THIRD QUARTER REVIEW OF THE SLOVAK ECONOMY

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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