MediuM-terM forecast Q4 2012

Transcription

1 Me d i u m-te r m forecast Q 1

2 Published by: Národná banka Slovenska Address: Národná banka Slovenska Imricha Karvaša Bratislava Slovakia Contact: Monetary Policy Department Press and Editorial Section Fax: Approved by the Bank Board on 7 December 1. All rights reserved. Reproduction for education and non-commercial purposes is permitted provided that the source is acknowledged. ISSN (online)

3 Co n t e n t s 1 Summary Current developments in the external environment and Slovakia 5 3 Technical assumptions 8 Forecast for the external environment 1 5 Macroeconomic forecast for Slovakia Economic growth Labour market Labour costs and price developments 15 6 Risks to the forecast 17 7 Comparison with the previous forecast 18 List of Boxes Box 1 Flash estimate of GDP for the third quarter of 1 what did it reveal about the state of the economy? 13 Graf 16 HICP inflation forecast 17 Graf 17 Comparison of forecasts of GDP composition 18 Graf 18 Comparison of forecasts for economic growth 18 Graf 19 Comparison of labour market indicators 18 Graf Comparision of price developments 19 Charts in Boxes Graf A GDP according to published sets of quarterly data 1 Graf B GDP forecast 1 List of Tables Tab. 1 List of consolidation measures 9 Tab. Forecast for gross fixed capital formation 1 Tab. 3 Compensation per employee 16 Tab. Risks to the forecast 17 Tab. 5 Medium-Term Forecast (MTF-1Q) main macroeconomic indicators Tab. 6 Medium-Term Forecast (MTF-1Q) main macroeconomic indicators 1 Tables in Boxes Tab. A GDP in the 3rd quarter of 1 1 Tab. B Cumulative GDP 1 List of Charts Graf 1 Composition of GDP growth Graf Short-term indicators 6 Graf 3 Labour market developments 7 Graf Inflation 7 Graf 5 Headline HICP inflation 7 Graf 6 USD/EUR exchange rate 8 Graf 7 Price per barrel of Brent crude oil (USD) 8 Graf 8 Price per barrel of Brent crude oil (EUR) 8 Graf 9 Non-energy commodity prices 9 Graf 1 Forecast for Slovakia s external demand 1 Graf 11 Forecast for external demand and for exports of Slovak goods and services 11 Graf 1 Composition of investment 11 Graf 13 Household real income, consumption, and savings ratio 1 Graf 1 Composition of GDP growth 13 Graf 15 Employment, hours worked (annual percentage changes; seasonally adjusted) and the unemployment rate 15 Q 1 3

4 1 Su m m a r y The December macroeconomic forecast of Národná banka Slovenska is based on currently available information, including the flash estimates of GDP and employment, monthly statistics, and ECB technical assumptions. 1 For the purposes of this Medium-Term Forecast, Národná banka Slovenska took into account the lower external demand, subdued domestic demand, negative trends in forward-looking indicators, worse labour market situation, and current consolidation measures. External demand for Slovak products and services is expected to bottom out at the end of 1 and beginning of 13, and therefore economic growth in 13 is assumed to slow quite markedly. Fiscal consolidation measures will act as a brake on economic growth (as projected in the previous quarter), mainly by weighing on investment and domestic consumption. The slowdown in economic activity, as well as the potential effects of amendments to labour and social legislation, could from as early as the fourth quarter of 1 cause employment to fall and unemployment to rise, with the effects being felt throughout 13. As external demand picks up, the domestic part of the economy should also begin to recover, and the assumption is that from 1 it will make a positive contribution to GDP and support a moderate economic expansion (Chart 1). This growth is expected to see an increase in job creation and gradual decline in the unemployment rate. The outlook for macroeconomic developments has deteriorated since the previous forecast. Chart 1 Composition of GDP growth (annual GDP growth in percent; contributions in percentage points) % 6 1.5% 5.8% -.9%.% 3.%.% Contribution of export markets 1) GDP not including export markets GDP growth 1.6% 3.5% Source: SO SR,. 1) The contribution of export markets to GDP growth represents the contribution of Slovak exports adjusted for imports used in the production of exported goods. This constitutes the impact of external demand on economic performance (excluding imports affected by domestic demand). Source: SO SR,. Slovakia s economic growth is now projected to be.% in 1, 1.6% in 13 and 3.5% in 1. The inflation rate is assumed to decelerate far faster than previously projected, falling to 3.8% in 1,.3% in 13 and 1.9% in 1. The risks to this forecast s projections for the real economy are predominantly on the downside, while the risks to the inflation projections are on the upside. 1 Eurosystem Staff Macroeconomic Projections for the Euro Area, December 1. For further details, visit the ECB website at Since the cut-off date for the data on which the assumptions are based was 3 November 1, the only available information on GDP was the flash estimate, according to which the Slovak economy grew in the third quarter by.6%. Q 1

