Slovakia catching up with the EU economy faster than Czechia

Slovakia catching up with the EU economy faster than Czechia
Slovakia is closing the gap with the rest of the EU faster than Czechia, although Czechia remains ahead overall
By Jaroslav Hroch in Prague March 30, 2018

Slovakia is closing the economic gap with the EU faster than Czechia, but still lags behind the Czech economy level in overall terms, a new CSOB study for to the 25-years anniversary of the split between Czechia and Slovakia says, released to the media on March 29 in time of the anniversary.

Czech GDP per capita was 88% of the EU average in 2017. This means that the Czech Republic narrowed the gap with the EU by 12 percentage points (pp) since 2015.

Slovak GDP per capita grew by 29 pp during the same period. However, it started from a lower position than Czechia: Slovak GDP per capita was 77% of the EU average in 2015.

Czechia and Slovakia entered the EU in 2004, but in 2009 Slovakia adopted the Euro, whereas Czechia has yet to do so.

“Not even during the most extreme outside economic pressure, which both countries were facing [during the global financial crisis], the adoption of the euro did not provide an undisputable economic comparative advantage,” said the chief economist of CSOB Martin Kupka.

The most common and also the riskiest feature of both countries is the dependence on car industry. Slovakia and Czechia are producing over one million of cars annually that accounts for 13% of the total EU car production.

The dominant brand in Czechia is Skoda. For Slovakia, it is Kia, which celebrated 3mn produced cars from its factory in Zilina. Kia produced 335,600 vehicles and 539,987 engines in 2017. Another important carmaker is Jaguar Land Rover and its new production factory in Slovakia, will employ as many as 6,000 people in its base of Nitra.

When measured in per capita terms, the countries are the top two producers worldwide in terms of production. “To the relatively high dependence on the car industry you can add the high share of this industry in the overall added value production. Both countries are thus at the mercy of the cyclical demand for new cars in Europe, which is at a peak right now,” added an analyst of CSOB Petr Dufek.

Both countries also have problems with the structural development in the regions. For example, the Bratislava region was the sixth most productive region in the European Union in 2017, at 184% of the European average GDP per capita production on a purchasing power parity (PPP) basis, according to the Statistical Office of the European Union (Eurostat). Czechia's Prague region was at 182% of the EU average and finished seventh. Both Prague and Bratislava have better results than Vienna, Bremen, East London and Stockholm.

However, what seems to be good result can easily go bad. Although the two regional capital cities are flourishing, other regions in both countries are significantly underdeveloped. The cause is that the capitals have too dominant a position, as well as corruption, the misuse of European funds and bad regional policies.

The Czech regions in the northwest and the northeast have the worst economic results – 63% of EU average and 72% respectively. Other regions are not much better – spread between 81% in the southeast and 75% in the Moravian-Silesian Region.

The regions in Slovakia show the same sort of spread in productivity and progress, but the gap between top and bottom is even wider. The west of the country was 72% of the EU average, mid-Slovakia 61% and the east only 53%.

The biggest dissimilarity is in the labour market. The difference between the Czech and Slovak unemployment is at least 4 pp. However, in a recent development, the Slovak labour market is catching up with the Czech one slowly and unemployment dropped to a historic low of 5.72% in February versus 3.7% in Czechia for the same month.

On the other hand, Slovakia is facing both high unemployment rate and a slow growth in job vacancies over the long term.

“There is the situation when Slovaks are leaving and looking work in Czechia, which is now essentially dependent on the influx of foreign workers,” added Dufek.

This will cause problems in the long term due to the reluctance of the Czech government to grant work permits to the foreigners as well as strong anti-immigrant sentiments in part of society. With Slovaks, the situation is different since both nations are very close to each other and have almost the same language.

A final issue is the question of higher education system in Slovakia, as a lot of students are also leaving Slovakia to attend Czech universities. Slovaks can study for free in Czechia under a mutual agreement on education. However, only small portion of Czech students travel in the other direction for their education, which is creating tensions.