Slovak Republic: Selected Issues and Statistical Appendix

This Selected Issues paper evaluates competitiveness in Slovakia and estimates the equilibrium real exchange rate path for the koruna. It takes stock of Slovakia’s growth performance over the past decade and assesses its growth potential over the medium term. It estimates the equilibrium real exchange rate appreciation in Slovakia using cross-section and time-series methods. The paper also presents production function estimates of potential output for Slovakia that imply sustainable rates of growth of 4.5–5.0 percent over the next five years.

Abstract

This Selected Issues paper evaluates competitiveness in Slovakia and estimates the equilibrium real exchange rate path for the koruna. It takes stock of Slovakia’s growth performance over the past decade and assesses its growth potential over the medium term. It estimates the equilibrium real exchange rate appreciation in Slovakia using cross-section and time-series methods. The paper also presents production function estimates of potential output for Slovakia that imply sustainable rates of growth of 4.5–5.0 percent over the next five years.

III. Slovakias Growth Potential and the Output Gap26

A. Introduction

1. Slovakia’s recent economic performance has been impressive. Real GDP growth was strong over the past three years, reaching an estimated 5¼ percent in 2004, the highest rate since the mid-1990s. This performance reflected in no small measure the strong reform program adopted in 2002, which inspired market confidence and won the support of major international institutions and private market participants.27 These reforms, together with the privatization and enterprise restructuring undertaken previously, helped turn Slovakia into one of the most attractive business environments in central and eastern Europe28 and drew substantial foreign direct investment. Significant investments since 2000 (Figure 1) added to Slovakia’s productive capacity and contributed to robust export-led growth.

Figure 1.
Figure 1.

Slovak Republic: Gross FDI Inflows

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A003

Sources: National Bank of Slovakia; IMF estimates (for 2004) and calculations.

2. These developments raise the question of what is Slovakia’s sustainable growth rate over the medium term. Can the current pace of economic expansion be sustained, or even surpassed, over the next few years? Certainly, recent reforms to the labor market and business environment will continue to bear fruit for several years to come. Also, additional investments now in the pipeline are expected to support continued, if not stronger, economic growth. This would definitely be desirable as vigorous growth is called for to raise Slovakia’s per capita income (about 50 percent that of the euro area at present) to euro area levels.

3. This chapter takes stock of Slovakia’s growth performance over the past decade and assesses its potential over the medium term. Section B reviews sectoral developments in the Slovak economy since the early 1990s to understand the sources of growth. Section C estimates potential output and assesses the current distance between that level and actual output—the output gap. Comparisons are then drawn with other estimates derived by the Slovak authorities, the OECD, and the European Commission. Section D concludes.

B. Slovakia’s Growth in the Past Decade

4. The services sector is predominant in Slovakia, but manufacturing is gaining in significance (Figures 23 and Table 1). The services sector represents more than half of real GDP and until recently was the main driver of Slovakia’s economic expansion. Indeed, services contributed about 2¾ percentage points to real GDP growth on average during 1993–2002 and captured the bulk of real capital formation in the country. Over the past two years, however, the manufacturing sector, led by the automobile industry, has gained in importance, contributing about 2 percentage points to GDP growth—more than services (Table 1). Also, foreign direct investments have mainly been concentrated in manufacturing since 2000—although a large share of these investments has also gone to the financial sector following its restructuring during 1999–2001 (Figure 3).

Table 1.

Slovak Republic: Sectoral Composition of Real GDP

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Sources: Data provided by the Slovak Republic’s Statistical Office; IMF estimates (for 2004) and calculations.

5. Services are largely provided by the private sector. Since 2000, the share of public services—mainly education, health care, and public administration—has averaged about 15 percent of GDP; following privatization, the bulk of the remaining services were provided by the private sector. In 2004, in particular, private sector services increased by more than 2 percentage points of GDP, driven by the expansion of the financial sector, while education, health, and public administration activities dropped by about 4 percentage points of GDP (Figure 4).

Figure 2.
Figure 2.

Slovak Republic: Real GDP by Branches, 1993–2004 1/

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A003

Sources: National Statistical Office of the Slovak Republic; IMF estimates (for 2004) and calculations.1/ The category “other” includes taxes and imputed banking services.
Figure 3.
Figure 3.

Slovak Republic: Investment by Sector, 1993–2004

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A003

Sources: National Statistical Office and National Bank of Slovakia; IMF estimates (for 2004) and calculations.
Figure 4.
Figure 4.

