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Medium-Term Forecast (MTF-2012Q3) - Summary

The recovery of global economic activity slowed in the first half of the year due to the protracted resolution of the euro area sovereign debt crisis. The debt crisis continues to fuel uncertainty among investors and consumers. This uncertainty is having a dampening effect on economic growth in Slovakia’s main trading partners, which in turn is expected to be reflected in domestic economic activity.

This NBS Medium-Term Forecast (MTF-2012Q3) continues to reckon on a gradual revival in external demand, proceeding on the assumption that the economies affected by the debt crisis will stabilise and that the climate of uncertainty will not become more pronounced.

The latest forecast is based on available national accounts data for the first half of 2012, on current monthly data, on short-term indicators, and on the ECB’s technical assumptions.[1]

For the production of the Medium-Term Forecast, NBS took into account the following factors:

  • weaker external demand;
  • improvements in exports and current production statistics;
  • worse domestic demand data and a further decline in sentiment;
  • the increasingly adverse labour market situation;
  • consolidation measures.

Based on assessments of these factors (particularly the real economy factors) and to some extent the effects of consolidation measures, the forecasts for key macroeconomic indicators for the next two years have been revised down considerably from the previous quarter.

While the national accounts data on the economy’s quarterly growth were better than expected, the seasonally adjusted structure of GDP made it difficult to identify a clear source of economic growth. Therefore year-on-year developments as well as monthly indicators were also taken into account to some extent. With this information, it was easier to assess the baseline condition of the economy. Although the economy expanded in the first half of the year, its growth was based entirely on the positive effect on export performance of a supply-side shock in the automotive industry, as is evident from industrial production data adjusted for the result from that industry. However, the signs from sentiment surveys and forward-looking indicators are for a worsening of the situation, even in the automotive industry. The labour market benefited only partially from the supply-side shock, and at the aggregate level no new jobs were created. Consumer demand therefore remained considerably subdued. As for investment demand, it declined amid persisting uncertainty, deteriorating sentiment, decelerating lending activity, and the tightening of credit standards.

Considering the current position of the economy, the long-running uncertainty and the slowdown in external demand, the outlook for economic growth over the projection horizon has been revised down substantially. The effect of consolidation measures caused a further lowering of the medium-term growth forecast. Thus the outlook for all components of growth is worse in this forecast than in the June forecast. Since the components of domestic demand have been revised down, the domestic part of the economy is not expected to make a significant contribution to overall growth. The labour market situation is also assumed to deteriorate, in terms of both employment and unemployment. Household income is assumed to be lower and this will be reflected in weaker household consumption. The inflation forecast has been revised up for 2012 and even more so for 2013, on the basis of new technical assumptions related to increases in energy and food inflation.

As regards the overall trend in the Slovak economy, the September forecast assumes that growth in 2012 will be moderately lower than in the previous year, with both domestic demand and external demand expected to make less positive contributions. With economic activity declining, weaker employment growth is anticipated. The adverse situation in the labour market is expected to result in stagnant real income, which should in turn be reflected in lower household consumption. Although the inflation rate is projected to decelerate, it should remain at a relatively high level.

Economic growth is expected to continue slowing in 2013. As the effect of the supply-side impulse fades away, net exports are projected to make a zero contribution to growth. Domestic demand is expected to be the main, but moderate, driver of economic growth, as the gradual recovery of confidence both abroad and in Slovakia should gradually boost domestic demand, even while consumers remain cautious. Investment demand is assumed to stay subdued owing to a combination of persisting uncertainty and the effect of fiscal consolidation measures. The labour market situation is not expected to change significantly, and employment is projected to remain flat. Consolidation measures are assumed to only partially curb household disposable income growth. The expectation is that households will cover part of their lost income by dipping into savings. Inflation is assumed to continue decelerating with all of its components contributing to the slowdown. Not even commodity price inflation is expected to increase.

In 2014, economic growth is expected to rise moderately in line with a stronger recovery of global demand. The contribution of net exports to economic growth is assumed to rise due to lower import intensity (reflecting the inclusion of new investment in the automotive industry). Growth in the domestic part of the economy is expected to continue rising gradually and therefore to contribute positively to an overall increase in economic activity. Domestic demand is assumed to be driven by consumer demand growth, as gains in labour productivity provide an impetus to income growth and subsequently to consumption. As for the investment activity of firms, it is expected to remain affected by the effects of fiscal consolidation measures taken in the previous year. The labour market should gradually begin to pick up in response to the upturn in economic activity. It is assumed that growth in employment and real compensation will translate into an increase in consumer demand. Price level developments are expected to be favourable, based on technical assumptions of lower inflation in commodity prices (especially oil prices).

The risks to the GDP forecast continue to be on the downside over the projection horizon. The most significant risk is that the sovereign debt crisis in Europe escalates and results in a more pronounced slowdown or decline in external demand. Another risk is that the economy’s response to fiscal consolidation measures is different from that projected. The risks to the inflation forecast for 2013 and 2014 are mainly on the upside, with the principal risk being higher oil prices.

Note: The Slovak version of the Medium-Term Forecast MTF-2012Q3 will be published on the NBS website at 10 a.m. CET on 19 September 2012.

[1] ECB Staff Macroeconomic Projections for the Euro Area, September 2012. The projections are available at

Petra Pauerová
NBS Spokesperson

National Bank of Slovakia
Press and Editorial Section
Imricha Karvasa 1, 813 25 Bratislava, Slovak Republic
Tel.: +421-2-5787 2142, +421-2-5865 2142, +421-2-5787 2169, +421-2-5865 2169

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