Lets stay on dispassionate economics

If you read some of the anglosaxon press these days, you would think that Stalin was elected in Poland, and the economy and society is in freefall. As we know, nothing could be further from the truth but for the sake of any westerners that would like to read more in depth stuff than press releases from propagandameisters (money doesn't do politics) here is some Austrian research:

First the table for those not so keen on too much text

Positive outlook:
• Bulgaria, with broadly based favourable impact from EU accession
• Romania, with focus on disinflation and EU accession
• Slovakia, with concerns on the impact of the fiscal easing
• Slovenia, positive on sustained high growth and adoption of the euro

Stable outlook:
• Czech Republic, with concerns related to the fiscal side
• Estonia, rapid growth, but adoption of euro may be postponed yet again
• Latvia, growing overheating pressures coupled with rising economic
• Lithuania, strong growth, improved political situation
• Poland, on strong fundamentals, with political environment still generating

• Ukraine, economy stronger again, but gas price hikes loom and politics remain

Negative outlook:
• Hungary, on toughness of the fiscal consolidation programme and political
unrest, potentially undermining reform commitment

"CEE region
General framework and growth prospects

The general outlook for the region is po-
sitive for strong economic growth, in
spite of increasing vulnerabilities. Dyna-
mic domestic demand, with lively in-
vestment, is accompanied by encoura-
ging exports in the wake of strengthe-
ned European demand and generally
good competitiveness. We forecast ave-
rage regional growth of 6 % in 2006 and
5.4 % in 2007, with all countries show-
ing growth close to or above 4 %.
Hungary, which is now facing the short-
term costs of a long-awaited fiscal cor-
rection, represents the only exception.
Still, the political scene is emanating
rather mixed signals, while the repeated
phenomenon of risk re-pricing recorded
in the last few months shows that the
region, and a few countries in particular,
remain vulnerable to the sentiment on
international markets. "

other juicy bits

"...Poland prospects unclear and keeping the zloty
rather volatile. Strong investments and
exports are the main drivers of growth
Slovakia and in the Czech Republic as
well, while Slovenia, which has secure
EMU entry in 2007, is waiting for the
promised boost in terms of competitive
ness and FDI appeal. Buoyant growth,
accompanied by increasing risks for an
overheating of the economy, is con-
firmed in the three Baltic countries. In
all three states domestic demand conti
ues to play a strong role in explaining t
higher growth, with limited room for a
significant correction in the external b
ance so far. The short-term outlook is
negative only in Hungary, where growt
will obviously decline (consumption
growth will be negative in 2007), in the
wake of the recessionary impact of the
new (long-awaited) fiscal correction pl
and the new monetary policy condition
The political environment is adding
further concerns, with the centre-left
coalition at the heart of a scandal
having lost local elections and the oppo
sition repeatedly calling for early elec-

Interest rates and macroeconomics

"Hikes in rates are also expected in the Czech Re-
public and Slovakia; in both countries the
new political landscape, which is opening
the door to increasing populism, is gener-
ating concerns for the fiscal stance. In the
Czech Republic, a deteriorating fiscal po-
sition, combined with increasing infla-
tionary pressures and the negligible ap-
preciation of the Czech koruna prompted a
25bp rise at the end of September 2006,
to be followed by a further + 50 bp in
2007. The lingering political deadlock,
which threatens fiscal discipline, remains
the main issue to watch.

In Slovakia, with
inflation remaining the key obstacle to-
wards adopting the euro, the central bank
has already hiked rates by 175 bp since
the beginning of the year. We see poten-
tial scope for an additional 25 bp hike in
2006, most probably taking place in No-
vember or December. However, given the
current deceleration in oil prices and
lower than expected regulated price in-
creases, our forecast for 2007, which as-
sumed a further 50 bp rate hike in Q1, re-
mains conditional on the persistence of
strong growth in private consumption.
Concerns are related to the fiscal side, yet
we still believe the budget deficit criteri-
on can be achieved if appropriate correc-
tive measures are put in place.

