Slovak Economic Growth Unexpectedly Picks Up as Czechs Fall Into Recession

Slovak economic growth unexpectedly accelerated last quarter as exports proved resilient to western Europe’s slowdown, beating the neighboring Czech Republic, whose economy fell into a recession.

Slovakia’s gross domestic product grew 0.9 percent in the fourth quarter from the previous three months, compared with 0.8 percent in the third. The Czech economy slumped into its second recession in two years as it shrank 0.3 percent, a second consecutive contraction, the nations’ statistics offices reported today. Slovak GDP rose 3.4 percent from a year earlier, compared with 0.5 percent in the Czech Republic.

The countries, which through 1992 formed Czechoslovakia, rely on western European export demand to drive growth. With household and government spending shackled by austerity to avoid contagion from the euro region’s sovereign debt crisis, Slovakia probably benefited from stronger demand for its products such as new Volkswagen AG (VOW) models, economists said.

“The acceleration in Slovakia, despite the slowdown at its major trading partners, can probably be attributed to the launch of new production lines,” said Maria Valachyova, an economist at Slovenska Sporitelna AS in Slovak capital, Bratislava. “Domestic demand has been stagnating for a couple of years already.”

The Czech koruna fell 0.2 percent and was trading at 25.111 against the euro at 12:32 p.m. in Prague. The ask yield on the Czech benchmark 3.85 bond maturing in 2012 fell to 3.181 percent from 3.2 percent yesterday. Slovak 4 percent bond due 2020 was priced to yield 4.405 percent compared with 4.314 yesterday.

Euro Region GDP

The euro region’s GDP contracted 0.3 percent from the third quarter, Eurostat, the European Union’s statistic office said today. Slovakia and France were the only euro-sharing nations reporting quarterly growth of the 12 countries whose data was available. The German economy, Europe’s biggest, contracted 0.2 percent, compared with the 0.3 percent estimated by economists polled by Bloomberg.

Hungary today reported 1.4 percent fourth-quarter economic growth from the year earlier, beating the 0.9 percent median estimate of 16 economists in a Bloomberg survey. Romania’s growth slowed to 1.9 percent from 4.4 percent, while Bulgaria’s expansion decelerated to 1.5 percent from 1.6 percent.

Eastern Europe will continue to be hurt by the slowdown in the euro region, which may feed into the Slovak economy’s performance with a delay this year, economists said. The Slovak Finance Ministry has revised the forecast for the 2012 GDP growth to 1.1 percent from an originally projected 1.7 percent. The Czech economy will probably expand 0.2 percent, according to the government forecast.

Deteriorating Demand

“While leading indicators suggest some pick-up in manufacturing activity and thus also exports, in early 2012, the outlook for domestic demand across central Europe is deteriorating due to tighter fiscal policies, soft labor markets and weak credit growth,” Michal Dybula, a Warsaw-based economist at BNP Paribas, said in an e-mail.

The Czech slump was probably the result of declining domestic demand, with household spending curtailed by rising unemployment and a government restricted by budget cuts, said David Marek, the chief economist at Patria Finance AS in Prague. The outlook is clouded by uncertainty over the euro area, the market for about 70 percent of Czech exports.

‘Lost Steam’

“Investment activity lost steam amidst growing worries about the euro zone debt crisis and its impact on the real economy,” Marek said in an e-mailed note. “Net exports remained the only engine of the GDP growth in the final quarter of 2011.”

Volkswagen starting serial production of a new subcompact models at its Bratislava plant probably helped drive Slovak exports, Valachyova said. The German carmaker in the fourth quarter accelerated production of the so-called New Small Family cars, which it expects will boost output of the Slovak plant to 400,000 vehicles in 2012 from about 144,510 in 2010.

The country’s fourth-quarter trade surplus was 976 million euros, the biggest since 2004, when the current methodology was introduced.

The 18-month-old government of Czech Premier Petr Necas has cut state subsidies, reduced public wages, raised the value- added tax and increased the retirement age to reduce the public- finance deficit.

The shortfall narrowed to 3.7 percent of GDP in 2011, from 4.8 percent in the previous year. The Slovak administration of Iveta Radicova trimmed the fiscal deficit to 4.6 percent from 8 percent. Both countries plan to cut the public-finance gap to less than the EU’s limit of 3 percent of GDP by 2013, even as worsening economic outlook threatens to curb budget revenue.

To contact the reporters on this story: Radoslav Tomek in Bratislava at rtomek@bloomberg.net; Peter Laca in Prague at placa@bloomberg.net

To contact the editors responsible for this story: James M. Gomez at jagomez@bloomberg.net; Balazs Penz at bpenz@bloomberg.net

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