VZCZCXRO3948
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHSL #0963/01 3471309
ZNR UUUUU ZZH
R 131309Z DEC 06
FM AMEMBASSY BRATISLAVA
TO RUEHC/SECSTATE WASHDC 0534
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 BRATISLAVA 000963 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR AALIKONIS 
USDOC FOR MROGERS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD LO
SUBJECT: SLOVAKIA AMONG WORLD'S FASTEST GROWING ECONOMIES 
 
¶1.  SUMMARY: Slovakia's economy rose by a record 9.8 percent 
year-on-year during the third quarter, up from 6.7 percent in the 
previous three months, the Statistical Office reported. The growth 
at one of the fastest rates worldwide was driven mainly by consumer 
goods and investments.  Robust economic performance may prompt the 
central bank to tighten its monetary policy further to trim down 
potential inflationary pressures.  The crown's recent strengthening 
has so far prevented an increase in shop prices, but possible 
corrections and/or rising household consumption could pose a risk 
for price stability in the upcoming months. END SUMMARY. 
 
¶2.  Slovakia's gross domestic product (GDP) rose by a real annual 
9.8 percent in the third quarter, to SKK 424.9 billion (in fixed 
prices), beating all market forecasts by several percentage points. 
The average growth in the first three quarters represents 7.8 
percent year-on-year.  The Statistical Office also said it had 
revised its full-year GDP growth forecast to 7.7 percent, from a 
previously expected 6.5 percent. Slovakia has had the highest growth 
rates among the four largest EU newcomers from central Europe over 
the past few years, but the third quarter figure brought it to the 
ranks of the world's fastest growing economies. 
 
¶3.  The key drivers of the Slovak economy were investments, shown in 
inventories, and domestic private demand.  The gross capital 
formation, i.e. corporate investment and change in inventories, rose 
by an extraordinary 19.3 percent annualized rate during the third 
quarter, the majority of which was result of unusually high stocks. 
The breakdown of the data showed stock accumulation primarily in the 
manufacturing industry, which indicates that a big portion of stocks 
should transform into exports, providing the impetus for more growth 
in the future.  Another part of inventories came from one-time 
purchases of strategic commodities, and the rest lies with Christmas 
season pre-stocking in the retail sector. 
 
¶4.  Domestic demand kept its solid pace, with household consumption 
rising at an above-forecast 6.5 percent from July to September, 
while public spending gained 1.2 percent on the year.  The 
contribution of net trade also remained positive, as export growth 
again outpaced imports 23.8 percent vs. 22.9 percent year-on-year 
for the reported period.  This component should gain more importance 
in months to come as carmakers PSA Peugeot and Kia gradually boost 
their production and consequently improve Slovakia's export bill. 
 
 
¶5.  According to the Statistical Office (using data based on random 
telephone surveys), Slovakia's unemployment rate dropped 2.8 
percentage points year-on-year in the third quarter, to 12.8 
percent, the lowest rate since the last quarter of 1998. The overall 
number of jobless declined by 73,400, or 17.7 percent, to 341,600. 
(NOTE: 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 on a seasonally adjusted 
base dropped to 9.8 percent in October, the new low since 1993). 
This was mainly a result of continuing domestic job creation and an 
outflow of Slovaks to the EU. Employment picked up 3.8 percent in 
the reported period after growing by 4.5 percent in the previous 
three months.  The number of Slovaks working abroad increased by 
more than 30,000 from a year ago, to approximately 166,000 at the 
end of September 2006.  Prospects for strong employment growth 
remain positive on incoming FDI and improving purchasing power, 
which could result in more jobs in the service sector. 
 
¶6.  The average nominal monthly salary in the Slovak economy reached 
SKK 18,212 (USD 680) at the end of the third quarter, up 7.7 percent 
from a year ago.  On the back of higher inflation, the real average 
wage growth slowed to 2.7 percent year-on-year in the third quarter, 
from 4.0 percent in the previous three months. The pace of pay 
increases still seems to be covered by productivity growth. The 
Statistics Office expects the average salary for 2006 to be 7.8 
percent higher than in 2005. 
 
¶7.  COMMENT: The GDP structure sent mixed signals to the policy 
makers at the central bank. The bank has raised its key two-week 
rate by 175 basis points this year, to 4.75 percent, because 
inflation risks from high energy prices and economic growth could 
endanger the goal of adopting the Euro in 2009. (NOTE: The consumer 
prices inflation recorded a 20-month high in August at an annual 5.1 
percent). But a crown appreciation by over 5 percent in the past 
three months has since limited shop price growth, allowing the bank 
to keep rates on hold for the second month in a row in November. 
Nevertheless, as November inflation accelerated to 4.3 percent 
Year-on-Year (after the 3.7 percent YoY in October) and domestic 
consumption remained high, the bank will probably remain very 
cautious.  Analysts rejected the immediate need to raise interest 
rates further, but admitted that more tightening may be needed in 
the coming months, largely depending on currency development and its 
eventual corrections. END COMMENT. 
 
 
BRATISLAVA 00000963  002 OF 002 
 
 
VALLEE