5 Cu r r e n t d e ve l o p m e n t s in t h e e x t e r n a l environment and Slovakia Slow recovery of the global economy Heterogeneous developments across the world The global economy expanded moderately in the third quarter of 1, but growth nevertheless remains at low levels. The global economy is recovering slowly and the process of restoring it remains fragile and volatile. Despite the implementation of various measures, uncertainty surrounding the resolution of the euro area sovereign debt crisis represents one of the gravest risks to the world economy s recovery. There are also concerns about how fiscal consolidation in the United States is going to proceed. A further risk to the revival of advanced economies continues to be weak labour markets and the financial situation of households. As for emerging economies, their growth in recent periods has been rising far slower than expected, but thanks to monetary and fiscal measures, it has begun to accelerate gradually. These measures have succeeded in compensating for the negative effects of weak external demand on economic activity. Emerging economies still, however, face the risk of increasing commodity prices and a further substantial slowdown in global trade. According to the OECD composite leading indicators (CLI), economic confidence in OECD countries declined slightly at the beginning of the third quarter of 1. Over the course of this period, the CLIs did not change, which would point to stabilisation of economic activity (albeit at low levels). Recession in the euro area After contracting in the second quarter of 1, euro area GDP declined again in the third quarter (by.1%). Economic activity in the euro area remains weak, weighed down mainly by the sovereign debt crisis and by low confidence among both firms and consumers (business and consumer confidence indicators have been below their long-term average for several months). With labour market conditions also deteriorating amid weak economic performance, the unemployment rate has reached an all-time high. The GDP of OECD countries grew moderately in the third quarter of 1, but there continued to be heterogeneity across countries. The euro area economy contracted further, and the Japanese economy shrank markedly. The strongest growth was reported by the United Kingdom, following three successive negative quarters. In the United States, GDP in the third quarter was slightly higher than in the previous quarter, based mainly on a strengthening of private consumption and increase in government spending. Residential construction investment made a positive contribution to GDP, but non-residential investment declined. Net trade contributed negatively to GDP growth due to a marked decline in exports. After falling in the summer months, the ISM 3 manufacturing index climbed above its expansionary threshold of 5 points in September and October, thereby indicating an improvement in sentiment. These positive developments were reflected mainly in new orders and production. In China, economic growth accelerated in the third quarter on the back of strong private consumption and investment. The PMI manufacturing output index rose back above its no-growth threshold in October after weakening temporarily in previous months; nevertheless, its level in October was far below the historical average for that month. Slovak economy driven mainly by exports Despite the euro area being in recession (the economy contracted in the third quarter for a second successive quarter), Slovakia s economy grew by.6% in the third quarter according to the SO SR s flash estimate. The third-quarter GDP developments were in line with expectations. Although the quarter-on-quarter growth was slightly higher than projected in the previous forecast, the difference was caused entirely by the downward revision of growth figures for previous quarters. The amount of final goods and services produced in the third quarter matched the level projected in the previous forecast. Although the composition of GDP growth had not The CLI indicators are published by the OECD on a monthly basis the latest available data, published in November 1, are for September 1. 3 The ISM (Institute for Supply Management) Purchasing Managers Index the index is a barometer of business sentiment in US industry. Although the survey collects data only from the industry sector, it is treated as a key indicator of sentiment in the economy as a whole. The China Manufacturing PMI: an indicator of economic sentiment in Chinese industry published by the Chinese National Bureau of Statistics. Q 1 5

6 Chart Short-term indicators (3-month moving average; annual percentage changes) Jan. 8 July 8 Source: SO SR. Jan. 9 July 9 Jan. 1 Industrial production index Industry sales Industrial new orders been published by the cut-off date for this latest forecast, the monthly data indicate certain tendencies; in particular that main driver of growth was seemingly net exports. Data on nominal foreign trade (in year-on-year terms) show that exports continued to grow in the third quarter alongside a decline in import intensity. New production lines launched this year in the automotive industry probably reached peak capacity in the second quarter and remained at that level in the third quarter. This view is supported by the industrial production index for manufacturing, since the automotive industry accounted for almost its entire growth. Industry sales followed a course similar to that of industrial production index, albeit their annual growth rates were lower, indicating that the production of smaller and cheaper vehicles is having an increasing effect on the figures. The composition of car production matches demand not only in the EU, but also in non-european economies, and as a result Slovakia is gaining market share in global trade. In contrast to net exports, domestic demand is assumed to have made a negative contribution to economic growth in the third quarter. Increasing pessimism among consumers translated into a year-on-year decline in retail trade sales. Consumer behaviour has long been cautious and that trend continued in the third quarter as real income declined and employment remained flat. July 1 Jan. 11 July 11 Jan. 1 July 1 These indicators imply that household final consumption fell. Data on state budget implementation (cashbasis) point to growth in general government final consumption. General government current expenditure increased year-on-year and seemingly made a positive contribution to economic growth. Looking at the current state of tax and social contribution revenues, their total amount in 1 will be lower than the amount projected by the Slovak Finance Ministry by 31 million (with VAT accounting for 11 million and corporate tax for million). Investment demand showed negative tendencies in the third quarter, in line with expectations. Lending to the corporate sector declined quite markedly in the third quarter. The outstanding amount of corporate loans fell year-on-year in August and September across all maturities. Despite favourable interest rate conditions (lending rates for enterprises are at all-time lows), lending activity is subdued on both the supply and demand sides. This is shown by the bank lending survey, according to which banks reported lower demand for corporate loans in the third quarter. A further sign of investment demand weakness can be found in hard indicators that point to a persisting decline in construction sector activity. The baseline position of the economy according to the flash estimates (worse than expected domestic demand) and monthly indicators (in particular short-term forward-looking indicators) point to slower economic activity in the near term. Stagnating labour market Employment remained flat in the third quarter, with economic growth being insufficiently robust to support new job creation. Construction employment remains depressed, according to monthly statistics, with a long-term downward trend in the number of people employed in the sector. The monthly employment statistics for industry do not show a clear trend; it is likely that firms have so far been cautious about making redundancies, preferring to withdraw bonuses and benefits as initial measures. This is confirmed by monthly data on nominal wages, which in month-on-month terms fell quite markedly. As it seems, firms were opting to retain produc- Q 1 6