Slovak Republic: Decomposition of the Services Sector

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A003

Sources: Slovak Statistical Office; IMF estimates (for 2004) and calculations.

6. Trends in employment and labor productivity have widely varied across economic sectors, implying different sources of growth for different sectors. The expansion of services has primarily been driven by employment growth. Indeed, despite a decline in economywide employment throughout the second half of the 1990s, employment in the services sector has continued to rise (Figure 5). The growth in manufacturing since 2001, which has also contributed significantly to economywide growth, has not really been driven by employment in that sector, however: it has mostly been associated with capital accumulation and productivity growth (Figures 3 and 5).

Figure 5.
Figure 5.

Slovak Republic: Sectoral Employment, 1996–2004

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A003

A03fig05a

Labor Productivity Growth by Sector 1/

(In percent)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A003

1/ Labor productivity is measured as GDP per worker for each sector.Sources: National Statistics Office of the Slovak Republic; IMF estimates (for 2004) and calculations.

7. Economic restructuring has reduced the contribution of employment to growth. During 1999–2000, a pickup in enterprise restructuring was associated with faster labor shedding—particularly in manufacturing and agriculture—which had started in 1997–98 (Figure 6). Therefore, throughout 1997–2000, real GDP growth was underpinned by increases in investment and productivity (Figures 3 and 6). Since 2000, continued strong productivity growth has remained key to sustaining GDP growth, except in 2003, when a strong rebound in employment also significantly contributed to real growth.

Figure 6.
Figure 6.

Slovak Republic: GDP, Labor, and Productivity Growth 1/

(In percent)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A003

Sources: Slovak Statistics Office; IMF estimates (for 2004) and calculations.1/ Labor productivity is measured as real GDP per worker.

8. Looking ahead, both greater labor utilization and further capital accumulation are expected to result in robust growth in the medium term. Slovakia’s high unemployment rate—17¾ percent—indicates a potential that, if exploited, would significantly raise economic growth.29 Foreign investments in the pipeline will provide another source for higher growth in the medium term, as they imply further capital accumulation and brighter employment prospects (Table 2). The next section assesses Slovakia’s medium-term growth potential by estimating potential output.

Table 2.

Slovak Republic: Recently Agreed FDI Projects

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Source: ING Barings, Slovakia.

C. Potential Output and the Output Gap

9. Potential output is a useful concept, but, being an unobserved variable, it is hard to measure. Potential GDP gives a benchmark against which the performance of an economy can be assessed. This benchmark can be a helpful guide in elaborating macroeconomic projections. It also helps in evaluating inflationary pressures, as these are most likely to arise when an economy is operating close to potential. Finally, it provides a framework for assessing the fiscal stance from the Keynesian point of view that a fiscal expansion (contraction) is desirable when output is below (above) potential. However, there is no single best measure of potential GDP; this variable can be extracted from the data using several approaches, which can give different results. This section explores two approaches to estimating potential output: statistical methods and the production function approach. It then draws comparisons with other estimates by the Slovak authorities, the EC and the OECD.

Statistical methods

10. Statistical methods provide a straightforward measure of potential output. These methods consider potential output as an equilibrium concept that can be extracted from actual output data. This equilibrium could follow an arithmetic trend—such as linear, polynomial, or exponential. Alternatively, potential output can be estimated through filtering techniques, the most popular of which is probably the Hodrick-Prescott (HP) filter. This filter smoothes the output series by minimizing the sum, over the sample period, of squared distances between actual and potential output at each point in time, subject to a restriction on the variation of potential output over time. The restriction parameter λ captures the variance of cyclical shocks to output relative to that of trend output shocks, and thereby controls the smoothness of the trend series: smaller values of λ indicate a smaller importance of cyclical shocks relative to shocks to the trend, and hence yield a smoother trend series.

11. Statistical methods to measure potential output are attractive for their simplicity, but they carry significant shortcomings. Only the output data are needed to derive potential output using these methods; hence, their simplicity. However, because they are not model based, statistical methods yield results that are not necessarily supported by an economic interpretation. Also, they ignore structural breaks in the data. Additional shortcomings are specific to the HP filter. First, considerable discretion governs the choice of the parameter λ—practitioners typically set λ equal to 100 for annual data and 1,600 for quarterly data, but λ should ideally be tailored to a country’s business cycle pattern and structural developments. Second, the HP filter is susceptible to what is often referred to as the “end-point problem,” caused by the asymmetry inherent in the filter at the extreme points of a time series. Therefore, the results for the extreme points of the sample are biased—although the bias can be corrected by extending the data with projections before running the filter and dropping the results for the extreme points of the extended sample.

