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Slovenian Economic Mirror: Broad-based economic growth in Slovenia accelerated further in the first quarter of this year

Broad-based economic growth in Slovenia accelerated further in the first quarter of this year; GDP was up 5.3% year on year. Growth in foreign demand and competitiveness gains continue to boost the growth of exports and related activity in manufacturing and some segments of market services. A significant improvement in labour market conditions and the high level of consumer confidence are the main drivers of further growth in private consumption. Investment in machinery and equipment continued to grow; construction investment also started to pick up at the beginning of the year. Inflation is mainly a consequence of higher prices of energy and services due to supply-side factors and the strengthening of consumption. The favourable economic trends are reflected in strong growth in general government revenue, which, amid moderate expenditure growth, contributed to a further decline in the general government deficit.

Broad-based economic growth in Slovenia accelerated further in the first quarter of this year; GDP was up 5.3% year on year, recording the strongest growth since the second quarter of 2008. The favourable developments from 2016, the most successful year since the onset of the crisis according to companies’ performance data, thus continued. In the first quarter of 2017 the quarterly growth strengthened further (1.5%, seasonally adjusted) and GDP exceeded the average level from 2008. Amid further growth in exports, household consumption and investment in machinery and equipment, construction activity also started to pick up this year. GDP growth was again significantly higher than the average of the euro area (1.7% year on year), which means a continuation of the three-year period of faster growth and, in turn, decline in the gap with the average development in the EU.

Growth in foreign demand and competitiveness gains continue to boost the growth of exports and related activity in manufacturing and some segments of market services. Economic conditions in the euro area and most of Slovenia’s main trading partners improved further at the beginning of this year. With rising foreign demand, the growth of Slovenian exports strengthened further (8.7%). The same holds true for manufacturing production, which continued to grow across industries of all levels of technological intensity. Export movements are also related to turnover growth in some segments of market services, particularly transportation and computer services. Further growth in the number of foreign tourist arrivals and overnight stays was reflected in higher turnover in accommodation and food service activities.

A significant improvement in labour market conditions and the high level of consumer confidence are the main drivers of further growth in private consumption (4.0%). In the first quarter employment continued to increase (2.6%, according to the national accounts statistics), the number of employed persons being almost 25,000 higher than in the same period of last year. Employment was rising across almost all sectors; after a long period of time a noticeable increase was also recorded for construction. Moreover, short-term expectations remained the highest since the onset of the crisis. The year-on-year growth of average earnings remained moderate; like employment, earnings were also up year on year in most activities. Favourable labour market conditions contributed to a further improvement in consumer confidence, which is the highest thus far this year. Consequently, private consumption also rose further. Households continue to increase spending particularly on durable goods, but also on other goods and services, which account for the bulk of consumption. Consumption growth is also reflected in further turnover growth in the distributive trades.

Investment in machinery and equipment continued to grow; construction investment also started to pick up at the beginning of the year. Growth in investment in machinery and equipment is related to high capacity utilisation, good business performance and lower corporate indebtedness. At the beginning of the year construction investment also started to rebound. In addition to the continuation of growth in housing investment, which started last year with the revival of the housing market, non-residential investment is also on the rise, private sector investment in particular according to our estimate. The growth of total investment activity is estimated to be also influenced by more favourable financing conditions than a few years ago and the first signs of rebound in the borrowing activity of companies. After last year’s significant fall in government investment (related to the modest absorption of EU funds upon the transition to the new financial perspective), the state budget’s investment expenditure at the beginning of the year remained similar to that at the same period of last year.
 
Year-on-year inflation stood at 1.5% in May, being still mainly due to higher prices of energy and services under the impact of supply-side factors and a rise in demand. Higher energy prices are influenced by year-on-year rises in oil prices on world markets, although oil prices have dropped again since the beginning of the year. The growth of services prices is mainly related to the strengthening of private consumption. Price rises are recorded particularly for services related to leisure (accommodation and food service activities). Non-energy prices remain similar year on year despite higher consumption.

The favourable economic trends are reflected in strong growth in general government revenue, which, amid moderate expenditure growth, contributed to a further decline in the general government deficit. In the first quarter of 2017 the general government deficit on a cash basis (EUR 375.6 million) was one third lower than in the same period last year; the primary balance turned positive. The strong revenue growth (7.4%) in the first quarter was mainly due to favourable economic conditions, including the situation on the labour market. The significantly more moderate growth of expenditure (2.6%) was largely a consequence of stagnant government investment and lower payments into the EU budget.