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Slovenian Economic Mirror: Amid good labour market conditions, a rising impact of demographics and a strengthening of wage growth

In Slovenia economic activity increased further towards the end of the year in most sectors; the rising value of the composite economic sentiment indicator is already close to its pre-crisis peak. The increase in employment and the decline in unemployment continued; wage growth was also higher in the recent period, following several years of only modest improvement.

In the euro area, the slightly higher-than-expected economic growth continued in the last quarter of 2017; short-term growth prospects are improving further. Economic activity in the euro area rose in all sectors, with confidence indicators already exceeding those before the crisis. International institutions, most recently the IMF, have revised upwards their growth forecasts for both the global and EU economies. The IMF estimates risks to the growth forecasts for this year and next as balanced, but tilted to the downside over the medium term, particularly owing to the threat of accumulation of financial risks, protectionist policies and geopolitical tensions.

In Slovenia economic activity also increased further towards the end of the year in most sectors; the value of the composite economic sentiment indicator is the highest in ten years. The high year-on-year growth in exports of goods and services continued, boosted by stronger foreign demand. Growth in manufacturing output intensified, driven not only by an increase in foreign, but also further growth in domestic demand. The increase in household consumption, supported by favourable labour market conditions, was highest in the segments of some durable and semi-durable goods and in leisure activities, which, together with higher exports of services, positively affected turnover in most service sectors. A further recovery in the property market, alongside higher investment expenditure by the government, contributed to an increase in construction activity. The high values of consumer and business confidence indicators are rising further.

The increase in employment and the decline in unemployment continued; wage growth was also higher in the recent period, following several years of only modest improvement. Towards the end of last year, the number of employed persons rose further, most notably in manufacturing, trade, transportation, and employment activities. Meanwhile, more and more enterprises, particularly in manufacturing, are facing a shortage of workers with the appropriate skills, which, among other things, is contributing to increased recruitment of foreigners. With smaller inflows into unemployment and with hiring, the number of registered unemployed continued to fall. In December it was 14.6% lower than one year earlier.  Average gross earnings in the first 11 months of 2017 were up 2.7% year on year in both the public and the private sectors. Wage growth remains lower than in the pre-crisis period, however, and does not exceed productivity growth, meaning that it is not causing any visible imbalances as yet.

Year-on-year growth in consumer prices rose somewhat at the end of the year. The main contributors to December’s growth (1.7% year on year) were higher prices of energy and food. The contribution of prices of clothing and footwear also increased relative to preceding months, while the contribution of service prices declined. The movement of core inflation does not indicate any major pressures on price growth.

The volume of loans to domestic non-banking sectors rose last year for the first time since 2010. The growth in household loans, having started in 2015, continued. The volume of corporate and NFI loans has also been increasing modestly since the middle of last year. After seven years of deleveraging, enterprises were increasing particularly the demand for investment loans and working capital loans, while the demand for loans for refinancing slowed.

Owing to the continuation of strong revenue growth, the deficit of consolidated general government budgetary accounts was substantially lower in the first 11 months of 2017 than in the same period of preceding years. Expenditure growth otherwise strengthened slightly in November owing to the payment of matured financial liabilities of hospitals. Amid favourable economic trends, the high growth of tax revenues and payments of social contributions continued, maintaining a relatively low general government deficit on a cash basis.