7 Chart 3 Labour market developments (annual percentage changes; level in %) (%) (balance of responses) Chart Inflation (annual percentage growth; deviations in p.p.) (%) (p.p.) 5 Actual inflation rate Source: SO SR, European Commission. cut off Unemployment rate (seasonally adjusted) Employment Nominal wages, 3-month moving average Employment expectations (3-month moving average) July 11 Aug. 11 Sep. 11 Oct. 11 Source:, SO SR. Nov. 11 Dec. 11 Other administrative prices Net inflation Energy (right-hand scale) HICP forecast in MTF-1Q3) Jan. 1 Feb. 1 Mar. 1 Apr. 1 May 1 June 1 July 1 Aug. 1 Sep. 1 Oct Food (right-hand scale) tive employees. Wage developments reflected not only firms cautious behaviour, but also their negative expectations about the real economy (and probable decline in profits) as well as the impact of fiscal consolidation measures that are to be implemented from next year. Chart 5 Headline HICP inflation (in percent; seasonally adjusted) Inflation rose slightly on higher food prices Oct. 1 Nov. 1 Dec. 1 Jan. 11 Feb. 11 Mar. 11 Apr. 11 May 11 June 11 July 11 Aug. 11 Sep. 11 Oct. 11 Nov. 11 Dec. 11 Jan. 1 Feb. 1 Mar. 1 Apr. 1 May 1 June 1 July 1 Aug. 1 Sep. 1 Oct. 1 HICP month on month changes (right-hand scale) Output gap (left-hand scale) HICP quarter on quarter changes (right-hand scale) HICP year on year changes (left-hand scale) Source:, SO SR. The annual rate of HICP inflation has in recent months stayed below but close to %, and; it was higher than projected in the previous forecast. Headline HICP inflation is now relatively high when compared with the current level of the output gap. The inflation growth was largely attributable to higher food prices; this component included an expected increase in tobacco product prices, which reflected not only a hike in excise taxes but also the fact that distributors were passing on their higher costs. The net inflation rate (comprising industrial goods prices and services prices excluding administrative prices) reflected price increases in the hotel and restaurant sector and in the education sector, which themselves were probably a pipeline effect of food inflation. The relatively marked acceleration of the net inflation components was dampened by persistently low consumer demand. Recent months have seen a slowdown in annual energy inflation, despite fuel prices reaching all-time highs Q 1 7

8 3 Te c h n i c a l a s s u m p t i o n s 5 Following the publication of the previous forecast in early September, the exchange rate of the euro against the US dollar remained volatile, but at higher levels. The single currency appreciated significantly in September, remained more or less stable in October, and became more volatile again in November. The euro area sovereign debt crisis and related events have long been the main factor in the exchange rate s movement. The current forecast assumes that the exchange rate of USD per EUR 6 will be 1.8 over the projection horizon. The price of oil increased gradually in the third quarter after declining in the second quarter. It increased amid reductions in OPEC and non-opec production, the introduction of oil sanctions against Iran, and the shutdown of several drilling facilities for regular maintenance. These factors were to some extent offset by a marked rise in Saudi Arabia s oil production. The price of a barrel of Brent crude oil averaged USD 11. in the third quarter, and given concerns about the global economy, weakening demand, and the high level of oil stocks, it is not expected to rise further before the year-end. During October investors were substantially reducing their long positions on the NYMEX commodity exchange. The International Chart 7 Price per barrel of Brent crude oil (USD) (USD/barrel) Source:, ECB. (p.p.) 6 Difference in annual rate of change between MTF-1Q and MTF-1Q3 (right-hand scale) MTF-1Q MTF-1Q3 Actual data Energy Agency slightly lowered its oil demand estimate for 13. This forecast assumes that the average price per barrel will be USD in 1, falling to USD 15 in 13 and USD 1.5 in Chart 6 USD/EUR exchange rate Chart 8 Price per barrel of Brent crude oil (EUR) (EUR/barrel) 1 85 (p.p.) Source:, ECB. MTF-1Q MTF-1Q3 Actual data Source:, ECB. Difference in annual rate of change between MTF-1Q and MTF-1Q3 (right-hand scale) MTF-1Q MTF-1Q3 Actual data The technical assumptions of the Medium-Term Forecast, as well as the assumptions for developments in the international economy, are based on the ECB Staff Macroeconomic Projections for the Euro Area of September 1, which are based on information available up to 15 November 1. 6 The bilateral USD/EUR exchange rate is assumed to remain unchanged over the projection horizon at the average level prevailing in the ten-working day period ending on the cut-off date. Q 1 8

