Over the past year, the Slovak economy has demonstrated more resilience to unfavourable external developments than many of its neighbours. A major part of this improved performance can be associated with the lucky timing of euro adoption, which among others has reflected in improved competitiveness for Slovak exporters, as was first seen with the return to economic growth way back in 2010.
Owing also to the turmoil in the sovereign bond markets in 2011, economy of Eurozone slipped back into a double dip recession in 2012. Such a development could not be avoided by the economies, for which the eurozone is the major trading partner. Hence, the neighbouring Czech Republic (-1 percent year-on-year (YoY)) and Hungary (-1.7 percent YoY) were dragged into another recession last year. Slovakia however escaped the fate of its regional peers and managed to eke out milder, but positive GDP growth (+1.8 percent YoY).
In Slovakia, all aspects of domestic demand faced an annual decline in 2012. Final household consumption declined by 0.6 percent YoY, the same extent of annual drop was reported by final government consumption. Gross fixed capital formation – investments – were down by 3.7 percent YoY. In such an environment, a significant improvement in foreign trade surplus (net exports) helped to propel the economic performance of Slovakia into black figures. While exports grew by 8.6 percent YoY (half the pace from the prior year), imports decelerated even more significantly to +2.8 percent annual growth and resulted in a record high foreign trade surplus (€3.6bn).
A similar picture continued in 2013, and Slovakia is still on track to record slight real GDP growth of up to 0.9 percent. The decline of government consumption by 0.3 percent was however accompanied by real stagnation of final household consumption (+0.3 percent YoY in H1 of 2013), and a worrying drop in investments by 7.3 percent YoY. Though the pace of exports decreased to a mere 4.4 percent in the first half of 2013, an even more pronounced slowdown of imports (+1.4 percent) contributed to yet another annual improvement in the foreign trade surplus, which in the first eight months of 2013 (€3.3bn) nearly reached the 12-month result of the past year.
Supported by the benefits of euro adoption, Slovak industry grew by +2.9 percent YoY in the first eight months of 2013 and has repeatedly proven to be more resilient in comparison with similar neighbouring economies of the Czech Republic (-2.4 percent YoY) and Hungary (+0.1 percent YoY).
Signals from Germany and the rest of the eurozone give reason for optimism.
“Higher than usual uncertainty” is a sentence we have gotten used to hearing with regards to the macroeconomic forecasts over the past few years, even from the major global central banks. However, a harvest of important forward-looking macroeconomic indicators during the summer and autumn of 2013 puts the outlook for the upcoming year on a slightly better footing.
The German business confidence indicator has chimed in with five consecutive months of improvement, starting in May. Over the past two decades, German business confidence has proven to be well correlated with eventual growth of the real economy, of which we only learned ex post and with a notable delay.
Not only has this “soft” statistic given reason for optimism. During the summer months, new German factory orders recorded the best results since the summer of 2011. Starting in June, the annual change of new orders returned back to black figures, for the first time since November 2011.
It was in September 2011, when we got the first warning signal about the looming return of the recession in the eurozone, which indeed materialised last year. The same forward-looking indicator based on the survey among purchasing managers (PMI Index) in June of this year signaled the potential recovery of economic growth in the coming quarters.
Turning back to Slovakia, surprising green shoots sprouted over the past few months from local domestic demand, which has been in the doldrums ever since the end of 2008. In 2013, real retail sales growth recorded four consecutive months of annual improvement – the longest in more than four years. One has to note, though, that this optimistic result was aided by seasonally supported stabilisation in registered unemployment during the summer. Whether this stabilisation will last is yet to be seen.
Nevertheless, there is a glittering ray of hope on the horizon for the upcoming year in the eurozone, which is the key export market, and for the domestic Slovak economy.
Vladimír Vaňo is Head of CEE Research for Sberbank Europe AG in Vienna and Chief Analyst of Sberbank Slovensko.
For more information about the Slovak business environment please see our Investment Advisory Guide.
18. Nov 2013 at 0:00 | Vladimír Vaňo