WHILE the automotive industry has propelled Slovakia’s economy to a sound level of growth compared with other European Union countries this year, experts expect that the euro region’s debt crisis and the austerity measures adopted will lower the country’s GDP growth next year. Both the Finance Ministry and the National Bank of Slovakia have slashed their forecasts for economic growth for next year. The Finance Ministry cut its forecast for 2013 by 0.5 percentage points to 2.1 percent while the central bank was even more pessimistic, cutting its estimate from 3.1 percent to 2 percent. Bank analysts see the forecasts as realistic or even too optimistic.
“The revival in global economic activity slowed during the second quarter of 2012, also under the development of the debt crisis in the eurozone,” Jozef Makúch, the governor of the National Bank of Slovakia (NBS) said when introducing the new prediction on September 18.
“The debt crisis keeps causing uncertainty among investors as well as consumers and is being reflected in the economies of Slovakia’s main trading partners. This should begin to be reflected in Slovakia’s economic activity.”
The central bank forecasts that Slovakia’s economic growth will slow to 2.7 percent in 2012 compared with the 3.3 percent it achieved in 2011, although the figure still represented an increase over the previous forecast of 0.2 percentage points. The FPI kept its forecast for 2012 at 2.5 percent.
Both the ministry and the central bank see the automotive industry, and especially the launch of new export capacities, as being behind the positive economic development this year.
When elaborating its midterm prediction, the NBS took into consideration on one hand lower foreign demand, still weak domestic demand, a more negative development on the labour market and a further decline in economic sentiment in Slovakia as well as abroad.
The latest NBS prediction already takes into consideration the austerity measures the Robert Fico government has adopted to consolidate the public finances. These measures include changes to the second capitalisation pillar of the old-age pension scheme, a hike in payroll taxes, revenues from special levies imposed on selected companies, an increase on corporate income tax to 23 percent, changes in the income tax on private individuals and changes in administrative fees.
The central bank has calculated that the total volume of austerity measures amounts to €1.57 billion, or 2.1 percent of GDP, and estimates that the consolidation measures will cut economic growth by 0.41 percentage points in 2013.
While Eva Sadovská, analyst with Poštová Banka, sees the forecasts of the ministry and the central bank as realistic, Vladimír Vaňo, chief economist with Volksbank Slovensko, is less optimistic.
“We consider these forecasts to be optimistic, especially due to the significant slowdown in external demand, as well as the still-uncertain outlook for the labour market and hence also for real household consumption,” Vaňo told The Slovak Spectator. “We expect that real economic growth might slow to below the 2-percent level in 2013.”
Poštová Banka expects the country’s economy to grow by 2.4 percent in 2012, but is revising its forecast for 2013 downwards.
“In the meantime we expect that the economy will grow next year a bit slower than this year,”
Sadovská told The Slovak Spectator. “This year the economy is being driven exclusively by foreign demand, especially for cars. During the first seven months carmakers [in Slovakia] manufactured almost one half more than during the same period in 2011. This cannot be overlooked.”
Sadovská attributes the growth in car production amid news about the weakening economy and declining demand to the extension of their export destinations to Asia and especially China, and the adaptation of their production to new client demands.
“Focusing on smaller and cheaper models gives them a certain competitive advantage for the time being,” said Sadovská, adding that the launch of new models and new production lines also supported car production significantly, a factor that might not be repeated next year. “We assume that car production will increase next year too, but not at the same pace as this year.”
With regard to the considerable influence the automotive industry has on Slovakia’s economic growth, while without its contribution the country’s economy would have stagnated during the first half of 2012, Makúch pointed out this asymmetry in the Slovak economy and called for a redress in the balance over the long term.
Vaňo, with respect to the fact that the automobile industry remains the primary driving force behind Slovakia’s economy, said that in small and open economies, such as Slovakia, Hungary or the Czech Republic, a higher concentration of major industries is neither surprising nor infrequent.
But he pointed out the role that history has played in Slovakia.
“One should keep in mind that the expansion and success of the Slovak automotive sector did not happen out of the blue: Slovakia benefited from the heritage of skilled labour left behind after the demise of an engineering industry focused on production of specialised military vehicles,” said Vaňo. “In that respect, Slovakia has drawn upon its existing competitive edge when it comes to labour qualification. This was further enhanced by numerous advantages associated with euro adoption, which contributed [significantly] to the arguments of why it was Slovakia that benefited in many cases from geographic optimisation of production capacities of major multinationals.”
According to Vaňo it is premature to forecast the impacts that the slashed economic growth estimates may have on the planned deficit in the public finances next year.
“Given the early stages of the budgeting process, it is too early to draw far-reaching conclusions,” said Vaňo. “The draft proposal of the budget for next year still anticipated the need to look for additional measures to bring the deficit down to the planned 2.9 percent of GDP. Due to the deterioration of the economic outlook, the additional cost-cutting and revenue-raising efforts will need to be more sizeable.”