9 Prices of non-energy commodities increased in the third quarter of 1, with a substantial rise occurring right at the beginning of the period. They were driven up mainly by agricultural commodity prices, which reached their highest level since the beginning of the year. The higher agricultural commodity inflation stemmed from fears that harvests would be weakened by drought. Metal prices declined as concerns about the global economy deepened during the quarter. This forecast assumes that nonenergy commodity prices will decline by 7.5% in 1 and by a further 1.5% in 13, before rising by 3.3% in 1. The average level of short-term interest rates 7 (three-month EURIBOR) is expected to reach.6% in 1,.% in 13, and.3% in 1. The latest forecast explicitly takes into account fiscal consolidation measures set out for this year and next year. The aim of these measures is to reduce Slovakia s general government deficit, to below 3% of GDP in 13. The main scenario of the forecast incorporates the consolidation effort as a technical assumption translated into the real economy through various transmission channels. The table below lists the consolidation measures that were known and taken into account at the cut-off date for this forecast. 8 The Chart 9 Non-energy commodity prices (annual percentage changes) (%) (p.p.) Source:, ECB. Difference in annual rate of change between MTF-1Q and MTF-1Q3 (right-hand scale) MTF-1Q MTF-1Q3 Actual data impact of these measures on the general government deficit is expected to be.3 billion in 1 and 1.6 billion in Since nothing is so far known about the consolidation measures to be implemented in 1, this forecast does not take into account the further consolidation effort. The composition of the planned consolidation measures are shown in Table Table 1 List of consolidation measures 1) 1. Changes to Pillar II of the pension saving system (opening of Pillar II; reduction of contribution from 9% to %). Increase in the social contribution burden (unifying maximum assessment bases; raising the contributions payable under work agreements that are not employment contracts and by self-employed people). 3. Imposition of special levies on selected entities (under laws on the special levying of selected financial institutions and of businesses in regulated industries).. Increase in the corporate tax rate to 3%; a 15% windfall tax on undistributed profits generated before. 5. Changes to the income taxation of natural persons (raising the tax rate; broadening the tax base; introducing a special tax on senior public servants) and to administrative fees. 6. Memorandum between the central government, regional self-governments, and municipalities. Source:. 1) Measures 1 to 5 were taken into account in MTF-1Q3. Measure 6 is included in this forecast. 7 The technical assumptions about interest rates and commodity prices are based on (futures) market expectations, with a cut-off date of 15 November 1. The assumption for short-term interest rates is of a purely technical nature. 8 The forecast takes account of the fiscal consoldiation measures known as at 1 November 1. 9 Consolidation effects were quantified on the basis of information from draft laws and calculations. The impact of the consolidation is estimated as.% of GDP in 1 and.1% of GDP in 13 (based on the nominal GDP from MTF Q1). The nominal consolidation volume remained the same as in MTF Q31. Q 1 9

10 Forecast for the external environment Slow recovery of global growth Global economic growth is expected to be 3.1% in 1, rising gradually to 3.3% in 13 and.% in 1. The main risks to the growth forecast remain uncertainty surrounding the resolution of the sovereign debt crisis in certain euro area countries, considerable fiscal consolidation in the United States, the intensification of financial market strains, and a potential stalling of the global economic recovery. around.5% in 1, to between 1.1% and.1% in 13 and.6% and.% in 1. The projected decline is predicated on a projected decline in energy price inflation and, to a lesser extent, food inflation. Upward pressures on inflation related to increases in indirect taxes are expected to be offset by the effects of weak domestic demand. In 1, the impact of indirect taxes is expected to be only slight, while the gradually closing output gap will have a less dampening effect on price growth. Weaker developments in the euro area Global trade to accelerate over the projection horizon GDP growth in the first three quarters of 1 was negatively affected by weak real disposable income, high unemployment, and a sharp fall in consumer and business confidence, amid financial market strains and adverse credit supply conditions in certain countries. These factors had a downward effect on domestic demand. The only positive contribution to GDP growth was from net exports, although that was largely attributable to weak import growth. In the light of the adverse factors, GDP is assumed to decline further in the next period. Real economic activity is expected to stabilise in the first half of 13 and gradually strengthen in the following period. This should see export growth recovering by the end of the projection horizon, boosted by external demand and improved competitiveness. A further stimulus to economic growth is expected from the effect of accommodative monetary policies on domestic private demand and from the impact of lower inflation on disposable income. Nevertheless, the unfavourable effects of elevated uncertainty, fiscal consolidation measures, and balance sheet restructuring are expected to diminish only gradually over the projection horizon. The annual rate of change in euro area GDP is estimated to be in the range -.6% to -.% in 1, -.9% to -.3 % in 13, and -.% to.% in 1. The average HICP inflation rate is expected to decline gradually over the projection horizon, from Global trade growth is expected to slow to 3.% in 1, from 6.3% in 11, and then to accelerate in each of the next two years, to.1% in 13 and 7. % in 1. Slovakia s external demand growth has decelerated sharply so far in 1 and is expected to stand at.8% for the year as a whole (compared to 6.3% in 11); it should then accelerate to.3% in 13 and 5.9% in 1. Chart 1 Forecast for Slovakia s external demand (quarter-on-quarter percentage changes) Source:, ECB. Q 1 1

