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Carmakers drive Slovakia's economy

OWING a big thanks to its automotive sector, Slovakia’s economy continued growing in the second quarter of 2012, a time when some of the European giants either stagnated or grew at a rate slower than 1 percent. The country’s economy grew at a rate of 2.7 percent year-on-year, a slight fall from the 3.0-percent growth recorded in the first quarter of 2012. The economy maintained a solid quarter-on-quarter growth at 0.7 percent, the country’s statistics authority reported in its flash estimate on August 14. Nevertheless, market watchers warn that due to the openness of the Slovak economy, Slovakia cannot fully escape the fate of its major trading partners: slower growth or stagnation.

Illustrative stock photo(Source: SITA)

OWING a big thanks to its automotive sector, Slovakia’s economy continued growing in the second quarter of 2012, a time when some of the European giants either stagnated or grew at a rate slower than 1 percent. The country’s economy grew at a rate of 2.7 percent year-on-year, a slight fall from the 3.0-percent growth recorded in the first quarter of 2012. The economy maintained a solid quarter-on-quarter growth at 0.7 percent, the country’s statistics authority reported in its flash estimate on August 14. Nevertheless, market watchers warn that due to the openness of the Slovak economy, Slovakia cannot fully escape the fate of its major trading partners: slower growth or stagnation.

The volume of GDP at current prices in the second quarter of 2012 reached €17.825 billion, the Slovak Statistics Office said.

Slovakia’s automobile industry is the driver behind the economic growth, market watchers suggest based on available monthly statistics. The Slovak Statistics Office will publish further details on the condition of the economy in September.

“GDP should have been driven mainly by foreign demand supported mainly by increasing car exports,” said Ľubomír Koršňák of UniCredit Bank.

The growth of the automobile industry by more than 50 percent could hardly have been overlooked, added Eva Sadovská, analyst with Poštová Banka.

“Our car producers were doing well even in times when demand from Europe was not as strong as in the past,” Sadovská said, attributing this development to the fact that since last year China has become one of Slovakia’s key customers along with France and Germany.

While confirming that a significant year-on-year increase in the foreign trade surplus was the main driver of the aggregate real GDP growth, Vladimír Vaňo, chief economist with the Volksbank Slovensko also suggests that one should however be careful when interpreting this significant increase in foreign trade surplus, which more than quadrupled compared with the second quarter of last year.

“…For while Slovakia experiences a gradual slowdown in export dynamics, weak domestic demand as well as a decline in investments lead to [an] even faster slowdown in imports, resulting in improved foreign trade surplus even in a period when we do feel [a] slowdown of demand from our major export partners,” Vaňo told The Slovak Spectator.

The major drivers of export and industrial manufacturing performance are a few major industries, such as the production of transport vehicles and electronic equipment, which benefit from standing on the more favourable side of the process of geographic optimisation of production capacities of multinational corporations, according to Vaňo.

On the other hand, domestic demand had a negative influence on GDP growth in the second quarter as well, said Koršňák.

This assumption was proved by retail revenues, which failed to maintain their level from the first quarter and in the second quarter recorded a drop, Sadovská noted. Stagnation and caution is also expected in the area of investments and the creation of stocks, she added.

“However we expect certain increases in spending by the public administration,” Sadovská added.
Of the other European countries which have published their flash estimates, Germany has positively surprised market watchers by posting growth of 0.3 percent, said Martin Baláž of Slovenská Sporiteľňa.

“In the next quarter we expect a gradual slowdown of the Slovak economy due to the slowing of industrial production, which has so far been the main motor of economic growth,” Baláž said, adding that despite the expected growth the country’s economy could in the second half of 2012 grow at 2 percent.

Yet, Eduard Hagara of ING Commercial Banking said that in the second half of the year, the growth of the economy will mainly depend on the performance of the car manufacturers, which is not without risk factors.

“So far, however, it seems that despite the continuing drop of registration of new cars in the EU, Slovakia’s carmakers have enough orders to keep the growth of the Slovak economy in positive numbers,” Hagara said.

The major risk for the Slovak economy is clearly the unfolding recession in the eurozone, which is the target market for over half of Slovak exports, Vaňo told The Slovak Spectator.

“Despite double digit annual growth in Slovak industrial production in the first half of 2012, one should not forget that eight out of fifteen Slovak industries recorded an annual decline in that period,” said Vaňo.

“Due to strong foreign trade links and the extremely high degree of openness of the Slovak economy, it would be short-sighted to assume that Slovakia could escape the gravity of the fate of its major trading partners.”

According to Vaňo, the so-called carry-over effect, a contribution of the massive increase in foreign trade surplus, is blurring the picture of Slovak economic performance this year, when compared with comparable neighbours, such as Hungary or the Czech Republic.

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