12. Figure 7 shows Slovakia’s potential output as measured by various arithmetic trends. Linear, quadratic, and exponential trends were fitted to annual real GDP data for the period 1993–2004.30 The results indicate that trend growth—no matter which statistical trend is used to measure it—averaged 4.1 percent over that decade, and that real GDP was growing above trend throughout the period except during 1999–2001. Thus the output gap, which measures the difference between actual and potential output, turned negative during 2000–03, indicating that actual output was below potential. This gap closed again in late 2003 and the level of GDP exceeded trend in 2004.

13. Applying the HP filter to the data to derive trend output leads to similar results (Figure 8). The HP filter was applied twice, once with λ equal to 100, as suggested by the literature, and a second time by setting λ equal to a smaller number, 20. The motivation for choosing a smaller value for λ was to explicitly reduce the importance of cyclical shocks in explaining output fluctuations, because the significant structural changes to the economy throughout the past decade probably played a greater role in output fluctuations in Slovakia than would be captured by setting a standard value for λ. The results obtained for potential output growth and the sign of the output gap correspond to those obtained from arithmetic trends. In both versions of the HP filter-as in the statistical trends depicted in Figure 7-actual output exceeded its potential level in two instances: during 1996–98 and in 2004. At all other times, the economy seems to have been operating below potential, with the negative output gap the largest in the year 2000, and a greater gap associated with a larger value of λ.

Figure 7.
Figure 7.

Slovak Republic: Real GDP and Arithmetic Trends, 1993–2004

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A003

Sources: Slovak Statistical Office data; and IMF estimates and calculations.
Figure 8.
Figure 8.

Slovak Republic: Real GDP and HP-Filtered Trends, 1993–2004

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A003

Sources: Slovak Statistical Office data; and IMF estimates and calculations.

14. The output gap patterns depicted in Figures 78 are broadly consistent with economic developments in Slovakia through 2002. Indeed, the positive output gap in the mid-1990s can be associated with the strongly expansionary fiscal policy at the time. Real government consumption growth exceeded 8 percent per year on average during 1996–98, spurring strong domestic demand growth and a rise in the current account deficit close to 9 percent of GDP per year over the same period. Similarly, the negative output gap in 1999 can be associated with fiscal tightening in late 1998. The government’s restrictive program included large price adjustments each year during 1999–2001, which squeezed households’ real purchasing power. The program also incorporated significant government spending cuts, particularly in 1999–2000. Hence, a negative output gap emerged and widened progressively until end-2000, when it started to close as domestic demand picked up again—initially driven by government consumption but later also by private consumption.

15. However, the output gap patterns are inconsistent with more recent economic developments. The statistical methods suggest that the output gap was closed toward the third quarter of 2003, which is hard to reconcile with national accounts data that point to falling domestic demand throughout 2003. This result turns out to depend on the sample choice (ending in 2004). Implementing the statistical detrending methods on an enlarged sample—extended to 2009 with staffs medium-term GDP projections—yields a negative output gap in 2004, which only closes again around 2006 (Figure 9).

Figure 9.
Figure 9.

Slovak Republic: Output Gap Measures, 1993–2009

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A003

Sources: Slovak Statistical Office data; and IMF estimates and calculations.

The production function approach

16. The production function approach models potential output as a function of potential labor and capital inputs and potential factor productivity. Potential output is assumed to evolve according to the following equation:

Y*=A*×L*a×K*(1a),(1)

where L* and K* refer to potential (or full-employment) labor and capital inputs (as defined below), α is the labor elasticity of output, and A* is potential total factor productivity (TFP). Assuming wages reflect the marginal product of labor, α is also equal to the labor share in total output.31 Estimating potential output thus requires the identification of full-employment input levels, potential productivity, and the labor share. Although there is considerable uncertainty surrounding these variables, this approach has a significant advantage in that it relies on a simple model: it is based on an economic rationale and is straightforward to implement. The remainder of this section estimates a potential output series for 1993–2004 for Slovakia based on equation (1) and derives medium-term projections for the series by projecting the variables on the right-hand side of that equation.

Full-employment labor

17. Full-employment labor is that part of the potential labor force that can be employed without triggering inflationary pressures. However, both this share and the potential labor force itself are unobserved variables. For example, the potential labor force, in particular, can differ from the actual labor force when scarce labor demand during recessions discourages labor force participation. Rather than estimating these two hidden variables to calculate full-employment labor, this chapter uses the trend underlying the actual employment time series as a measure of full-employment labor. The advantage of this approach is that only one unobserved variable has to be estimated.

