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The Slovak economy grew 6.6 percent in the second quarter of this year on strong household demand and investments, and may expand faster as new car factories boost output, pointing to further interest rate rises.

The Slovak Statistics Office gave no breakdown of the year-on-year figure in its preliminary gross domestic product (GDP) estimate on Tuesday, which topped a 6.3 percent rise in the first quarter and 6.4 percent forecast in a Reuters poll. "I expect once again that investments and household consumption are the drivers behind the data," said ING Bank senior analyst Lucia Steklacova.

The figure beat surprisingly weak second quarter growth of 3.6 percent in fellow new EU member Hungary, also reported on Tuesday. Household demand has been heating up Slovak inflation, prompting the central bank to raise the key repo rate by 150 basis points so far this year to 4.5 percent.

Consumer price growth jumped to 5 percent in July from 4.6 percent in June, and analysts predict more rate rises to curb inflation in order to qualify for euro adoption in 2009.

"Still strong consumer spending, which will add to already strong inflationary pressures, will not allow the central bank to sit idle, and we expect the board will go for yet another hike," Danske Bank said in a report.

The Slovak economy has grown rapidly as multi-national manufacturing companies take advantage of low labour costs and government aid.
Car factories built by PSA Peugeot-Citroen (PEUP.PA) and South Korea's Kia Motors Corp. (000270.KS) are raising output and analysts expect them to boost exports in the second half.

A second quarter 0.9 percent expansion in the euro zone economy, the strongest quarterly growth in six years, should also help Slovakia.
This "could have an impact (on the second quarter), but it is more likely to back solid growth in the third and fourth quarters, linked to the start of new output capacities in the car factories," said analyst Marek Gabris at bank CSOB.

The new government of leftist Robert Fico has said it will stick to the 2009 euro entry target, although analysts said this would also depend on whether spending promises are compatible with narrowing the budget gap to 3 percent of gross domestic product, another euro entry criterion.
The central bank has raised its end-2007 inflation estimate to 2.8 percent, above its 2.0 percent target, but still expects a drop in 2008 will meet the euro entry criterion.

The Statistics Office will publish a breakdown of the second quarter figures on Sept. 7. The crown currency dipped to 37.570 to the euro (EURSKK=) after the data from 37.530 ahead of the figures. One trader attributed the dip to shifts in other markets in the region rather than the growth data.

source: Reuters