VZCZCXRO7340
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHSL #0385/01 1781500
ZNR UUUUU ZZH
R 271500Z JUN 07
FM AMEMBASSY BRATISLAVA
TO RUEHC/SECSTATE WASHDC 1041
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 BRATISLAVA 000385 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR AALIKONIS 
USDOC FOR 4232/ITA/MAC/EUR/MROGERS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD LO
SUBJECT: SLOVAK ECONOMY CONTINUES TO GROW RAPIDLY, BUT SLOWER THAN 
EXPECTED 
 
¶1. Summary: The Slovak economy continues to grow at a fast rate, 
reaching 8.9 percent real GDP growth in the first quarter of 2007, 
but did not attain the double-digit heights predicted by many 
economic analysts.  Real wage growth increased 4.5 percent, which is 
higher than in the first quarter of 2006, but still lags behind 
productivity growth.  The unemployment rate hit the historically low 
level of 8.33 percent, placing some pressure on wages.  EU-norm 
inflation dipped to 1.5 percent, the lowest in Slovakia's history. 
End Summary. 
 
----------------------------------------- 
BALANCED GDP GROWTH NOT PUSHING INFLATION 
----------------------------------------- 
¶2. GDP increased by 2.3 percent points in the first quarter of 2007 
(1Q07) in comparison with the first quarter of 2006 (1Q06), reaching 
414.6 billion SKK (16 billion USD) total.  In contrast to most of 
2006, when economic growth was fueled primarily by imported stocks 
and supplies, growth was more clearly export-driven.  Overall 
domestic demand rose 3.4 percent during the first quarter and 
private consumption maintained a rate of 6.3 percent annualized 
growth.  Hence, there is no sign of significant inflationary 
pressure, but there is also limited space for monetary or fiscal 
flexibility in the near term. 
 
¶3. The reduction in imports was to some degree a byproduct of an 
unexpected slowdown in the energy sector, which can be partially 
explained by the warm winter.  Some of the import reduction is a 
statistical mirage, since a large percentage of this winter's 
energy-related imports were not counted by the Statistical Office 
during the first quarter, but will be accounted for in May 2007.  In 
other sectors, the machinery / electronics / automotive industry 
grew by a robust 139.8 percent over 1Q06 due to increased production 
at the Kia and Peugeot Citreon plants.  Projected real GDP growth 
for 2007 is 8.8 percent, thanks to the continuous high investment 
activity and related dynamic job growth. 
 
------------------------- 
SINGLE-DIGIT UNEMPLOYMENT 
------------------------- 
¶4. According to the Statistical Office (using data based on random 
telephone surveys), Slovakia's unemployment rate dropped by 2.9 
percentage points in comparison to 1Q06, to 11.5 percent.  This is 
Slovakia's lowest unemployment rate since 1997.  Statistics provided 
by the Ministry of Labor, which are more in line with the U.S. 
methodology based on those actively seeking employment, indicated 
that unemployment dropped to a new historical low of 8.33 percent in 
May 2007.  The unemployment rate decreased in 62 out of 79 districts 
in Slovakia, with the highest unemployment rate registered in Banska 
Bystrica region (14.32 percent) and Kosice region (13.82 percent). 
The number of long-term unemployed (more than two years) declined by 
43,600 compared to 1Q06, but the lack of job skills among the 
numerous long-term unemployed still remains a serious impediment to 
continued high growth.  Strong employment growth was propelled by 
both domestic job creation and the continuing outflow of Slovaks to 
the EU.  Despite positive developments in the labor market, 
unemployment in Slovakia still ranks among the highest in the EU. 
 
------------------------------------------- 
REAL WAGES GROW, BUT LESS THAN PRODUCTIVITY 
------------------------------------------- 
¶5. Real wages grew 4.5 percent in 1Q07, reaching average monthly 
salary of 18,511 SKK (app. 745 USD).  This was slightly less than 
expected, but still a 7.1 percent increase in comparison with the 
same period last year. Productivity growth continues to exceed labor 
costs, which further suggests that inflationary pressures will 
remain limited in the short run.  The biggest increase in nominal 
wages compared with 1Q06 was registered in health services (an 
increase of 12.6 percent), which is largely a byproduct of the 
settlement from last year's labor stoppages by public sector doctors 
and nurses. 
 
-------------------------------- 
NO DOMESTIC INFLATION RISK, BUT... 
-------------------------------- 
¶6. Inflation measured by the Ministry of Finance reached 2.4 percent 
but EU-norm inflation reached the historical minimum of 1.5 percent. 
 Central bankers see no risks within the domestic economy that could 
create serious inflation.  Governor Ivan Sramko of the National Bank 
of Slovakia has expressed concern, however, that inflation will pick 
up in June due to projected increasing fuel prices.  According to 
Sramko, only exogenous risks like commodity prices and exchange rate 
fluctuations could potentially cause Slovakia to not meet its 
Maastricht criteria for inflation, but he stressed that this was 
unlikely.  An internal European Central Bank (ECB) document, which 
was picked up by the media on June 26, notes that the ECB staff has 
concerns that Slovakia's low inflation rate may be short-lived.  The 
memo questions whether the inflation performance is sustainable when 
 
BRATISLAVA 00000385  002 OF 002 
 
 
the favorable impact of nominal exchange rate appreciation against 
the Euro fades away.  In response Sramko downplayed the report to 
the media noting that he had not heard any official concerns from 
the ECB over Slovakia's ability to meet the inflation criteria. 
 
¶7. Prime Minister Robert Fico continues to balance adherence to 
Maastricht criteria with his desire to create new social programs. 
Last week Fico said, "I want to publicly state that, regardless of 
the strictness of the fiscal Maastricht criteria, the government has 
implemented and will implement...such a fiscal policy that will 
support economic growth...but also enable...solidarity." 
 
 
VALLEE