18. Figure 10 shows full-employment labor estimated using the HP filter. Potential labor declined during 1998–2001 because of enterprise restructuring. It picked up again during 2002–04 as the restructuring process started bearing fruit and foreign investment generated job creation. Over the medium term (2005–09), we project potential employment growth to accelerate slightly compared with the early 1990s, as depicted by the broken line in Figure 10, in view of the anticipated job creation associated with structural reforms and with both announced and other expected investment projects.

Figure 10.
Figure 10.

Slovak Republic: Employment Levels

(In thousands)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A003

Sources: Slovak Statistical Office; and IMF estimates and calculations.
Labor share

19. We calculate the labor share as the share of labor income in total value added, based on national accounts data. Labor income is derived from two sources: wages and salaries, and income of the self-employed.32 However, no separate data are available on the latter: it is included in gross mixed income, the balancing item in the generation of income accounts. Assuming that 30 percent of that balancing item is income accrued to labor, total labor share is therefore estimated at 0.55 for the period 1993–2004. This average share is assumed to remain constant over the medium term.

Full-employment capital

20. We assume that full-employment capital is equal to actual capital. There are no official data for Slovakia’s capital stock, although the Statistical Office is calculating it for the years 1998 and 1999. We use preliminary 1998 capital stock data prepared by the Statistical Office,33 plus national accounts data on fixed capital formation and capital consumption for 1993–2004, to calculate a capital stock time series for that period. To project that series in the medium term, we assume that capital will continue to depreciate at 4 percent (a rate comparable to the historical average rate of depreciation) while projected fixed investment34 will add to capital. The capital stock data are then deflated with the investment price deflator to obtain a real capital stock series (Figure 11). The capital stock was rising fastest in the mid-to-late 1990s, following capital destruction in the early stages of the transition period. The size of anticipated investment projects suggests that capital will again accumulate at strong rates over the medium term.

Figure 11.
Figure 11.

Slovak Republic: Capital Stock Estimate

(Sk trillion, constant 1995 prices)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A003

Source: Slovak Statistical Office; and IMF estimates and calculations.
Figure 12.
Figure 12.

Slovak Republic: TFP Growth

(In percent)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A003

Source: IMF estimates and calculations.
Potential TFP

21. We estimate potential TFP from the data as follows. We first calculate actual productivity growth by using in equation (1) actual employment and capital (estimated above) as inputs;35 actual real GDP for output; and 0.55—the labor share estimated from the data—as α. We then detrend the resulting times series using the HP filter to obtain trend productivity growth (Figure 12). After having declined in the initial stages of the transition, productivity growth picked up in 2000. Trend productivity growth seems to have peaked in 2004 but is assumed to continue at robust rates in the medium term, sustained by technological progress, which is driven by foreign direct investments.

Potential output

22. Using the series derived above for L*, K*, and A* in equation (1) gives a time series of an estimate for potential output for the period 1993–2009.36 The results broadly agree with those obtained from the statistical approaches. Indeed, actual real GDP growth turns out to have exceeded potential growth for the entire sample period except during 1998–2001 (Figure 13), as suggested by the results obtained from statistical methods (Figures 78). Also, all results imply that the output gap was positive in the mid-1990s but turned negative in 1999 (Figures 78 and 14). Potential growth has averaged about 4 percent since 2001 but is expected to reach 4½ percent on average in the medium term.

Figure 13:
Figure 13:

Slovak Republic: Real GDP Growth

(In percent)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A003

Sources: Slovak Statistical Office; IMF estimates and calculations.
Figure 14.
Figure 14.

Slovak Republic: Actual and Potential GDP

(In billions of koruna at constant 1995 prices)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A003

Sources: Slovak Statistical Office; IMF estimates and calculations.

23. Slovakia’s estimated potential growth rate compares favorably with the euro area average, but faster employment and capital growth will be needed to reach the rate of that area’s best performers (Table 3). Denis, McMorrow, and Röger (2002) find that average potential growth in the euro area was 2½ percent during 2001–03 and should remain around that rate over the next few years. Potential growth ranges between 1¾ percent and 3¼ percent for all euro area countries, lower than Slovakia’s, except for Ireland and Luxembourg. Slovakia’s potential growth has been much lower than that of the latter two countries because of lower employment and capital growth. As these inputs have grown only modestly in the past, their growth is projected to remain modest in the medium term (Table 4). Structural efforts that boost employment and/or capital growth could improve Slovakia’s performance, bringing its potential growth closer to the level of Luxembourg or Ireland.

