When Národná banka Slovenska produced its latest Medium-Term Forecast (MTF-2012Q1) in March 2012, the uncertainty in financial markets was no longer escalating and expectations in the euro area were gradually stabilising. At the same time, however, Slovakia’s external demand recorded a further decline. As for the domestic part of the economy, it had contrasting effects on the forecast; on the one hand, there was the publication of favourable data on the Slovak economy for the last quarter of 2011, while, on the other hand, the situation in the labour market began to deteriorate.

These factors meant that, unlike in previous forecasts, it was not necessary to substantially revise developments in the economy and price level. Thus the projections for the basic macroeconomic indicators remain close to those given in the December forecast. The forecasts of other institutions are therefore also beginning to converge with the original and current estimates of NBS.

As in the December forecast (MTF-2011Q4), economic activity in both Slovakia and the euro area is expected to pick up over the projection horizon. This assumption was subject to a considerable degree of uncertainty in MTF-2011Q4, which has eased significantly in the light of recent developments.

The latest macroeconomic outlook for Slovakia is based on the ECB’s technical assumptions, on the most recent national accounts data for the last quarter of 2011, and on updated monthly data and short-term indicators. The projection horizon for the medium-term forecast has been extended to 2014.

Slovakia’s economic growth in the fourth quarter of 2011, according to the published data, was far higher than projected in the previous forecast. Export growth rose relatively sharply and net exports consequently made the largest contribution to GDP growth; however, this was not in line with the outlook for external demand. It may be supposed that in 2012 export performance will start to be affected by the lagging effect of lower demand from Slovakia’s main trading partners, as implied by the ECB’s revisions to projected growth in the euro area and global economy. A rise in import growth is assumed for this year on the basis of expected restocking. The rapid investment growth in the fourth quarter is not expected to carry on into 2012, due to a tightening of lending standards. Looking further ahead, investment activity is assumed to grow at a similar pace to the economy. Domestic consumption is expected to remain somewhat subdued in 2012 and then to pick up in the subsequent period. It is therefore assumed that economic growth will gradually be based more on domestic demand than on external demand. The labour market is expected to stabilise over the projection horizon, with conditions improving for the creation of jobs and reduction of unemployment. However, the downturn in the labour market in the fourth quarter of 2011 (in contrast to strong economic growth for that period) will affect the employment growth forecast for the whole of the current year. The unemployment rate is therefore expected to remain high throughout this year.

The inflation rate slowed in the first two months of 2012, reflecting to a large extent the fading of the effects of inflationary factors of the previous year, including tax hikes, the introduction of charges, and high prices of food and energy. Inflation is assumed to continue decelerating in 2012, owing to slower economic growth, declining agricultural commodity price inflation, and a reduction in administered gas prices. The marked slowdown in wage growth in the fourth quarter of 2011 (according to the published data) will affect the level and growth of wages in 2012. With the economy growing relatively quickly over the production horizon, it is assumed that labour productivity will rise and create scope for real wage growth. Inflation is likely to remain at low levels over the horizon, especially with energy and food prices making a lower contribution.

The sharp rise in GDP growth towards the end of 2011, at a time of declining external demand, is explained mainly by one-off factors. The forecast for economic growth throughout the projection horizon has been revised down slightly from the previous forecast. The labour market projections for 2012 have been revised down substantially in the wake of recent negative figures. In the medium-term horizon, employment is expected to pick up, but remain below the levels estimated in the previous forecast. Compared to the December forecast, the inflation projection for 2012 remained largely unchanged and the projection for the medium term horizon remained the same.

The risks to the GDP forecast continue to be on the downside over the projection horizon. The most significant risk is the anticipated implementation of fiscal consolidation measures in the euro area in general and in Slovakia in particular. Since there are still no specific consolidation measures for the years 2013 and 2014, the latest forecast does not reckon on fiscal deficit reduction in that period. A downside risk is that lending conditions are tightened both in Slovakia and abroad, with a negative impact on external demand and on investment in Slovakia. On the other hand, the current situation in external demand gives rise to the upside risk of a continuation of the supply-side shock and reduced import intensity. The risks to the price level forecast for 2012 are predominantly on the upside, the principal risk being higher external inflation and higher energy prices. In the medium-term horizon there is the risk that price inflation will be more pronounced due to the expected implementation of consolidation measures (through higher indirect taxes). The downside risks include weaker domestic demand and a deterioration in the labour market situation.

Note: The Slovak version of the Medium-Term Forecast MTF-2012Q1 will be published on the NBS website at 10 a.m. CET on 28 March 2012.

Petra Pauerová
hovorkyňa NBS

National Bank of Slovakia
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