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Slovenian Economic Mirror: Economic activity continues to increase at a moderate pace, but it is expected to slow gradually

At the beginning of the second quarter, economic activity in Slovenia increased further in most sectors, while the growth of industrial production was lower than at the beginning of the year, reflecting more moderate imports. Activity in construction remains high. Strong growth also continued in most service activities, boosted by positive labour market developments. Employment is increasing further, amid a significant lack of appropriately skilled workers mainly on account of the hiring of foreigners, but also due to the hiring of unemployed. These are the key findings of the Slovenian Economic Mirror presented by the Institute of Macroeconomic Analysis and Development today.

At the beginning of the second quarter, economic activity in Slovenia increased further in most activities, but the growth of industrial production was lower than at the beginning of the year, amid more moderate imports. After the strong growth early in the year, manufacturing output increased further in most activities, yet at a more moderate pace. This is at least partly related to lower growth in exports as a consequence of (i) fluctuations of exports in a small number of activities, especially the surge in the pharmaceutical industry at the beginning of the year, and (ii) lower growth of economic activity in main trading partners. More specifically, short-term indicators of economic activity for the euro area, where Slovenia exports more than half of all goods, indicate somewhat lower growth in economic activity in the second quarter than in the first, while expectations regarding future economic trends in the euro area continue to deteriorate.

Economic activity and its growth slowed slightly in most sectors in Slovenia too

Activity in construction, which this year increased the most in the construction of buildings, remains relatively high; residential property prices are rising further. Due to worse weather conditions, construction output otherwise deteriorated in April for the second consecutive month, but remained high. The supply on the residential property market remains limited, despite this year’s faster growth in the construction of buildings, and property sales are easing. Residential property prices continue to increase, with signs of moderation in Ljubljana.

With further growth in employment and stronger wage growth, households continue to increase their spending on the majority of goods. Employment is increasing further, amid a significant lack of appropriately skilled labour mainly on account of the hiring of foreign workers, though also, to a somewhat lesser extent than in previous years, the hiring of the unemployed. Wage growth strengthened this year, which, along higher growth in social transfers and a further increase in household loans, continues to boost growth in private consumption. This is reflected in rapid turnover growth in accommodation and food service activities and further turnover growth in the sale of food and most non-food products, while turnover in the sale of cars to natural persons has stagnated for more than a year.

The growth of domestic consumption and the still relatively strong growth of international trade are reflected in the continuation of strong turnover growth in transportation, storage and several other service activities. The growth of imports is rising, amid the increase in domestic consumption, which keeps the growth of international trade relatively high despite the moderation of export growth. This, alongside growth in domestic consumption, continues to boost turnover growth in transportation and storage activities. Turnover growth also remains high in administrative and support service activities, while moderating in professional and technical activities after the period of strong growth. With rising domestic demand and the related strengthening of growth in Slovenian goods imports, the high surplus on the current account is gradually falling.

Despite strong growth in general government expenditure, the consolidated general government balance was higher year on year in the first five months. This was a consequence of further strong growth in revenues from taxes and social contributions, a smaller decline in non-tax revenues and lower interest payments than in the same period of last year. The strong growth of expenditure was due primarily to higher expenditures on wages, social transfers and investment.

In June inflation rose moderately, to 1.8%, being still main driven by prices of services. June’s increase in year-on-year consumer price growth reflected higher growth in prices of goods, food in particular, and a smaller decline in clothing and footwear prices than in June 2018. The year-on-year growth of Slovenian industrial producer prices remained relatively low in May, amid their further strengthening on the domestic market and a decline on foreign markets, where the demand is easing.

The still relatively high economic sentiment, which otherwise continues to deteriorate especially in manufacturing, indicates a continuation of moderate economic growth in the coming months. Amid significant uncertainty in the international environment, confidence in manufacturing is deteriorating further, pointing to more moderate growth in the coming months than in the first quarter. The prospects for the part of the economy that is focused predominantly on the domestic market are more favourable. Confidence thus remains high in construction, service activities and among consumers.