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Slovenian Economic Mirror No 4/2017

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. 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 (4.0%). Investment in machinery and equipment continued to grow; construction investment also started to pick up at the beginning of the 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. 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 economic growth in the euro area continued. GDP in the euro area rose by 0.5% and was 1.7% higher year-on-year. Among Slovenia’s main trading partners, similar quarterly growth was recorded by Germany and Austria and slightly lower growth by France and Italy. In most countries the main factor of economic growth remains domestic consumption.

In its spring forecast for the euro area, the EC expects GDP growth in 2017 and 2018 to remain similar to that last year. GDP is expected to increase by 1.7% this year and 0.1 pps more in 2018. Against a backdrop of the ECB’s expansionary monetary policy, high business and consumer confidence, and growth in the volume of global trade, the EU economy will continue to be driven particularly by private consumption and investment. The risks to the forecast are more balanced than at the beginning of the year. Downside risks still predominate, particularly uncertainty regarding the future economic policy of the US, China’s economic adjustment, the low profitability of the European banking sector and the UK’s exit from the EU. Upside risk is mainly related to the decline in political uncertainty.

Oil and non-energy raw material prices are lower than at the beginning of 2017. After hovering around USD 55 early in the year, the average price of a barrel of Brent Crude was down around one-tenth in May. Oil prices are falling despite OPEC’s decision to reduce oil production at the end of 2016, which is related to the slow contraction in the surplus of oil supply and the rising shale oil production in the US. The prices of non-energy raw materials in dollars are also lower. In May they were down 3% on January. At the year-on-year level, on the other hand, the prices of oil and non-energy raw materials remained higher.

In the first quarter of 2017, economic growth accelerated further; it is becoming increasingly broad-based. Quarterly economic growth strengthened further (1.5%, seasonally adjusted), while GDP was up 5.3% year-on-year. The main driver of growth remains exports, backed by rising foreign demand and improvement in the competitive position of Slovenian enterprises. Exports are closely related to further growth in manufacturing production. The situation also continues to improve in most market-service activities, particularly the distributive trades, transportation, accommodation and food service activities and information and communication activities.  Positive labour market developments, with growth in employment and earnings, and a further improvement in consumer confidence have contributed to growth in private consumption (4.0%). Investment in machinery and equipment (mostly private investment) also continued to rise, which is related to the high level of capacity utilisation, good business results and lower corporate indebtedness; borrowing conditions are also better than a few years ago. Construction investment also started to pick up at the beginning of the year. 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 rising, particularly that of the private sector, according to our estimate. GDP growth significantly surpassed the euro area average again (1.7%), which represents a continuation of the three-year period of faster growth and hence a narrowing of the gap with the average development level in the EU.

The growth of real merchandise exports and imports strengthened further in the first quarter.  The growth of exports continues to be underpinned by rising foreign demand and competitiveness gains in manufacturing activities. The growth of imports is underpinned, in addition to favourable export trends, by the strengthening of domestic private and investment consumption.

Exports and imports of services remained high in the first quarter of 2017, following the sizeable growth in the second half of last year.  The growth of exports is underpinned primarily by higher exports of transport and technical, trade-related, services. The growth of imports arose mainly from transport services and professional and management consultancy services.

Production volume in manufacturing increased further in the first quarter of the year. Growth continued in all categories of industries according to technological intensity, remaining the lowest in low-technology industries. Growth in manufacturing production continues to be underpinned particularly by stronger foreign demand; sales on the domestic market are recovering at a slower pace.  Reflecting the strengthening of demand, capacity utilisation is high, and the majority of enterprises expect further growth in production and hiring in the second quarter of the year.

After remaining approximately unchanged in the second half of last year, the value of construction output strengthened in the first quarter of 2017. Amid a general improvement in economic conditions and a gradual rebound in the property market, the construction of buildings has recently started picking up. Activity in the construction of residential buildings, having started to pick up mid-2015, remained unchanged in the last two quarters. Activity in the construction of non-residential buildings, which started to recover mid-2016, continued at the beginning of 2017. The construction of civil-engineering works, which dropped sharply last year due to lower government investment, rose in the first quarter.

The growth of investment in machinery and equipment continued at the beginning of the year. It is attributable to the rising demand and the high rate of capacity utilisation. Lending activity also shows the first signs of recovery. In our estimation, investment is increasing across most sectors, so its growth is not only due to a small number of large investment projects.

In retail trade, sales of food products started to rise in the first quarter in addition to the rises in sales of non-food products and automotive fuels. Favourable trends in retail trade were boosted by the strengthening of private consumption and economic activity. Stores selling food, where turnover stagnated until the first quarter of this year, had otherwise recorded further turnover growth in discount stores last year. This was reflected in a renewed decline in the concentration ratio in this sector, which is already very close to the threshold between moderate and high market concentration.

Turnover in the sale of motor vehicles to domestic and foreign customers continued to increase in the first quarter. At home, the sales to households and legal entities increased. The growth of sales to foreign markets has already been strengthening noticeably for five consecutive years; last year these also increased significantly (following several years of decline) on markets beyond the EU.

The first quarter also recorded a continuation of nominal turnover growth in wholesale trade, which started in the second half of last year. This year’s growth was, in addition to stronger domestic production activity, also influenced by rising prices. Last year prices declined and had the opposite effect, nominal turnover stagnating despite the favourable economic situation. However, with a concurrent decline in purchasing costs,  the business results of the sector already improved significantly last year.

