National Bank Medium-Term Forecast (2Q 2012)

When this NBS Medium-Term Forecast (MTF-2012Q2) was prepared, expectations in the euro area were gradually stabilising. It is assumed that a trough in the euro area economic activity was reached at the end of 2011 and the beginning of 2012. Subsequently, the economic activity should be on rise again. These assumptions, as well as the previous forecast, are based on expectations that the financial crisis will not intensify and the world trade and external demand will recover, as well as on the gradual strengthening of domestic demand over the projection horizon.

National Bank of Slovakia (c) Frettie

The latest macroeconomic outlook for Slovakia takes into account the Eurosystem’s technical assumptions, [1] the published flash estimate of economic and employment growth in the first quarter of 2012, and the most recent monthly data and short-term leading indicators [2].

Given the minimum changes to technical assumptions, it was not necessary to substantially revise developments in main macroeconomic indicators for the projection horizon. Their figures thus remained similar to the previous forecast. More favourable developments of the Slovak economy and employment in the first quarter of 2012 led to their slightly upward revision for the whole of 2012. In connection with current faster price developments, inflation forecast for this year was also revised upward.

The flash estimate of the economic and employment growth in the first quarter of 2012 suggested that the supply-side shock from the previous quarter was not just one-time effect and it could boost the economy. The main contribution to the economic growth was from net exports, when exports increased while imports plummeted. In the course of 2012, import intensity is expected to fade out. Economic growth should be mainly based on export performance and, as for the domestic part of the economy, on household and general government consumption. On the other hand, more marked slowdown is expected in investment demand. This, together with expected lower external demand, should lead to a slowdown in economic activity in 2012 when compared with the previous year.

External demand should accelerate in the projection horizon, which should support the dynamics of economic growth in Slovakia. This growth should thus be based both on external demand as well as gradually recovering domestic demand. It will be supported by positive income effects and low interest rates.

As regards the labour market, a slowdown against its 2011 figures should be seen in employment growth in 2012 as a result of economic developments. Later this year, the growth of employment, together with a more marked economic recovery, should be reinforced. In line with these developments, a gradual decrease in the unemployment rate should be seen over the projection horizon.

At the beginning of the year, inflation stood at somewhat higher levels than expected. It was mainly affected by developments in prices of unprocessed food and industrial goods excluding energy (unexpected hikes in pharmaceutical and egg prices). This higher than expected rise in prices was also translated into the overall 2012 forecast. Over the prediction horizon, however, their downward trend is expected, while the negative output gap, high unemployment rates, and a lower increase in energy prices should put downward pressure on inflation for the period of 2013-2014.

When compared with the previous forecast, GDP growth for 2012 was the most revised indicator. As it was significantly higher than expected in the first quarter of 2012, it could offset the adverse impact of lower external demand projected for 2012. Similarly, moderately higher employment growth was expected as a result of better than projected data published in the first quarter of 2012. In the medium-term horizon, no deviations from the projections published in March were recorded. Inflation projection for 2012 was revised upward in comparison with the previous forecast. This is mainly due to its higher increase than expected in the first quarter of this year. Price developments were kept at comparable levels for the whole projection horizon.

The risks to the current medium-term forecast for the real economic growth are predominantly on the downside. Uncertainty surrounding developments in certain euro area countries could spread to other countries as well and thus lead to reductions in demand for Slovak goods and services. This might then adversely affect performance of the Slovak economy. The expected continued fiscal consolidation in the external environment may also exert a downward pressure on external demand. Given that no figures on the Slovak consolidation measures were available at the time of the current forecast production, no new measures were included in the baseline scenario. Nevertheless, they may constitute downside risks to growth. As preliminary information suggests, measures can be expected on the income side and their nature should not imply any substantial negative impact on GDP in the short term. By contrast, their effect on the sustainability of public finance and growth in the longer-term horizon may be questionable. Positive risks would also be possible in the Slovak external trade if the supply-side shock and low import intensity were not just one-time effect and continued.

The risks to the inflation forecast for 2012 are balanced. For the years to come, risks are predominantly on the upside. They include risks to external inflation, oil prices and exchange rates. As to the situation in the domestic side of the economy, prepared public finance consolidation may be subject to upside risks, particularly in relation to its possible impact on indirect taxes and their increases. Overall, the impact of these risks could be partly subdued due to lower than expected external demand.

[1] Eurosystem Staff Macroeconomic Projections for the Euro Area, June 2012. For more detailed information on ECB projections see:

[2] The closing date for the forecast indicators was on 15 May 2012, when only data from GDP flash estimate were available.

Petra Pauerová

NBS Spokesperson

Source: National Bank of Slovakia (NBS)

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