11 5 Macroeconomic forecast for Slovakia 5.1 Economic growth Weak external demand to depress Slovak exports The most recently published short-term indicators point to a more marked deterioration in the Slovak economy s export performance. These negative indicators fit in with a slump in export expectations for the near term and a deterioration in the competitive position of Slovak firms in the both the euro area and non-euro area markets. The forecast for the external environment confirms these developments and assumes that growth in external demand for Slovak goods and services will stall at the end of 1 and beginning of 13 and that export growth will decelerate as a result. External demand is expected to remain subdued in the first half of 13. With production in the automotive sector assumed to be running at close to its potential in the third quarter of 1 (due also to the supply side shock at the beginning of the year), no additional boost to Slovakia s export performance is assumed for subsequent quarters. External demand is expected to accelerate gradually from the second half of 13, with a positive effect on export developments. Firms investment activity at a standstill Current developments and forward-looking indicators point also to the continuation of negative tendencies in firms investment activity. Expectations in the construction sector remain entrenched in negative territory. Meanwhile, investment decisions in the corporate sector are being postponed due to the current uncertainty; this is confirmed by the bank lending survey, in which banks report a decline in corporate demand for long-term loans amid a lack of demand for investment financing. The outlook for the real estate market is also unfavourable. The number of building permits issued is declining, and the data on construction startups shows a similar trend. Concerning residential construction, household investment is expected to be postponed, given the pessimistic consumer sentiment. Investment activity is expected, on the basis of these indicators, to decline this year; as for investment in coming years, it is assumed to remain flat as firms face an increase in their tax and social contribution burden (due to the effect of fiscal consolidation measures). The temporary growth in investment in 13 is a technical increase which explicitly incorporates the effect of investment in the automotive industry. Chart 11 Forecast for external demand and for exports of Slovak goods and services (at constant prices; annual percentage changes) Chart 1 Composition of investment (annual contribution in p.p.) Car exports Electronics exports Other exports Exports (goods and services) Slovakia's external demand Private residential investment Government investment Other private investment Gross fixed capital formation (annual percentage changes) Source: ECB,. Source: SO SR,. Q 1 11

12 Table Forecast for gross fixed capital formation (annual percentage changes) Gross fixed capital formation (overall) GFCF (adjusted to exclude one-off investment in the automotive industry) Source:. Ho u s e h o l d c o n s u m p t i o n t o i n c r e a s e v e r y m o d e rate l y over the projection horizon The negative trends in consumer behaviour are expected to persist, according to the latest developments as well as short-term forward indicators. Households see their financial situation deteriorating further and expect the unemployment rate to increase. It is therefore assumed that consumers will be postponing purchases of durable goods until a later date. Looking at the fundamentals, household consumption is also expected to be subdued by developments in real income, which is assumed to increase slowly amid the dampening effect of fiscal consolidation measures (especially in 13). The impact of tax and social contribution increases should fall hardest on self-employed people. This forecast did not take into account the full impact of consolidation measures, and it assumes that households will be using their savings to some extent. The growth in nominal compensation per employee in 13 and 1 is expected to be dampened by declining corporate profits and the consequent lower increase in negotiated Chart 13 Household real income, consumption, and savings ratio (annual percentage changes; level in %) Savings ratio (right-hand scale) Disposable income Household consumption Source: SO SR,. Note: The savings ratio is calculated from nominal quantities. wages. Further downward pressure should come from the public sector wage freeze planned for 13. Although the inflation slowdown is projected to be more marked over the projection horizon than in 1, it is not expected to give any significant stimulus to household consumption. Qu e s t i o n m a r k s o v e r n e x t y e a r s general government s p e n d i n g The forecast for 13 factors in the effects of a public sector wage freeze and decline in intermediate consumption (the wage freeze will not apply to teachers; based on the approved general government budget for 1 1, their salaries are assumed to rise by 3%). These measures are expected to have a minimal effect on general government final consumption. In real terms, general government final consumption is projected to fall slightly in 13 owing to a higher deflator, and then to increase in 1. The forecast does not take into account any consolidation measures for 1 since none have yet been unveiled. How general government final consumption develops in the next two years will depend on the impact of fiscal consolidation measures. The risk is that if revenues are lower than planned, budget expenditure will be further reduced, thereby dampening general government consumption. Slow import growth Looking at the current situation, import growth is expected to continue decelerating this year. This stems partly from a moderate decline in import intensity and partly from subdued activity in the domestic part of the economy. That situation should remain similar in 13, except for the marked impact of investment imports in the automotive industry, which is expected to result in import growth accelerating slightly. In 1, with consumption picking up, it is assumed that import growth will increase and that it will be dampened by a decline in import intensity related to the start-up of production in an investment project in the automotive industry. Considering the developments in exports Q 1 1

