Czech vs. Slovakia: Slovak outperformance has yet to prove permanent
3.06.2014Company: Amcham
Czech vs. Slovakia: Slovak outperformance has yet to prove permanent
- Slovakia clearly outperformed the Czech Republic in terms of economic growth from 2008-2013, posting 1.0% GDP growth p.a. on average against Czech’s 0.5% p.a. decline.
- Our analysis does not point to one driver in particular that explains Slovakia’s outperformance but rather to a variety of factors. Net exports rather than domestic demand were the primary driver of the divergence. Slovakia’s lower tax burden also played a role, as did a number of one-offs.
- The surge in FDI resulting from entry to the EU materialized later in Slovakia than in Czech, aiding growth in recent years. Post-2008, FDI inflows continued into manufacturing in Slovakia but not in Czech.
- The share of high-tech manufacturing in total GVA grew more in Czech (1.2 p.p.) than Slovakia (0.8 p.p.) between 2008 and 2012. Knowledge-intensive services, however, is the sector where Slovakia has overtaken its neighbor the most in terms of GVA over the last five years. Notably, its support services subsector added 0.2 p.p. more to GDP growth per annum than did Czech’s, as Slovakia’s EMU membership supported the emergence of various outsourcing centers.
- A lower tax burden has also aided Slovakia’s competitiveness. At 6 p.p. of GDP, the gap in the tax burdens between the two countries has been constant since 2006. Fiscal policy was only marginally more restrictive in Czech in 2009-2013, but importantly, discretionary measures resulted in larger cuts in public investment during 2011-2013.
- The currencies of each country looked overvalued against long-term fundamentals in 2009-13 but, unlike in Czech, this didn’t prove to be an obstacle to real GDP convergence in Slovakia.
- For the coming years, we expect the two countries’ GDP growth rates to converge, unless growth is boosted by new policy measures in one country.
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