Table 3.

Slovak Republic and Euro Area: Potential Growth Comparisons

(Average for 2001–03, in percent)

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Sources: Denis, McMorrow, and Röger (2002); and IMF estimates and calculations.
Table 4.

Slovak Republic: Decomposition of growth, 1994–2009

(In percent)

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Sources: Slovak Republic’s Statistical Office; and IMF estimates and calculations.

24. TFP has been the main driver of potential growth (Figure 15). Indeed, throughout the past decade, labor and capital growth can explain only about 10 percent of potential output growth, with the residual associated with TFP growth. The role of the latter declined during the 1990s, while that of capital accumulation increased, contributing in 1998 almost 1 percentage point to potential output growth. The contribution of labor has remained negligible, although it should increase with the pickup in potential employment over the medium term.

Figure 15
Figure 15

Slovak Republic: Contributions to Potential Output Growth

in percent

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A003

Source: IMF estimates and calculations

25. These estimates of potential output provide information on the current degree of slack in the economy. Figure 16 plots the output gap associated with the production function estimate of potential output. A negative number indicates that actual GDP was below its potential level. The output gap seems to have been negative and large in 1999–2000 but has been narrowing since then. In 2004, the gap was still negative but rapidly closing, reaching about ½ of a percentage point of potential GDP, compared with about 1½ percent in 2003. Indeed, large increases in administered prices and indirect taxes had contributed to a decline in consumption and, hence, a continued significant output gap in 2003; however, strong wage growth and direct tax cuts in 2004 supported an increase in private demand, which helped close a large part of that gap.

Figure 16.
Figure 16.

Slovak Republic: Output Gap

(In percent of potential output)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A003

Source: IMF estimates and calculations.

26. According to staff medium-term projections, the output gap is expected to close by 2007. Actual GDP growth is likely to remain robust from 2005 on, supported by both domestic demand growth and strong exports. However, large investments—particularly in car manufacturing plants—will at the same time also contribute to a capacity expansion and hence to potential output growth. This potential is expected to remain unexploited until 2007, when significant additional labor is hired and production actually begins in the finished plants, thus boosting GDP growth and helping to close the gap.

A comparison of various output gap estimates

27. This subsection compares the above production function estimates of the output gap with those derived by the Slovak authorities, the European Commission, and the OECD. The Ministry of Finance of the Slovak Republic (MoF) and the National Bank of Slovakia (NBS) provided separate estimates of Slovakia’s potential output and output gap to the 2004 Article IV consultation mission. The European Commission’s estimates are published in the Autumn 2004 Economic Forecasts (European Commission, 2004). The OECD estimates are inferred from the 2004 Economic Survey of the Slovak Republic (OECD, 2004a) .

28. The NBS and the MoF follow different methods to estimate potential output. The NBS uses a multivariate Kalman filtering model with unobserved components that jointly estimates potential output, and equilibrium interest and exchange rates. This approach combines statistical filtering techniques with macroeconomic modeling. The NBS adjusts potential output to reflect (i) a permanent shock in 2003 from Volkswagen’s opening of a new production line of Touareg vehicles and (ii) a temporary shock in 2004:Q1 from the leap-year effect—the latter estimated at 1 percent year on year in the first quarter (Gavura 2004). MoF estimates are based on a production function, similarly to IMF estimates (Ministry of Finance of the Slovak Republic, 2004); however, the two estimates differ, mainly because of different estimates of the capital stock and the labor elasticity of output.

29. The output gap estimates derived in this chapter fall between those of the NBS and the MoF (Figure 17). The three results are broadly comparable over the period 1994–99. From 2000 on, however, the results diverge in terms of magnitudes of the gap. For 2004, the output gap estimated by the MoF is only slightly negative, at minus 0.1 percent, while IMF estimates point to a negative gap of ½ percent; the NBS sees much larger slack in the economy, estimating a negative output gap of 1½ percent of potential output. 37 The three institutions also have differing near-term projections for the output gap: the NBS anticipates continued slack during 2005–07, while the MoF expects the economy to be operating close to potential; IMF gap estimates fall in between.

Figure 17.
Figure 17.

Slovak Republic: Comparison of Output Gaps

(In percent of potential output)

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A003

Sources: NBS; MoF; and IMF estimates and calculations.