13 Chart 1 Composition of GDP growth (annual percentage changes, component contributions in p.p.) %.% 3.5% 3.5% 1.5.% 1.6% GDP not including contribution of export markets Contribution of export markets - MTF-1Q3 MTF-1Q MTF-1Q3 MTF-1Q MTF-1Q MTF-1Q Contribution of export markets GDP not including contribution of export markets GDP growth in % Source: SO SR, forecast. and imports, the contribution of net trade to economic growth is expected to be around zero in 13 and to be in positive territory in the following year. The situation in nominal terms should be similar, with the surplus in the goods and services balance projected to fall in 13 and then rise in 1. Other current account balances are expected to show a similar development. The income balance deficit is assumed to fall moderately amid a decline in profits, while the current transfers surplus should increase slightly due to a projected increase in the utilisation of EU funds. Ec o n o m i c g r o w t h t o s l o w m o r e m a r k e d l y in t h e n e a r term and to accelerate moderately as of 13 Economic growth is expected to reflect a sharp slowdown in external demand growth in the near term and then to accelerate from the second half of 13. Over the whole projection horizon, however, the economy will face headwinds from fiscal consolidation measures and their dampening effect on revenue and investment. Economic growth is expected to be 1.6% in 13 and 3.5% in 1. The main driver of growth is assumed to be external demand rather than domestic demand. The output gap is expected to widen quite markedly in 13 owing to the economy s low real growth an effect of decelerating external demand and of consolidation measures that affect mainly capital stock. The utilisation of production and human capacities will be lower. In 1, as both external and domestic demand recover, the output gap will begin to close. Box 1 Flash estimate of GDP for the third quarter of 1 what did it reveal about the state of the economy? According to the SO SR s flash estimate, published on 15 November 1, the Slovak economy grew by.6% in the third quarter as against the previous quarter, and by.5% in year-on-year terms. When compared with expectations, however, the results may vary. The quarter-on-quarter growth exceeded expectations, while seasonally-adjusted GDP and the annual growth rate were in line with expectations. These comparisons indicate that economy is performing as, or perhaps even slightly better, than predicted. Q 1 13

14 Table A GDP in the 3rd quarter of 1 (seasonally adjusted) Volume (EUR millions) Quarter-on-quarter changes (%) Year-on-year changes (%) Flash estimate (SO SR) estimate (MTF-1Q3) Source: SO SR,. Table B Cumulative GDP (seasonally adjusted) (EUR millions) 1st half of 1 1st to 3rd quarters of 1 Year-on-year changes (%) (EUR millions) Year-on-year changes (%) Published figures for the nd quarter (SO SR) 1) Flash estimate in the 3rd quarter (SO SR) Source: SO SR,. 1) Figures for the 3rd quarter are taken from the Medium-Term Forecast (MTF-1Q3). Looked at in another way, however, the published figures may give less grounds for optimism. The latest GDP flash forecast includes a downward revision of the figures for the first half of 1. According to this seasonally adjusted data, GDP for the first six months was 57 million lower than first estimated (in September, with the publication of the second-quarter GDP figures). Consequently, the economy s year-on-year growth rate in the first half was. percentage point lower than stated in the September projections, and that is why GDP for the first three quarters was. p.p. higher than had expected. In the light of these comparisons, the Slovak economy is in worse condition and the third-quarter figures can be viewed as less favourable. The downward revision of the first-half figures reflected the economy s relatively sharp slowdown during that period. In fact, the seasonal adjustment method is not fully capturing the trend change, and therefore a situation has Chart A GDP according to published sets of quarterly data (seasonally adjusted) (EUR millions) (%) 16,7. Chart B GDP forecast (EUR millions) 16,6 16,5 16,3 (EUR millions) ,5 16, 16,1. 16,3 15,9 (q-o-q) , 15, ,1 15,5 Q1 Q Q3 Q Q1 Q Q , Q3 Q Q1 Q Q3 Q Q st quarter figures (published) nd quarter figures (published) 3rd quarter figures (SO SR flash estimate) Q forecast Estimated revision after publication of the Q figures Source: SO SR,. Source: SO SR,. Q 1 1

