(Adds Finance Minister comments in paras 17-18)
By Peter Laca
BRATISLAVA, June 3 (Reuters) - Slovak GDP growth slowed down
in the first quarter but the central European country remained
the EU's hottest economy, at risk of an inflation rise at the
time of euro adoption planned for next year.
The Statistics Office said real first-quarter gross domestic
product rose by 8.7 percent on an annual basis, matching the
flash estimate released on May 15.
Slovakia, which is set to become the 16th member of the euro
zone next year, has had one of the highest GDP growth rates in
the European Union since joining the bloc in 2004.
Expansion peaked at 14.3 percent in the last quarter of
2007, helping the central European country narrow the wealth gap
with the richer west. Slovakia's GDP per head is estimated at 71
percent of the EU average this year.
Resurgent domestic demand, fed by rising household
consumption after years of belt-tightening reforms, has helped
keep the headline figure up.
Investment has been rising, mainly thanks to large projects
like those of car makers PSA Peugeot <PEUP.PA> of France, South
Korea's Kia Motors <000270.KS> and electronics firms Samsung
<005930.KS> and Sony <6758.T> building new factories.
Exports were a key factor behind growth in recent quarters,
but the structure appeared to be shifting more towards domestic
consumption this year.
"Growing domestic demand should be the main driver of
economic growth also in the coming quarters," said Frantisek
Bernadic, head of the National Accounts Department at the
Statistics Office.
Analysts pointed to accelerating household spending as a
possible source of upward pressures on consumer prices.
Separate data showed 6.2 percent real wage growth in the
first quarter, which observers said was also adding to possible
inflation risks.
"Further acceleration in household consumption supports our
view that the NBS has to be cautious as demand-led pressure on
inflation is likely to rise gradually," said 4Cast analyst Piotr
Matys.
"Thus we expect the central bank to keep rates on hold in
coming months."
Bernadic said, however, that in the Statistics Office's view
the economy did not appear to be overheating so far.
The central bank NBS will have to align its interest rates
with the euro zone as part of the euro adoption process, a move
that will take away independent monetary policy and thus put the
burden of fighting inflation on fiscal policy.
The government has pledged to cut the budget deficit to keep
a lid on inflation.
The main Slovak two-week repo rate is now 4.25 percent, 25
basis points above the euro zone benchmark.
The government of leftist Prime Minister Robert Fico, who
has benefited from fast economic growth as it boosts state
budget revenues and covers part of his welfare agenda, said it
would raise its 7.5 percent forecast of full-year GDP growth.
"We are now going to revise up our growth forecast for this
year," Finance Minister Jan Pociatek said on the sidelines of
European Union finance ministers meeting.
CROWN NO HARM TO TRADE
First quarter GDP signalled that Slovakia's industries can
cope with a rising currency, which had firmed by 9.9 percent to
the euro in the first three months of the year, in local
currency terms.
The crown's rise accelerated in April and May as investors
expected the country to seek a strong conversion rate for the
euro adoption to contain future inflation pressures.
The rise had led to a 15 percent revaluation of the crown's
peg to the euro in the exchange rate grid ERM-2 last week.
The market widely expects the actual conversion rate for
swapping the crown for euro to be set around the new central
rate of 30.1260, which, the Statistics Office said, should not
be a major blow to Slovakia's trade.
"Even an eventual fixing of the conversion rate near the
30-crown level should not have a significant impact on foreign
trade balance," Bernadic said.
For GDP details, please click on [] []
(Reporting by Peter Laca)
(Editing by George Obulutsa)
