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Fading Domestic Demand Curbs Slovak GDP Growth to Three-Year Low

Slovakia’s economy expanded at the slowest pace in almost three years in the third quarter, curbed by weakening domestic demand as the government seeks to cut the budget deficit with higher income taxes.

Gross domestic product rose 2.1 percent from a year earlier, the weakest expansion since the end of 2009 and compared with 2.6 percent growth in the second quarter, the Slovak Statistics Office said in a statement posted on its website today. The third-quarter reading was below the 2.2 percent increase reported in the flash estimate published Nov. 15. On a quarterly basis, GDP grew 0.6 percent.

“Growth was again driven solely by foreign demand, helped by an increased output in the car factories following the expansion of their production capacities,” Martin Balaz, an analyst at Slovenska Sporitelna AS in Bratislava, said in an e- mailed report. “We expect economic growth to slow slightly further in the fourth quarter due to the uncertain situation in the euro zone and a slowdown in our main trading partners.”

Slovakia’s growth still outperformed its bigger neighbors in central Europe also affected by weakening domestic demand. Poland economy, the biggest among the post-communist EU members, expanded 1.4 percent in the third quarter, while GDP in the Czech Republic shrank a preliminary 1.5 percent from a year earlier.

OECD Forecast

Even as the short-term outlook for the economy has worsened, it is set to advance 2.6 percent this year and 2 percent in 2013, one of the fastest expansions in the euro area which Slovakia joined in 2009, the Organization for Economic Cooperation and Development said in a survey released today. This matches the European Commission’s November projection.

“The main priorities now are to restore public finances while fostering domestic drivers of growth and ensuring the funding of items to promote growth, such as education and active labor market policies,” the OECD said in the report.

Still, Slovakia’s medium- and long-term growth prospects are uncertain as the country must improve its labor market and education efficiency to remain competitive, the Paris-based group said.

Slovak lawmakers approved on Dec. 4 tax increases for individuals and companies, dismantling the previous system of a uniform 19 percent tax rate as the east euro-region country seeks to boost budget revenue.

The government raised the corporate tax rate to 23 percent and imposed a 25 percent top rate for income of individuals exceeding 2,867 euros ($3,748) per month. The changes are effective from next year.

To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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