US embassy cable - 04BRATISLAVA1162

UNCLAS BRATISLAVA 001162 
 
SIPDIS 
 
 
DEPT PASS TO USTR FOR RDRISCOLL 
 
TREASURY FOR CHRISTOPHER GREWE 
 
USDOC FOR MROGERS AND STIMMINS 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, LO 
SUBJECT:  THIRD QUARTER REVIEW OF THE SLOVAK ECONOMY 
 
1.  Summary. Slovak economic growth slowed slightly to 5.3 
percent in the third quarter of 2004, but still outpaced its 
Central European neighbors.  Higher investments and household 
consumption replaced exports as the main economic catalyst. 
Growth should remain strong with inflow of foreign direct 
investment (FDI) continuing to gain momentum and new auto makers 
boosting the supply capacity of the economy.  In addition, rising 
wage forecasts and GOS spending plans should accelerate domestic 
demand and further fuel economic growth.  End summary. 
 
2.  The Slovak GDP rose at a real annual rate of 5.3 percent in 
the third quarter of 2004, down moderately from the 5.5 percent 
and 5.4 percent growth of the second and first quarter.  In real 
prices, the GDP equaled USD 11.3 billion, 8.8 percent higher than 
the third quarter of 2003.  The Slovak economy outpaced all of 
its neighbors as the Czech Republic, Poland, and Hungary 
registered 3.6, 4.8, and 3.7 percent growth respectively.  For 
the EU, GDP growth equaled 2.1 percent for the quarter. 
 
3.  Domestic demand, up 7.3 percent, has replaced exports as the 
largest driving force of the economy.  This rise was fueled by a 
3.7 percent jump in household consumption, a 2.9 percent boost in 
public spending, as well as a 16.9 percent leap in gross 
investments (NOTE: gross investment equals investment plus change 
in inventories).  Much of this investment comes from the two auto 
factories now under construction and should intensify further as 
actual production begins in 2006.  Government spending should 
also continue to rise as the GOS has budgeted a 77 percent 
increase in construction for 2005. 
 
4.  The higher household spending was stimulated by increased 
real wages, which rose 1.2 percent in the quarter.  The average 
nominal monthly wage in Slovakia reached USD 510 during the same 
period, up 8.8 percent from 2003.  Analysts highlighted that 
third quarter real productivity improved by 15.8 percent from 
2003 with a 4.7 percent increase in labor costs for the same 
period, a clear sign of growing competitiveness of the Slovak 
economy. 
 
5.  Export growth in constant prices slowed to 5.1 percent in the 
third quarter, down from 16.4 percent in the second quarter of 
2004.  Economists cited a three week summer hiatus at Volkswagen, 
Slovakia's largest exporter, as the main reason for the drop. 
Poor economic performance in Germany, the largest importer of 
Slovak goods, and the EU in general, also contributed to the 
decrease (NOTE: In the first three quarters, around 85 percent of 
Slovakia's exports headed to the EU).  Imports rose by 9.6 
percent, down from 17 percent growth in the previous quarter. 
For the first time in two years, the net trade contribution to 
the Slovak economy was negative, reducing the GDP by 3.7 
percentage points. 
 
6.  The Slovak Statistics Office stated that it expects the 
economy to expand by 5.5 percent in 2004, compared to the 5.4 
percent market consensus.  The OECD anticipates the Slovak GDP to 
increase by 4.9 percent this year, followed by 4.8 percent and 
5.0 percent growth in 2005 and 2006.  The central bank drafted 
its monetary program on the expectation of 4.9 percent growth in 
2005.  Many analysts believe that growth around 5 percent appears 
sustainable into the next decade. 
 
7.  Comment.  Growth in real wages, projected between 3.5 and 5 
percent in 2005, increasing government expenditures, plus the 
start of auto production by Kia, Peugeot, and Ford should 
continue to push household consumption higher and reduce 
unemployment.  In addition, exports will likely return to higher 
rates of growth resulting in robust GDP growth for the next three 
years.  Finally, FDI inflow should exceed current account 
deficits and reduce Slovakia's net external debt burden.  End 
comment. 
 
THAYER 
 
 
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