Slovakia lags Europe in economic convergence

Bratislava, Slovakia (Miroslav Petrasko, CC BY-NC-ND)

Slovakia is still lagging behind more advanced European countries in economic convergence, according to analysis by the Slovak central bank, NBS.

Slovakia’s economy is growing but the country’s position in terms of performance and productivity indices has not improved enough, the NBS said in its latest Analysis of the Slovak Economy’s Convergence.

The report notes that the national economy could begin growing more rapidly, but not before 2018, when its pursuit of the EU average in economic performance should see a revival.

This will be partly due to the launching of production at carmaker Jaguar Land Rover’s plant in Nitra, positive developments on the labour market and growing household consumption.

The relative performance of the country’s economy achieved 77 per cent of the EU average in the past year, which meant the fourth year of stagnation in approaching the economically more advanced states of Europe. The relative productivity of Slovakia even fell last year; by one percentage point to 82 per cent of the EU average.

On the other hand, after four years of decline, Slovakia came closer to the West in prices when the relative price level reached 68 per cent of the EU average in 2016 and soared by 2 percentage points year-on-year. The problem is that the differences between EU countries in the dynamics of economic growth have fallen to a historic low.

Although Slovakia posts economic growth exceeding the level of 3 per cent, it is not enough to catch up with the more developed West.

The central bank noted that the Slovak economy has begun to lag behind its partners from the Visegrad Group (V4) as well. This was evident in the first half of this year, when the economies of Hungary, the Czech Republic, and Poland grew faster than the Slovak one. The NBS attributes this to the post-crisis development, in which private consumption did not develop in Slovakia as well as in the surrounding countries. And while general government consumption was the most dynamic in Slovakia from among the V4 countries, it failed to offset the lagging of private consumption.

The central bank’s forecast sees the growth of Slovakia’s GDP in the next two years as accelerating to 4.2 per cent in 2018 and to 4.6 per cent in 2019. It expects Slovakia’s GDP to reach 82 per cent of the EU average in 2019.

The situation concerning the adoption of necessary structural reforms and support for the business environment has not improved in Slovakia, with the country even falling in the Doing Business 2017 international chart on a yearly basis. Similar developments were seen in the Global Competitiveness Report and World Competitiveness Yearbook. Slovakia is also losing the competitive advantage it had due to low salary costs, NBS noted.

Nonetheless, Slovakia has been performing well in nominal convergence, i.e. in meeting the Maastricht Criteria. Currently, Slovakia comfortably meets the fiscal criteria for adopting the euro, but its deficit significantly exceeds budgetary thresholds, with the country recording a higher deficit in 2016 than the EU average. The goal of achieving a balanced budget has again been postponed as well.

Erst Bank said in a statement that Slovakia’s structural deficit is on a downward track, having reached 2.1 per cent of GDP in 2016 and is forecast to fall to 1.7 per cent of GDP this year. For the next two years, the structural deficit is expected at 1.1 per cent and 0.6 per cent of GDP, respectively, fulfilling the consolidation criteria until it reaches the MTO in 2020. “The cyclical position of the economy remains good and labor market reinvigoration continues. Even though corporate tax revenues are expected to be somewhat lower than previously thought, this should be more than compensated for by higher levy revenues,” it reads.

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