30. Potential output estimates by the OECD and the European Commission also give different messages regarding the degree of slack in the Slovak economy. The OECD estimates are based on statistical filtering methods and the European Commission estimates on the production function approach. These estimates, like the IMF and NBS estimates, point to a progressively closing gap since 2000. However, they differ on the size of the gap over time. In particular, while the OECD estimates suggest a large negative gap for 2004, perhaps close to the one estimated by the NBS,38 the European Commission’s 2004 autumn forecasts point to a very small output gap, if at all negative, in 2004 (Table 5).

Table 5.

Slovak Republic: Output Gap Estimates

(In percent of potential output)

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Notes: EC(a) refers to the European Commission’s estimates from a production function approach; EC(b) refers to the European Commission’s estimates from an HP filter approach. Sources: IMF estimates; and European Commission (2004).

31. Selected high-frequency indicators confirm that the output gap narrowed in 2004. In periods where the output gap is closing, pressures are likely to arise in the form of inflation and wage increases, and strong demand—as captured by retail sales or economic sentiment, for example.39 Figure 18 plots these variables for Slovakia. Inflation—measured excluding food, fuel, and administered prices—and the indicator of economic sentiment do not necessarily reflect a rise in underlying pressures in 2004 from 2003, although the economic sentiment indicator rose significantly during 2004. However, the remaining indicators give an opposite signal. Indeed, 2004 saw a strong increase in retail sales and real wages, which suggests that the output gap may have narrowed significantly.

Figure 18.
Figure 18.

Slovak Republic: High-Frequency Indicators, 2001–04

Citation: IMF Staff Country Reports 2005, 072; 10.5089/9781451835502.002.A003

Source: Slovak Statistical Office; National Bank of Slovakia; and IMF calculations

D. Conclusion

32. Slovakia’s growth potential over the medium term looks to be robust. Potential investment projects are likely to raise capacity and increase employment opportunities and factor productivity. Based on the production function method, potential growth in Slovakia could average 4½ percent over the next few years. However, this growth rate may be underestimated because the effect of the important recent structural reforms on the economy’s fundamentals and, hence, on growth are hard to quantify. Indeed, recent labor market and legislative reforms could boost productivity or factor input accumulation beyond the levels estimated in this chapter, and raise potential growth close to the levels estimated for Luxembourg or Ireland (5–6 percent).

33. Various indicators suggest that the degree of slack has been diminishing. Although different measures of potential output give different results for the output gap, they all show that this gap is narrowing in 2004–05. Developments in consumer demand and real wages are also consistent with a significant reduction of the output gap in 2004.

References

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26

Prepared by Nada Choueiri.

27

Both the IMF and the World Bank supported the government’s reforms, and the OECD praised Slovakia in 2004 as a top reformer in the region. For more details on the government’s reform program, see the IMF staff reports for the 2003 and 2004 Article IV consultations (www.imf.org).

28

This view was voiced by several institutions, including the World Bank (2004), the OECD (2004b), and the major rating agencies.

29

For details on policy measures that could increase the employment of Slovakia’s labor force, see the IMF staff report for the 2004 Article IV consultation (www.imf.org).

30

Since actual data were only available for the first three quarters of 2004, the staff’s estimate for the fourth quarter was used to derive annual GDP data for that year. The trends were also estimated for quarterly data and yielded similar results.

31

In other words, if W is the economywide wage level, then assuming W=dY/dL implies that the labor share, WL/Y, is given by WL/Y = (dY/Y)/(dL/L) = α.

32

The share of labor income from wages and salaries alone in total value added is 0.48.

33

Capital stock data for 1998 remain subject to considerable uncertainty, which affects the capital stock series and, hence, potential output estimates.

34

Medium term projections for fixed investment are from the IMF staff report for the 2004 Article IV consultation (www.imf.org).

35

In the absence of reliable data on capacity utilization, it is assumed that the existing capital stock is always being fully used in actual production.

36

An initial value is needed to scale the potential output series. We assume that the output gap closed during 1995, as suggested by the statistical detrending of actual output (Figures 7–8).

37

The NBS calculations of the output gap will be published in a paper forthcoming in 2005.

38

See OECD (2004a), p. 27 for details. The Survey does not quote any numbers but includes a graph that points to an output gap of about −1½ percent of potential GDP in 2004.

39

Data on capacity utilization would be desirable to assess the degree of slack in the economy, but the data available for Slovakia are not reliable.

Slovak Republic: Selected Issues and Statistical Appendix
Author: International Monetary Fund