into account seasonal influences, the industry had already slowed down in June when industrial output declined by 1.4 percent compared with May.
“Our calculations show that the slowdown affected almost all sectors,” Valachyová wrote in her memo, adding that the car industry remains the primary driving force. Sector diversification, i.e. production of small as well as luxurious cars, as well as geographic diversification, i.e. the growing share of exports not only to Europe but also Asia, helps the technologically modern Slovak car factories to do well during times of slow global economic growth.
Boris Fojtík, an economic analyst with Tatra Banka, added that the June industrial output, excluding the production of motor vehicles, declined by over 2 percent year-on-year and that this illustrates that Slovakia’s economy already feels the negative development in Germany.
German industrial output fell slightly more than expected in June, in the latest sign that a renewed flare-up in the eurozone debt crisis is taking its toll on Europe’s largest economy, Reuters reported on August 8. Production in Germany fell 0.9 percent on a seasonally adjusted basis. The drop was driven by a 1.0 percent month-on-month slump in manufacturing output, a 1.6 percent decline in the production of capital goods and a 0.9 percent decrease in consumer goods output. Energy production, which rose by 1.2 percent, was the only bright spot on a seasonally adjusted basis.
“The outlook for industrial production remains subdued for the time being given the weaker order situation at the moment,” the German ministry of economy wrote in its memo cited by Reuters.
Forecasts for Slovakia
Fojtík expects that Slovak industry will be heavily influenced by the automotive industry during the entire 2012 year.
“The final growth of production in individual months will then be affected, especially if the auto factories maintain their current high volume of production in spite of the decline in car sales in Western Europe,” said Fojtík. “Outlooks of other sectors are, unfortunately, not encouraging.”
SLSP estimates that the growth of industrial output might even speed up in July. This might be due to the moving of holidays from July to August, possibly resulting in lower growth in August.
“Sentiment in Slovak industry decreased in July; similarly, European indicators hint at another slowdown of industry in the eurozone,” wrote Valachyová. “We assume that the deceleration would also mirror Slovak numbers during the fourth quarter.”
UniCredit Bank analyst Ľubomír Koršňák pointed out that the launch of new production in Slovak car factories may be at its end and even though he expects the automotive industry to maintain its current relatively high production levels, the dynamics of the year-on-year growth will gradually slow down.
“Sentiment indicators in Germany, as well as in the eurozone, imply that demand abroad will also remain weak during coming months,” said Koršňák. “Thus export-oriented sectors of industry may still be limited by weak demand at the target markets. Because of this we do not expect more significant growth of production in these sectors.”
Hagara expects that thanks to carmakers the growth of Slovakia’s GDP will remain positive this year. But since it is concentrated in one sector it is not able to create many new jobs. And without a drop in unemployment from relatively high levels it is not possible to expect a significant revival of domestic demand.
“The considerable decline of construction production [down 12.1 percent year-on-year in June] offered only further proof that domestic demand remains week,” wrote Hagara.