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IMF cuts GDP growth forecast

THE ORGANISATION for Economic Cooperation and Development (OECD), a club of industrialised nations, and the International Monetary Fund (IMF) have both doused hopes of buoyant growth in the Slovak economy in 2013. After the OECD in late May reduced its estimate for Slovakia’s gross domestic product (GDP) growth from 2 percent to 0.8 percent, a week later the IMF said it was now forecasting that the country’s economy would grow by just 0.6 percent this year. As recently as April, the IMF was forecasting 1.4-percent growth in 2013.

THE ORGANISATION for Economic Cooperation and Development (OECD), a club of industrialised nations, and the International Monetary Fund (IMF) have both doused hopes of buoyant growth in the Slovak economy in 2013. After the OECD in late May reduced its estimate for Slovakia’s gross domestic product (GDP) growth from 2 percent to 0.8 percent, a week later the IMF said it was now forecasting that the country’s economy would grow by just 0.6 percent this year. As recently as April, the IMF was forecasting 1.4-percent growth in 2013.

Meanwhile, Slovakia’s statistics authority reported that the economy in the first quarter of 2013 posted 0.6-percent growth year-on-year, down slightly from 0.7 percent in the last quarter of 2012. The Slovak Statistics Office thus confirmed its flash estimate from last month.

Growth was fuelled by exports, while domestic demand acted as a brake on the economy, according to market watchers.

Over the first three months of 2013, the country generated GDP of €16.811 billion, up by 1.6 percent year-on-year in current prices. Compared to the previous quarter, Slovakia’s economy recorded feeble 0.2-percent growth after the figures were cleansed of seasonal factors, according to the Slovak Statistics Office.

On a brighter note, Slovakia still performed better in the first quarter than most other economies in the European Union, which saw its overall GDP contract by 0.1 percent compared to the last three months of 2012. Compared to the same quarter in 2012, the economy of the EU slowed in the first quarter by 0.7 percent and the eurozone contracted by 1.1 percent year-on-year, according to the SITA newswire.

“The global picture these data provide us is, in an international comparison, positive: the Slovak economy has exceeded the performance of its key partners, but on the other hand the economy is considerably losing steam,” Andrej Arady, a macroeconomist with VÚB Banka, wrote in a memo.

The growth continued to be fuelled entirely by foreign demand, while domestic demand deepened its year-on-year decline to 3.4 percent, Arady said, adding that not even exports managed to avoid a slowdown, dropping from 7.1-percent growth in the last quarter of 2012 to 4.2-percent in the first quarter of 2013.

Foreign consumers’ weaker interest in Slovak products is causing the economy to slow, according to Eva Sadovská, analyst with Poštová Banka: “weaker orders reported by the industry result not only in slower growth of the volume of production but also weaker investment activity”.

The detailed structure of GDP, published by the statistics authority on June 5, did not surprise Ľubomír Koršňák, chief economist with UniCredit Bank, who noted that domestic demand shows no signs of revival, and that its decline can be observed in all three major components: household consumption, government spending and investments.

“Despite the repeated growth of real wages after two years of continuous falls, household consumption continued dropping by 0.9 percent year-on-year,” Koršňák said adding that “the further increase of unemployment and prevailing low consumer confidence” had contributed to this development.

Koršňák also noted that investments also continued their significant drop, concluding: “considering the unstable situation but also the increased tax burden Slovak companies are probably delaying their investments.”

Economic developments in the eurozone and economic sentiment imply that feeble growth rates will prevail in the following quarters, said Martin Baláž, analyst with Slovenská Sporiteľňa bank.

The IMF prediction

Slovak Finance Minister Peter Kažimír and the head of the recent IMF mission to Slovakia, James John, both see weak domestic demand and deteriorating developments in demand from foreign business partners, mainly in Europe, as being behind the fund’s decision to cut its growth prediction for Slovakia.

“Slovakia in the first quarter of 2013 was in the black, but I can observe that the growth structure is not very good,” said Kažimír as quoted by the TASR newswire, adding that the ministry is likely to revise its estimate for GDP growth for 2013. “Growth was mainly driven by exports, and we fear mainly a slump in domestic consumption, which may have adverse effects on the overall performance this year.”

Despite these developments, the finance minister still believes that Slovakia will squeeze its public finance deficit below 3 percent and the IMF considers its plans achievable. It will nevertheless require further consolidation so that further growth in the public debt is avoided, according to the IMF, as reported by SITA.

The IMF thus recommends that Slovakia, among other things, improves tax collection. Slovakia should introduce, according to John, a discussed real estate tax, while also improving the effectiveness of its public spending. To improve the situation on the labour market the fund recommends improving the education system and active policy measures in the labour market, SITA reported.

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