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Slovakia: Looking beyond headline figures

“We can’t eat the charts,” went a popular quote from a Slovak parliamentary debate on the budget way back in the nineties. The reality of Slovak consumers in 2012, however, in many respects falls along with this popularised statement. With regard to the specifics of the small and open Slovak economy, what might at first sight appear as an impressive overall real GDP growth figure actually boils down to a less impressive picture for domestic demand. Hence a look beyond headline figures is inevitable.

“We can’t eat the charts,” went a popular quote from a Slovak parliamentary debate on the budget way back in the nineties. The reality of Slovak consumers in 2012, however, in many respects falls along with this popularised statement. With regard to the specifics of the small and open Slovak economy, what might at first sight appear as an impressive overall real GDP growth figure actually boils down to a less impressive picture for domestic demand. Hence a look beyond headline figures is inevitable.

REGIONAL COMPARISON: ONE-EYED AMONG THE BLIND


The year 2012 has seen the return of the recession in both the Czech Republic and Hungary; regional neighbouring peers with comparable economies, especially with regard to their size, openness and key export market – the eurozone. After a surprising decline of -0.5 percent at the beginning of the year, the annual decline of the Czech economy widened to -1.0 percent in the second quarter. Even more severe is the downturn in Hungary, which after -0.7 percent in the first quarter suffered an annual decline of -1.3 percent in the second. In light of this environment the Slovak economy continued to achieve relatively stable 2.9 percent annual growth in the first quarter of 2012, only slightly slower than the 3.2 percent in the prior year and down from 4.4 percent in 2010, the first year after the recession. When something appears too good to be true, a more in-depth analysis beyond the headline figures is required. First of all, a further slowdown in annual growth dynamics can be expected in the second half of the year, bringing the full-year figure close to the 2 percent mark, which will still stand out among the regional peers. To understand such a surprise, the composition of the growth figures needs to be examined.

BEYOND AGGREGATE GDP GROWTH FIGURES


Final household consumption declined in real terms by -0.2 percent in the first half of 2012, in line with reports of relatively stagnant unemployment and souring consumer confidence. Under pressure from its consolidation targets, final government consumption also declined by an annual -0.9 percent. Reversing last year’s trend (5.7 percent real growth in 2011) was also gross fixed capital formation – corporate and infrastructure investments – which was down by -2.5 percent, and when also including a decline in inventories, the gross capital declined by as much as -4.3 percent compared with the previous year.

So far, the individual parts of the mosaic fall into place logically and in a manner consistent with other more frequent indicators domestically, or from Slovak export markets. So where does the growth come from amid this sea of red figures? Unsurprisingly, from improvement in net exports, which is consistent with previous years. After 10.8 percent real annual growth in 2011, the real growth of external demand for Slovak production (aka exports) grew by 7.5 percent in the first half of 2012. Despite a slowdown in real export dynamics, an even faster slowdown in real imports resulted in new records in trade surplus in 2012.

RECORD TRADE SURPLUS AMID SLOWDOWN IN THE EUROZONE? YES, BUT…


According to the preliminary monthly customs statistics, the nominal value of Slovak exports for the first eight months of 2012 increased by 10.7 percent from a year ago, while the nominal volume of imports was only 5.7 percent higher. The resulting preliminary trade surplus for the eight months hence skyrocketed to €2.1 billion, a staggering six-fold increase compared with the same period of the previous year. While the double-digit growth of exports falls in line with the development of industrial production this year, one should also note the widening gulf between exports and imports. The more significant slowdown in imports sheds a bit more light on the underlying picture in Slovakia: weaker dynamics of imports is not only due to subdued domestic demand, but it also reflects the process of inventory depletion of local industries (as reflected in the gross capital formation).

Decreasing the stock of inventories is a logical reaction from corporations to the concerns of weaker demand in the future. At the same time, it helps to explain why the dynamics of imports lag so much behind exports, contributing to the record high trade surplus. Higher depletion of the stock of raw materials and other inputs allows suppliers of major Slovak industrial conglomerates to import less of their production inputs.

However, one has to beware that at a certain point within this year, the volume of inventories will reach the minimum permissible level, at which point the dynamics of exports and imports will get closer to each other and hence the record trade surplus will moderate. As a result of this, as well as due to base effect (annual comparison with higher trade surpluses at the turn of 2011/2012), the positive contribution of net exports to Slovak GDP growth will gradually taper off at the end of 2012 and throughout 2013.

INDUSTRY: PICTURE SKEWED BY HIGH CONCENTRATION


Slovak industrial production continued with solid double-digit annual growth in August, although the pace of expansion slowed from 18.5 percent in July to 17 percent in August. Average 12-month annual growth of industrial production hence stands at 12.6 percent year-on-year. Production of transport vehicles continues to be the key driver of industrial expansion, increasing by 77.2 percent compared with the same month one year ago. For the first eight months of the year, production of transport vehicles increased by 51.6 percent year-on-year. Other major drivers of industrial growth in year-on-year terms were production of machinery and equipment (+14 percent in August), production of electrical equipment (+9.2 percent in August), production of computer, electronic and optical products (+3.8 percent) as well as production of metals and metal constructions (+3.2 percent). Production of textile and apparel has also been rather successful in Slovakia this year (+5.8 percent in August, +9.3 percent for the first eight months).

Apart from the major industries that contribute to the overall positive result of Slovak industry, one must note that out of 15 industrial sectors, eight recorded an annual decline in production for the first eight months of 2012.

New industrial orders continued to be strong despite slowing annual growth dynamics: after recording a 37.9 percent annual increase in July, their annual growth slowed down to 14.5 percent in August. The main drivers of the new industrial orders in year-on-year terms were automotive production (+26.8 percent), production of metals (+12.9 percent) and production of computer, electronic and optical equipment (+9.7 percent). The Slovak automotive industry thus continues to benefit from the opening of new production lines for fresh models, which is part of the process of geographic optimisation of production facilities within multinational corporations.

LESSON OF 2012: THANKS AGAIN, EURO


Given the specifics of Slovak economic development over the past year, one still must beware of the ongoing risks. Stabilisation and recovery in the eurozone – if and when – remains the cornerstone for the improvement of the situation within the export-driven central European economies. However, the past year provided additional evidence of benefits that Slovakia has derived from the lucky introduction of a common European currency. While in previous years these benefits might have appeared a bit theoretical (currency stability, lower transaction costs in foreign trade, favourable interest rates), repeated favourable divergence of the Slovak industrial production trajectory compared with the similar economies of the Czech Republic and Hungary – in a similar way as in 2010 – repeatedly proved that euro adoption enhanced the competitiveness of the Slovak industry.

OUTLOOK FOR 2013: BEWARE


The greater challenge still lies ahead, especially with regard to inevitable continued consolidation of public finances. In a period when the only certainty is the absence of certainty, one can draw a salient conclusion for this overview from the August 3 rating report of Standard and Poor’s, which affirmed Slovakia’s rating (A/stable outlook) due to the “expectation that the government will continue its efforts toward fiscal consolidation and stabilising government debt as a share of GDP, as well as the view of Slovakia’s stable banking sector” and the “economy’s growth potential”.
However, the last sentence of the S&P rating report speaks volumes, and does not require additional comment: “Although we do not consider this likely, [downwards pressure on the rating] could follow consistently larger-than-anticipated deficits owing to an economic contraction, most likely as a response to external uncertainties.”

In light of the ongoing recession in the eurozone, as well as in several neighbouring economies, another Slovak proverb is apt: “Don’t shout ‘hop’ before you’ve jumped over.” 

The author is chief analyst at Volksbank Slovensko

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