VZCZCXRO3802
RR RUEHAG RUEHDF RUEHIK RUEHLZ
DE RUEHSL #0331/01 1151210
ZNR UUUUU ZZH
R 251210Z APR 06
FM AMEMBASSY BRATISLAVA
TO RUEHC/SECSTATE WASHDC 9772
INFO RUCNMEM/EU MEMBER COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 BRATISLAVA 000331 
 
SIPDIS 
 
SIPDIS 
 
DEPT PASS TO USTR FOR RDRISCOLL 
TREASURY FOR AALIKONIS 
USDOC FOR MROGERS AND STIMMINS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD LO
SUBJECT: SLOVAK ECONOMY GROWING AT RECORD PACE 
 
¶1.  SUMMARY: In the last quarter of 2005, the Slovak economy 
reached an all time record for economic growth of 7.6 
percent, the fastest rate among the four biggest economies 
that joined the EU on May 1, 2004.  A high volume of 
investments and fast-growing household consumption were the 
key growth engines, while external factors played a negative 
role.  Unemployment over the last three months of 2005 
dropped to the lowest rate since the first quarter of 1999 
and wages rose at one of the highest rates in the whole EU, 
exceeding productivity growth.  Economic analysts expect 
further interest rate hikes in the coming months. END 
SUMMARY. 
 
¶2.  Slovakia's GDP rose at a historic annual rate of 7.6 
percent in real terms (9.9 percent in nominal terms) during 
the last quarter of 2005, to SKK 384.1 billion (USD 12.4 
billion).  For the full year 2005, the Slovak economy 
accelerated by 6.0 percent year-on-year, the highest rate in 
10 years, to SKK 1,439.8 billion (USD 46.4 billion), after a 
5.5 percent growth in 2004.  The private sector generated 
90.6 percent of GDP last year.  Slovakia's growth matched 
the Czech Republic's economic performance, while it was 
ahead of Poland with 3.2 percent and Hungary with 4.1 
percent rates for 2005. 
 
------------------------------------ 
STRUCTURE OF GROWTH REMAINS THE SAME 
------------------------------------ 
 
¶3.  The main driver of the economy was domestic demand, led 
primarily by investments.  The gross investment showed an 
extraordinary 33.5 percent year-on-year increase in the 
fourth quarter, contributing 6.6 percentage points to the 
growth rate.  Significant components of this high growth 
rate were changes in stocks and inventories. (NOTE: Some 
retailers built up their stocks of cigarettes due to the 
increase in excise tax of tobacco effective January 1, 
2006).  Fixed investments alone grew 15.1 percent, providing 
3.9 percentage points to the overall rate.  Household 
consumption, the second strongest growth engine, slowed down 
to an annual 5.9 percent rise, from 6.2 percent in the third 
quarter, extending its growth to the eighth consecutive 
quarter after two years of stagnation in 2002 and 2003. 
Government spending rose 3.8 percent in the reported period, 
accelerating from 0.9 percent in the preceding quarter. 
 
¶4.  External demand played a negative role in the last three 
months of 2005.  Net exports (exports minus imports) knocked 
off 3 percentage points from the growth rate, with imports 
rising 17.7 percent and exports 15.0 percent year-on-year 
during the last quarter.  The trade balance deteriorated 
primarily in December, which itself produced 33.4 percent of 
the full year trade deficit.  The massive growth in 
investment indicated that a significant portion of imports 
were technologies for the two car plants under construction. 
(NOTE:  French PSA Peugeot is scheduled to kick off its 
production in May, while South Korean Kia should start in 
November. Both plan their annual output for 300,000 cars at 
full capacity).  Rising import prices of commodities also 
contributed to the overall foreign account deterioration as 
Slovakia is almost fully dependent on Russia for natural gas 
and oil. 
 
------------------------------ 
UNEMPLOYMENT AT A SIX-YEAR LOW 
------------------------------ 
¶5.  According to the Statistical Office (using data based on 
random telephone surveys), Slovakia's unemployment rate 
dropped to 15.3 percent in the fourth quarter of 2005, the 
lowest rate since the first quarter of 1999.  Compared to 
the same period in 2004, the number of unemployed people in 
4Q05 declined 10.4 percent to 407,600.  For the whole of 
2005, the unemployment rate fell by 1.9 percentage points to 
16.2 percent, while the number of unemployed people was down 
by 11.1 percent to 427,500 (This data is taken as an average 
for the full year and is therefore higher than the fourth 
quarter numbers).  Statistics provided by the Ministry of 
Labor, which are more in line with the U.S. methodology 
focusing on those actively seeking employment, indicated 
that unemployment dropped from 15.6 percent in 2003 to 11.36 
percent in December 2005. The strong economic growth also 
resulted in a 2.1 percent annual rise in employment for 
¶2005.  At the end of the year, 2.26 million people in 
Slovakia had jobs, a rise of 2.5 percent or 54,900 on the 
year. 
 
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BRATISLAVA 00000331  002 OF 002 
 
 
WAGES OUTPERFORMED PRODUCTIVITY 
------------------------------- 
¶6.   Average nominal monthly wages grew by 9.2 percent year- 
on-year in 2005, to SKK 17,274 (USD 560), or 8.4 percent in 
the last quarter, to SKK 19,466 (USD 628).  For the same 
period, real wages rose 6.3 percent and 4.7 percent, 
respectively.  In 2004, real wages increased 2.5 percent on 
an annualized base.  In comparison, the labor productivity 
slowed down to 3.7 percent in 2005, from 5.2 percent in the 
previous year.  The central bank noted that if such a strong 
relative wage increase over productivity growth as seen in 
2005 was repeated this year the economy would face serious 
inflationary risks. 
 
¶7.  COMMENT:  The central bank cited robust economic growth 
based on strong growth of investments and household 
consumption as one of the principal reasons behind a 50 
basis point interest rate hike in February, 2006.  Despite 
the slow down in household spending during the last months 
of 2005, the GDP structure in combination with wages (rising 
faster than productivity) and retail sales data still imply 
potential demand-led pressures on consumer prices.  This 
suggests that the central bank may incline to further 
monetary tightening.  Strong household consumption assisted 
by increased employment, rising real incomes and better 
access to credit confirmed the fast growth in improving 
living standards, which is theoretically good news for a 
governing coalition facing early parliamentary elections in 
June.  The positive effects are not being felt equally 
throughout the country, however, and may not be enough to 
bring about a third-term for a Dzurinda-led center-right 
coalition.  The upcoming start of production at the two car 
plants will provide strong one-time impetus for the economy 
and could accelerate its growth to over 7 percent this year. 
 
VALLEE