A completely new macroeconomic policy
framework is now in place in Hungary.
Following the general elections, the re-
elected government has finally addressed
the messy fiscal position of the country,
and a new corrective programme has been
adopted, which has also been endorsed
by the EU Commission. With the plan al-
ready having an impact on inflation and
with international markets having largely
re-priced Hungarian risks, in view of the
fiscal stance and political distress, the
central bank has started hiking rates. The
prime rate of 6.25 % in June increased to
7.75 % by the end of September. We ex-
pect the tight monetary policy stance to
be continued in the future, as inflation
will stay high both due to the direct im-
pact of the fiscal corrective measures and
to some stickiness in prices thereafter. In
Slovenia, strong domestic demand, high
energy prices and the adoption of the eu-
ro are factors which suggest that inflation
may move upwards slightly. The central
bank has already responded by raising in-
terest rates by 25 basis points in August –
also with a view to maintaining the inter-
est rate differential to the ECB. The fiscal
policy remains cautious, calling for fur-
ther declines in the deficit. Inflation con-
vergence has been and continues to be
the main crucial issue for the three Baltic states"

Its nice to see that Slovakia shares the same "problem" as the baltic tigers
i.e. too fast growth prompting inflation to go up, lower prices in oil will help alot though...
The euro looks a certainty if Fico just keeps thing largely as they are...

Slovakia in detail
"Buoyant economic prospects sustained
mainly by domestic demand and recov-
ery in net exports. Despite the new gov-
ernment decision to increase the public
finance deficit, the Maastricht criteria
could still be met. Energy prices repre-
sent the riskiest factor for inflation de-
velopments, while the restrictive mone-
tary policy should partially contribute to
slowing down pressures on the demand

side. 2007 key interest rate hikes re-
main conditional on the persistence of
strong growth of private consumption,
wages and employment in H2 2006.
employment in H2 2006. Despite the
risks connected to inflation develop-
ments and relaxed fiscal stance, we still
reckon there is scope to meet all maas-
tricht criteria in time for euro adoption
as of 1.1.2009.

Forecasts for 2007
Economic growth is expected to peak in
2007, due to new production capacities
on the supply side (connected mainly to
automotive). On the demand side, net ex-
ports are expected (driven by increase
of export-oriented capacities) to be the
main driver, followed by private con-
sumption and investment.

Construction activity is still benefiting
from the investment boom, recording
15.4 % average yearly growth in the first
7 months of the year. Such growth is
mainly driven by new construction (both
in infrastructure and building construc-
tion). We expect a gradual slow-down of
the annual growth due to the higher base
last year as well as to the gradual decline
of investment activity. Despite this, con-
struction activity should still record dou-
ble-digit yearly growth.
Based on the labour force survey the un-
employment rate reached 9.85 % in August
– the lowest rate ever – recording a 1.03 %
annual decline. Seasonally adjusted unem-
ployment (UniBanka calculation) reached
10.30 % (1.07 % yoy decline). The unem-
ployment decline is still driven by new
jobs, reflecting strong economic growth.
However, long-term unemployment re-
mains the key problem – it is the highest
among EU countries, while unemployment
adjusted for the long-term unemployed
(over 2 years) is already lower than the

EU-15 level. Altogether, we see only limit-
ed scope for further decreases in the un-
employment rate (despite the expected
strong economic growth). Following this
year’s forecast of 10.7 %, we forecast a
10.5% (yearly average) figure in 2008.
Income and wages
The average monthly wage reached SKK
18,324 (EUR 486) in Q2, recording 8.8 %
yoy growth. Real wage growth accelerat-
ed to 4.0 % in Q2, versus 2.7 % in Q1 (de-
spite the registered hike in inflation).
Public administration, education and
trade were the drivers behind such wage
growth. On the other side, construction,
the energy sector and agriculture record-
ed the lowest yearly growth. We expect
2006 real wage growth to be 3.2 % yoy.

Monetary policy
The central bank increased key interest
rates by 75 bps in Q3 (first by 50 bps in
July and then an additional 25 bps in Sep-
tember). Together with the other hikes in
H1, the 2-week repo rate went up by an
overall 175 bps. The reasons for such
tightening of monetary conditions remain
the same as in H1 – inflation risks. The
central bank specifically mentioned ex-
pected regulated price hikes as well as
the still relatively high private consump-
tion (driven by employment and wage
growth and increasing household indebt-
edness) as main factors. "


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  3. The thing that bothers me is the extent to which this rapid growth in Slovakia is just catching up after the pre-EU years of uncertainty. I think the stats for FDI per head show us much lower than the Czechs and the Hungarians.

    This is worrying because there've been press reports this week that there is no spare capacity in the labour market in big parts of Slovakia. Most of the unemployed who are left are the long term unemployed with the wrong skills or no skills.

    With the aging population fewer young people are coming through. It looks like we'll need immigrants to keep labour costs down, but Slovakia isn't geared culturally to support that.

    To use a railway metaphor: are we about to run off the end of the track at full speed? Maybe there are fundamentals these rosy statistics aren't picking up.