15 arisen in 1 where the most recently published seasonally-adjusted figures are overestimated, and the publication of new figures is regularly accompanied by the revising down of figures for previous quarters. The result is not only a lower level of GDP, but also lower GDP growth in both quarterly and annual terms. It may therefore be expected that the 3rd quarter figures have been overestimated. The fact that seasonally unadjusted GDP growth for the 3rd quarter was.% year-on-year and seasonally adjusted growth was.5% indicates that the initial figures might have to be revised. Assuming convergence of the seasonally adjusted and unadjusted annual rates of change, the economy s third-quarter growth is expected to have been overestimated by between. and.3 percentage point. Therefore the growth forecast for the fourth quarter of 1 must take this correction into account so that the growth estimate for the year as a whole is not too high. It is assumed that after publication of the data on the economy s fourth-quarter performance, the trajectory of seasonally adjusted GDP in previous quarters will again be revised down. 5. Labour market Em p l o y m e n t s i t u at i o n ex p e c te d t o b e u n f a v o u r a b l e over next three quarters The labour market is further deteriorating, and forward-looking indicators only confirm the impact of the slowdown in economic activity. Employment expectations are negative in all sectors with the exception of retail trade. Although employment expectations in the retail trade sector remain positive, they have been declining for a long time. In industry, negative trend Chart 15 Employment, hours worked (annual percentage changes; seasonally adjusted) and the unemployment rate (%; seasonally adjusted) can be observed; positive employment expectations became negative in recent months and a tendency for redundancies prevailed. These indicators point to a decline in employment in the period ahead, and further support for this outlook can be found in employers fears of deteriorating flexibility in the Slovak labour market. It is possible that firms facing a shortage of orders will begin making redundancies from the fourth quarter. Another factor that could put downward pressure on employment, mainly by reducing the economy s competitiveness, is the increase in firms social contribution burden and the related increase in labour costs. Employment in the first half of 13 is expected to fall due to weak economic growth as well as to the potential effects of legislative amendments. Firms could operate with smaller workforces and respond more flexibly to shifts in demand by adjusting the hours worked, which are expected to increase moderately at the end of 13 and beginning of 1. With external demand recovering, employment is also expected to begin rising gradually. The unemployment rate should move in line with projected employment developments, increasing to 1.6% in 13 and then falling back to around 1% in Employment Hours worked per employee Unemployment rate (right-hand scale) Source: SO SR, Labour costs and price developments Sl i g h t r i s e in l a b o u r c o s t s in 13 w i l l n o t significantly affect price developments Labour costs are expected to rise moderately this year and accelerate further in 13. This will Q 1 15

16 Table 3 Compensation per employee (annual percentage changes) Overall economy nominal Overall economy real Public sector nominal Public sector real Private sector nominal Private sector real Source: SO SR, Eurostat, calculations. Note: Deflated by the private consumption deflator. reflect an increase in compensation stemming from fiscal consolidation measures (increases in social contributions and taxes), while labour productivity growth will be approximately the same as this year. Labour productivity growth will rise in 1 under upward pressure from increasing foreign and domestic demand. It is expected, however, that firms will retain a larger part of their earnings and that the upturn will not translate into higher compensation per employee. Thus, as in the previous period, profits from capital are expected to exceed profits from labour. Such labour cost growth is not assumed to have an inflationary effect on consumer prices. The annual inflation rate is expected to continue decelerating until the end of 1, under substantial downward pressure from the services component. Annual services price inflation will decelerate due to a base effect, namely the fact that rail transport prices rose markedly in November 11 and are expected to increase only marginally in November 1. Energy inflation is also assumed to slow, in response to fuel price developments. Upward pressure on headline inflation is expected from higher prices of food and of non-energy industrial goods (reflecting increases in pharmaceutical and import prices during 1). St a b l e inflation a t c l o s e t o % o v e r t h e p r o j e c t i o n h o r i z o n The inflation rate is expected to decelerate over the projection horizon, from 3.8 % in 1, to.3% in 13 and 1.9% in 1. Demand-pull inflation pressures are not being created since the unemployment rate remains high, expectations for private consumption are rather pessimistic, and the output gap is negative. Cost-push inflation is expected to be affected by autonomous factors. A deceleration of import price growth and decline in oil prices is assumed to have a dampening effect on price growth. Given the low domestic demand for goods and services, it is assumed that inflation over the projection horizon does not have to be accelerated by the adopted fiscal consolidation measures. The annual inflation rate is assumed to slow in 13. This largely reflects a projected deceleration of energy inflation (specifically in fuel prices and administered energy prices) and of unprocessed and processed food inflation, stemming from developments in world commodity prices. The rising trend in non-energy industrial goods inflation is expected to end in 13 as a result of decelerating import price inflation. In 1, the inflation rate is assumed to maintain its downward trend with almost all components recording slower growth in comparison with 13. The lower inflation is expected to reflect a moderate slowdown in annual import price inflation (e.g. in energy prices), a projected high rate of unemployment, and a slight decline in food inflation. Q 1 16

17 6 Risks to the forecast Ri s k s t o t h e r e a l e c o n o m y f o r e c a s t a r e p r e d o m i n a n t l y o n t h e d o w n s i d e, w h i l e r i s k s t o t h e inflation f o r e c a s t a r e o n t h e u p s i d e The risks to the medium-term forecast for the real economy are predominantly on the downside. The lack of a resolution to the sovereign debt crisis continues to fuel uncertainty about future developments in external demand; if the crisis deteriorates, it could seriously dampen the expected moderate recovery of this demand. There also remains the risk of how the economy will respond to the fiscal consolidation measures so far adopted. A further risk could be the effect of any additional consolidation measures taken in the event that the current consolidation effort proves insufficient; this could result in a failure to meet the general government deficit target of less than 3% of GDP in 13. Likewise, the adoption of further consolidation measures in 1 could weigh on economic activity. In the labour market, the increase in the social contribution burden under work agreements represents an upside risk to employment. The effect on unemployment, however, is expected to be limited, since a significant proportion of the people working under such agreements would in the event of redundancy be classified as economically inactive. Chart 16 HICP inflation forecast (%) Source: SO SR, Q1 Q Q3 Q Q1 Q Q3 Q Q1 Q Q3 Q Q1 Q Q3 The risks to the inflation forecasts for 13 and 1 are on the upside and include the price of oil, the euro s exchange rate against the US dollar, and external inflation. Their impact on the inflation rate would have been greater but for domestic factors (labour market) seen as downside risks to price growth. Table Risks to the forecast GDP Fiscal consolidation measures, sovereign debt crisis, external demand demand Sovereign debt crisis, external demand Inflation Balanced External inflation, exchange rate, oil price Domestic demand Zdroj:. Fiscal consolidation measures, sovereign debt crisis, external External inflation, exchange rate, oil price Domestic demand Q 1 17

