Economic growth numbers disappoint analysts

Worse times are coming and the Slovak economy is poorly prepared, they say.

Volkswagen Slovakia plantVolkswagen Slovakia plant (Source: Courtesy of VW Slovakia)

Slovakia's economy is growing slower, recent numbers published by the Statistics Office have confirmed.

The slowdown has even deepened in the third quarter of 2019 compared with the previous quarter. The GDP growth in stable prices reached 1.3 percent, with its tempo slowing down by 3.3 percentage points in the year-on-year comparison. This makes it the lowest growth since the last quarter of 2013, the Statistics Office noted as reported by the TASR newswire.

"The economy continued developing in positive numbers in the third quarter of 2019, supported mainly by the domestic demand," the Statistics Office noted. The domestic demand increased by 4.3 percent compared to the same quarter in 2018.

UniCredit Bank Czech Republic and Slovakia analyst Ľubomír Koršňák sees the main reasons for the economy slowing down in the decreased external demand, but noted that Slovakia's own structural problems that result in the part of the economy losing its competitiveness also accentuated it.

Investments drove economy

VÚB Bank analyst Michal Lehuta mainly sees new investment behind the economic growth. The investments increased by 7.8 percent y/y in the third quarter of this year.

"Without these investments, the local GDP would record a slight decrease," Lehuta wrote in his memo.

Koršňák noted that the growth in investments is mainly thanks to the private sector, namely the financial sector (41 percent increase year-on-year in regular prices), but also non-financial companies (15 percent) and households (10 percent). On the other hand, public investments continued dropping (-19 percent).

Imports on the rise while exports drop

While household consumption (1.8 percent) and the public administration consumption (3.7 percent) remained in the growth territory, the exports drove the economy's performance down, Lehuta noted.

Unlike domestic demand, foreign demand has dropped for the second consecutive quarter, the Statistics Office noted. While the exports of goods and services decreased by 0.2 percent, imports increased by 3.3 percent.

"The stronger growth of imports was driven by the still-growing domestic demand but, it seems, also by the increasingly demanding imports of part of the production," Ľubomír Koršňák said. He mainly sees potential for problems in the subcontractors' network of the automotive industry, which might face ever stronger competition from abroad. "The secondary effects of a new end production (like the fourth carmaker) have thus not been delivered in the expected scope, and are spilling over to the surrounding countries to a significant extent," Koršňák wrote.

Labour market reflects the slowdown

The labour market has also been showing symptoms propeled by the strong economic slowdown in the third quarter.

The employment rate only increased by 0.2 percent year-on-year. The number includes people working abroad, whose number has been on a decline, Lehuta noted.

The unemployment rate, on the other hand, slightly increased to 5.9 percent, "the first quarter-on-quarter increase since 2013 when Slovakia coped with the second wave of recession in the eurozone", Lehuta noted.

Not ready for worse times

Koršňák admits the numbers for the third quarter come as a disappointment.

"The strong ties of the Slovak economy to Germany have been confirmed, but it seems that the current slowdown of the economic growth might be mainly due to structural problems of the key part of the Slovak economy," he wrote. These are linked to changes in the demand and the partial loss of competitiveness of the Slovak economy due to the exhaustion of the labour force in the west of the country, the increasing pressure on salaries and several governmental measures that worsened the quality of the business environment.

The analyst thus expects the slowdown to take on more of a long-term character. Several risk factors remain ahead: the external threats include the potential tarrifs on European cars imported to the US, Brexit insecurity, and slower-than-expected economic growth in Europe. Locally it's the parliamentary election that might end in a stalemate result.

"Slovakia's economy is thus facing worse times after a period of relatively strong economic growth, and it does not seem to have prepared for that very well," the analyst concluded.

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