By Jan Lopatka
PRAGUE, Feb 14 (Reuters) - The Slovak economy roared ahead
at record speed in the fourth quarter while Hungary slid toward
stagflation and Czech data raised inflation worries, exposing
how different policies affected the central European neighbours.
Slovakia, whose previous right-wing government kick-started
investments and growth by slashing taxes and liberalising the
labour market, reported a whopping 14.1 percent year-on-year
expansion in the fourth quarter, far beyond any forecasts.
Hungary posed a sharp contrast, with fourth quarter gross
domestic product, a wide measure of economic performance, rising
just 0.8 percent, below a market estimate of 1.5 percent,
according to official data.
The figures showed that Slovakia, which is on a path toward
euro adoption next year, was on a fast track to catch up with
the much richer euro zone where fourth quarter growth slowed to
2.3 percent year-on-year, according to Eurostat.
"The Slovak flat tax and its commitment to euro adoption
probably has helped to generate more FDI (foreign direct
investment), whereas in Hungary FDI is being deterred by
relatively high wage growth... and maybe higher tax regime,"
said Lucy Bethell, macroeconomist strategist at the Royal Bank
of Scotland.
"In many ways government policies have contributed to the
difference in the growth rates."
The Slovak figure was inflated by stockpiling of cigarettes
ahead of a January tax hike, but growth still hit 9.7 percent
excluding that effect, the statistical office said.
The Slovak economy grew 10.3 percent in the whole of 2007,
versus just 1.3 percent in the bigger neighbour.
"This morning we got more evidence that the Hungarian
economy is sliding into a stagflation -- high inflation and very
low growth," said Lars Christensen, economist at Danske Bank.
Hungarian Finance Minister Janos Veres, stung by comparisons
with what was once the country's much poorer neighbour, said on
Thursday that Hungary would start to narrow the gap and noted
that Slovakia's strong growth had its costs.
"How did Slovakia form the basis of that? They cut social
spending roughly by half ... Those who mention Slovakia as an
example should say that too," he told state television MTV.
Relations between Slovakia and Hungary have often been
strained, mostly due to disagreements over the rights of a
Hungarian minority in southern Slovakia, and mutual verbal
sniping is common.
MONETARY POLICY SQUEEZED
The poor Hungarian growth record is affected by the
government's drive to cut its budget deficit, which the
government aims to slash to 4 percent of GDP this year from
9.2 percent in 2006 and estimated 5.7 percent last year.
The weak figures will help the doves in the central bank,
while the risk of sustained inflation, which hit 7.1 percent in
January, will bolster the hawks, keeping chances of an interest
rate hike in the air.
The monetary policy dilemma may be shared in fellow central
European EU member, the Czech Republic, where producer prices
rose to a nearly 13-year high of 6.0 percent in January while
industrial output growth slowed to 2.9 percent in December,
keeping the option of one more policy tightening open as well.
Czech fourth quarter GDP, due out on Friday, is expected to
show a slowdown to 5.6 percent and more cooling is seen in 2008
as fiscal reforms aimed at cutting the budget gap kick in.
Poland will report GDP on Feb. 29, and markets expect 6 percent
growth.
Slovakia is unlikely to hike interest rates to brake the
economy as it needs to keep its setting close to the European
Central Bank with the looming euro zone entry. The EU will rule
on Slovak euro entry in the spring.
The European Commission instead called on Slovakia to slash
the budget gap below the planned 2.3 percent this year in order
to avoid a price jump after the crown is swapped for the euro.
"In theory, it should be fiscal policy (counteracting
overheating) but even fiscal gap close to 2 percent of GDP that
Prime Minister (Robert) Fico is now promising, seems to be
inadequate to such a strong growth," said Miroslav Plojhar, EMEA
economist at JP Morgan.
For Hungarian GDP story click on []
For Slovak GDP story click on []
(Additional reporting by David Chance in Budapest and Peter
Laca in Slovakia; editing by Tony Austin)