18 7 Comparison with the previous forecast Looking at the technical assumptions of this forecast in comparison with those of the previous forecast, external demand growth over the projection horizon has been revised down. Another marked change since the last forecast was the decline in oil prices and non-energy commodity prices, which in conjunction with the euro s appreciation against the US dollar resulted in a more pronounced decrease in commodity prices. Compared to the previous forecast, short-term interest rates have remained basically unchanged. As for fiscal consolidation measures, their composition has been revised slightly without any impact on the economy. The size of the fiscal consolidation remained the same; the only changes were in the component measures. Certain measures included in the assumptions of the previous forecast were not approved (they included the taxation of service pensions and limits on tax bonuses for children in higher-education), and are therefore not considered in the latest forecast. These measures were, however, replaced with others (a 15% windfall tax in 13 on undistributed profits generated before, the payment of health insurance contributions on dividends paid from Chart 17 Comparison of forecasts of GDP composition (annual percentage changes; contributions to growth at constant prices in p.p.) 7 6 Chart 18 Comparison of forecasts for economic growth (annual percentage changes in GDP at constant prices; contributions to growth in p.p.) % MTF-1Q3 Source:. 1, and a memorandum between the central government, regional self-governments, and municipalities). Chart 19 Comparison of labour market indicators (contributions to unemployment) (thousands of persons) 3.% MTF-1Q.% MTF-1Q3 1.6% MTF-1Q 3.5% 3.5% MTF-1Q MTF-1Q Contribution of export markets GDP not including contribution of export markets GDP (growth in %) 5 3.7%.%.% 1.6% 3.5% 3.5% MTF-1Q3 Household consumption Fixed investment Net exports (exports-imports) Source:. MTF-1Q MTF-1Q3 MTF-1Q MTF-1Q MTF-1Q General government consumption Changes in inventories GDP (growth in %) - -3 P3Q 1 Source:. PQ 1 P3Q 1 PQ 1 P3Q PQ 1 Employment Economically inactive population Demography Unemployment (changes in the number of unemployed) Q 1 18

19 Ou t l o o k f o r t h e d o m e s t i c s i d e o f t h e e c o n o m y d e te r i o rate s Regarding Slovakia s real economy, major changes against the previous forecast resulted from recent developments. In particular, domestic consumption is expected to decelerate at a faster pace, with a corollary of that slowdown being a decline in import growth. Household consumption General government consumption Fixed investment Changes in inventories Net exports (exports-imports) GDP growth in % Weakening external demand will act as a drag on export growth, and the most pronounced effect of this slowdown will be on the GDP forecast for 13. The employment situation is expected to be worse than projected in the previous forecast, owing to the economy s slower growth and the potential fears of firms about the Slovak labour market becoming less flexible. The unemployment rate forecast has been revised up in line with these developments. As for price and cost developments, the increase in all price indices and in labour costs Chart Comparision of price developments (annual percentage growth of the HICP; component contributions in p.p.) Source: P3Q 1 PQ 1 Food Energy HICP (growth in %). P3Q 1 Net inflation Other administrative prices was moderately slower than projected in the previous forecast. With the economy growing at less than its potential, the output gap widened..3 PQ P3Q PQ 1 Q 1 19

20 Table 5 Medium-Term Forecast (MTF-1Q) main macroeconomic indicators (year-on-year changes) Indicator (annual percentage changes unless otherwise indicated) Actual Forecast PQ-1 Difference with MTF-1Q3 Prices HICP inflation (average) CPI inflation (average) ULC 1) (compensation per employee at current prices / labour productivity ESA 95 at constant prices) Labour productivity ESA 95 (GDP at current prices/employment ESA 95) Compensation per employee Economic activity Real GDP Final consumption of households Final consumption of general government Gross fixed capital formation Exports of goods and services Imports of goods and services Real gross disposable income of households Output gap (% of potential output) Labour market Employment (ESA 95) Unemployment rate (Labour Force Sample Survey; percentage) Balance of payments Economic openness (% of GDP) Balance of trade (% of GDP) Balance of services (% of GDP) Current account (% of GDP) Current and capital account (% of GDP) External assumptions for the forecast External environment Real world GDP growth Growth in Slovakia s export markets Technical assumptions Exchange rate (USD/EUR) ) Price for a barrel of Brent crude oil (USD) ) Price for a barrel of Brent crude oil (EUR) ) Rise in oil prices (in USD) Rise in oil prices (in EUR) Non-energy commodity prices M EURIBOR (%) Source:, ECB, SO SR. 1) ULC unit labour costs. ) Changes against the previous forecast in % Q 1