After the strong growth at the end of last year, nominal turnover in market services continued to increase in the first quarter of 2017. Its growth continues to be underpinned particularly by the export-oriented service sectors, particularly road transportation and computer services. With further growth in employment, turnover continues to increase in employment activities (part of N activities). In some sectors, especially in certain segments of professional and technical activities (particularly architectural and engineering services), on the other hand, activity has remained fairly low for some time

Economic sentiment remains favourable. Having improved in 2016 in most sectors and among consumers, confidence remains high in the middle of the second quarter.

The number of employed persons continues to increase across most activities, in recent months particularly in construction following a long period of stagnation in that sector. Short-term expectations of enterprises about future employment remain the highest since the onset of the crisis. However, there is a segment of enterprises, particularly in manufacturing, that are facing a shortage of skilled labour. After the relaxation of hiring restrictions in 2016, the number of employed persons in public service activities remained higher year-on-year in education (particularly at the primary level), the health sector and, though to a lesser extent, public administration. The survey data and data according to the statistics of national accounts also indicate a further strengthening of employment in the first quarter of this year.

The number of the registered unemployed continues to decline as a result of strong hiring and lower inflows. In the first five months of 2017 the outflow into employment remained at a similarly high level as in the same period of last year. The inflow into the unemployment register, related mainly to the termination of fixed-term contracts, was smaller year-on-year. There were also fewer first-time jobseekers, in our view as a result of better economic conditions and smaller generations of young people finishing school. At the end of May, 87,655 persons were registered as unemployed (14.3% fewer than in May 2016), which is close to the level recorded in 2005 and 2006. The survey data also show a further decline in the number of unemployed persons in the first quarter.

Wage movements in the first quarter were moderate. Average earnings per employee in the private sector remained at the level recorded at the end of last year, when they were marked by high extraordinary payments. In the public sector they rose slightly again and also remained close to the high December level increased by public servants’ promotion pays.

Inflation continues to be influenced by year-on-year price rises in services and energy. The growth in service prices in some segments (e.g. accommodation and food service activities) mainly reflects a further strengthening of private consumption; additionally, the price movements in services are also significantly affected by year-on-year price rises in public utility services. Energy prices also continue to increase, but their contribution to the year-on-year inflation is gradually declining due to the base effect. Food prices also remain higher year-on-year, reflecting seasonally higher prices of unprocessed food in particular. Prices of semi-durable goods were similar to those one year before, while prices of durable goods remain down year-on-year.

The year-on-year growth in industrial producer and import prices is strengthening. The main reason for the higher growth is the movement of commodity prices on global markets, which, amid rising demand, are gradually passed on to import prices and the prices of domestic industrial producers.

Price competitiveness improved slightly in the first four months of the year. The improvement was a consequence of the nominal depreciation of the euro against the currencies of Slovenia’s main trading partners in and outside the EU. The real effective exchange rate deflated by relative  consumer prices consequently declined to just below the level from one year before, which is close to the lowest figures since Slovenia’s entry into the ERM2 in 2004. Among euro area countries, Slovenia was around the middle in terms of year-on-year movements of price competitiveness.

The current account surplus remains high; it reached 6.6% of estimated GDP in the 12 months to March. The larger surplus in current transactions in the first quarter in comparison with the same period of 2016 was mainly due to the higher trade surplus in services, while the surplus in trade in goods was already down year-on-year for the third quarter in a row. This was attributable not only to volume factors, but also to deteriorated terms of trade. As a result of higher euro prices of primary commodities and industrial producer prices, import prices were significantly higher (5.2%) than export prices (3.3%) year-on-year. The deficit in primary income was down year-on-year largely owing to lower net interest payments, while the deficit in secondary income was lower as a result of lower payments into the EU budget.

The net outflow of external financial transactions continues. In the first quarter the net capital outflow of the Bank of Slovenia (BoS) and the private sector exceeded the net capital inflow of the general government sector, with the BoS buying foreign debt securities under the public sector purchase programme (PSPP). Liabilities of the BoS within the Euroystem declined. In the private sector, transactions in portfolio investment and loans predominated. Commercial banks continued to increase investment in foreign securities and repay foreign loans. Short-term trade crediting of enterprises increased; this is related to the rising trade in goods and services.

In April the volume of loans to domestic non-banking sectors was up year-on-year for the third consecutive month. Household borrowing is rising, while the decline in corporate and NFI loans is slowing noticeably. Owing to more favourable borrowing conditions abroad, financially sounder enterprises continue to withdraw from Slovenian banks, which contributes to a further decline in the banking sector’s net interest income.

Fiscal developments were favourable at the beginning of the year. In the first quarter, the general government deficit on a cash basis was one-third lower year-on-year; the primary balance turned from negative to positive in the same period. The favourable trends are based on the relatively rapid year-on-year growth in most revenue categories and moderate growth in expenditure.

Year-on-year growth in general government revenue amounted to 7.4% in the first quarter. The strong revenue growth is attributable, in addition to certain one-off factors, primarily to favourable economic conditions, including the situation on the labour market. Receipts from the EU budget remain an exception. Their year-on-year decline was primarily a consequence of the extremely low drawing on funds in January, while receipts from the EU budget in the following two months were increasing almost solely due to the inflow of funds under the Common Agricultural and Fisheries Policy.

In the first quarter of 2017 general government expenditure was up 2.6% year-on-year. Its moderate growth, which is contributing to the rapid deficit reduction, is to a great extent affected by the standstill in government investment and a decline in payments into the EU budget. These two categories excluded, year-on-year expenditure growth would have come close to 4% in the first quarter. Expenditure growth was attributable primarily to growth in current transfers, particularly transfers to individuals and households and compensation of employees.