Home > Blogs > Max Growth A tale of a tortoise and a hare - and what it means for the property investor Very interesting data coming out of Slovakia these days that seems to create very favourable conditions for property investors. AND they create a telling contrast between the two European GDP growth leaders – Latvia and Slovakia. First of all, and rarely in the CEE, Slovakian inflation appears to be under control. Secondly, the data suggests that Slovakia is well on course to enter the Eurozone in 2009. The reason why this low inflation is so very significant is that Slovakia also has blisteringly hot GDP growth. And what we're seeing is a really benign alignment of factors – high growth, low inflation, plus two consecutive months of trade surplus, AND, in a little more than 12 months, the strong possibility of the economy anchoring itself to an highly secure currency zone. Pegging your currency to the euro is one thing – anyone can do that. But holding it and fulfilling the strictures of joining the eurozone and actually doing so, are something else. Slovakia must file its application to join by May next year. It appears to be on target. Eurozone qualifiers Only Slovenia has so far met the Eurozone’s so called Maastricht criteria and no other recently joined EU member is likely to join until at least 2010. Slovakia’s economy has been growing fast for a while now – but at an official 9.4% GDP growth year on year last month, the pace is truly blistering. So is Latvia’s, we can add. In fact its GDP growth rate is even higher, at over 11% year on year last quarter. But then we come up against the stark contrast. Latvia also has raging inflation at nearly 14%, with wage rises of 33% in the third quarter of this year. This is all made worse by the huge falls in Latvian unemployment levels – the jobless rate was over 9% in 2004 and now it’s just 4.9%, so there is unlikely to be a sudden end to wage rises. In Slovakia’s case we actually have falling inflation – from 3.3% in October, to 3.1% last month. And modest wage growth – during the first three quarters wage growth across the board was 6.9 % up. Then, of course, there’s Latvia’s massive current account deficit – a whopping 20% plus of GDP! So, despite Latvia’s red hot growth, spending power (and, of course, borrowing potential) in Slovakia is actually growing faster and is much more sustainable – whereas growth in Latvia at current rates clearly isn’t. Hard landings A hard landing then for Latvia and sustainable high growth for Slovakia? It looks that way. So, what’s driving Slovakia’s growth and its increasingly healthy looking trade surplus compared to Latvia’s yawning trade deficit? The answer is actually quite simple and can be summed up with the tortoise and hare story. No prizes for guessing which is the hare! While Latvia has blazed a trail, bingeing on borrowing, sucking in imports and failing to tackle an ever-widening trade deficit (financed by all that foreign borrowing), Slovakia, so long in the shade of it’s old twin, the Czech Republic, was quietly welcoming big investors. Tortoise effect These investors – primarily car manufacturers and ancillary services - typically have tortoise- like qualities; in other words, they take time to have an effect. But that was then. And now they ARE having an effect. Slovakia posted its second trade surplus in succession in October as exports powered ahead – exports, of course, driven (pun intended) by cars. The October surplus was modest - $109 million – but it’s significant because it compares with a trade deficit of 4.45 billion koruna ($195 million) just a year before. Exports went up an annualised 11% in October. Imports rose 5.3%. The deficit has been narrowing as newly built factories such as the car assembly plants of PSA Peugeot Citroen as well as Kia Motors upped production, joining the pre-exisiting output from Volkswagen’s factory. Such exports are always vulnerable to downturns in the importing economies, especially at a time of a credit crunch. Even so, this is an economy well placed to export its way to strength and success. The long term trend looks clear. Of course, car workers, while they can command good salaries, also have something of a salary ceiling. After all, the reason these car manufacturers moved to Slovakia in the first place was because they could find workers with the requisite skills – or skills enough to allow quick and easy training – PLUS the fact that these workers were relatively cheap. Unlike knowledge-based industries and services, a core cost of any manufacturing, even relatively highly skilled car making, is labour. It’s core because there is only so much efficiency that can ever be achieved – and as this increases, it gets harder and harder to create more productivity growth. Essentially then, while productivity matters a lot, you can’t really beat very low labour costs. So, what does all this amount to for the property investor? It means, I think, that in locations dominated by manufacturing - even relatively high-end motor manufacturing – that there will be a limited sized window to take advantage of very rapid property price growth. Exactly how long this window will stay open is hard to say, but it is likely that the early growth, as so often is the case, will be the fastest. But locations whose economies are driven by manufacturing will reach an affordability ceiling and after this period higher, very strong growth will be unlikely without a fundamental change in the nature of the local economies. A switch in emphasis away from manufacturing to services and, for example, truly hi-tech manufacturing, pharmaceutical research and development, and so forth. This can take years to achieve. Window of accelerated growth The likelihood is that in manufacturing-dependent areas of Slovakia we’ll see some three to five years of excellent growth before the ceiling is reached and that growth rapidly slows. What is clear is that, judging by property price growth, these areas are already taking off fast. The message then is pretty clear – act fast. For evidence of this take off, see This article. POSTED BY ROBIN BOWMAN ON FRI 14TH DECEMBER AT 18:00 GMT [ Back To Blog Home ]

CONTRIBUTORS Neil Lewis Robin Bowman Ben Greenwood Noreen Lucey Stanislaw Staromlynski Brett Tudor Panos Tsigaras First Name Last Name Email  BLOG POSTS Nov 2008 Oct 2008 Sep 2008 Aug 2008 Jul 2008 Jun 2008 May 2008 Apr 2008 Mar 2008 Feb 2008 Jan 2008 Dec 2007 A tale of a tortoise and a hare - and what it means for the property investor Polish rent rises – Independent data confirms rentals are surging Nov 2007 Oct 2007 Sep 2007 Aug 2007 Jul 2007  DISCUSS Comment On Blog Post  BOOKMARK THIS Del.icio.us Stumble It! Digg This Facebook Reddit

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