Slovenian Economic Mirror No 6/2017
In October the IMF improved its world economic growth forecast for this year and next. Growth is expected to strengthen further to 3.6% and 3.7% this year and in 2018 respectively. Advanced economies, in particular the euro area and Japan, are also expected to make a considerable contribution to this growth. The growth of the Chinese economy should remain stable; after several years of recession, Russia is also projected to see economic growth this year. Owing to the more favourable conditions, the IMF also raised its outlook for global trade. According to the IMF, world GDP growth could increase even more than forecast, supported by even stronger business confidence and the continuation of relatively favourable financial market trends. Downside risks to growth are related to a faster-than-expected hike in Fed interest rates, uncertainty over US trade policy and the continuation of strong credit expansion in China.
In the third quarter, economic growth in the euro area continued. According to preliminary data, GDP rose by 0.6% and was up 2.5% year on year. In manufacturing, activity increased further during the summer months, while remaining similar to previous months in retail trade and construction. The continuation of favourable economic developments is corroborated by the economic sentiment indicator (ESI) and the composite Purchasing Managers’ Index (PMI), which have reached the highest values in five years and continue to rise.
In view of favourable economic developments in the euro area and expecting a further gradual convergence of inflation rates towards the inflation target, the ECB decided at the end of October to reduce its monthly bond purchases next year. At the beginning of 2018, its monthly purchases will thus be halved to EUR 30 billion. The announced measures will remain in force at least to September 2018 and thereafter until a sustained convergence of inflation with the inflation goal is achieved. Inter-bank interest rates did not change significantly, given that the ECB’s key interest rates remained unchanged. The ECB intends to reinvest the principal payments from maturing securities purchased under the bond purchase programme for an extended period of time after the end of the programme and for as long as necessary. This will have a favourable impact on the liquidity of the banking system.
In Slovenia favourable developments continue in most sectors; the prospects also remain good. Higher foreign demand and competitiveness gains are boosting exports and manufacturing production, particularly in export-oriented industries, which is reflected in further growth in Slovenia’s merchandise market share on foreign markets. The improvement in economic conditions and the recovery of the property market are reflected in stronger activity in residential construction, while activity in other construction segments has been declining in recent months. As a result of positive labour market developments and high consumer confidence, private consumption continues to expand, particularly in the segments of durable goods and leisure-related services. Lending to households is also on the increase. With stronger domestic and foreign demand, turnover is also rising in other market services. Economic sentiment continues to improve, indicating a continuation of positive trends.
The growth of real merchandise exports and imports continued during the summer months. Exports were up 9.2% year on year in the first eight months of 2017, their growth stemming mainly from exports of machinery and motor vehicles. Imports recorded 9.9% growth during the same period, reflecting not only favourable export trends but also stronger domestic consumption.
Nominal exports and imports of services maintained their high levels in the summer months. In the first eight months of the year, exports were up 10.9% year on year, mainly as a consequence of higher exports of technical, trade-related business services, travel and transport services. Year-on-year import growth (7.6%) is mainly underpinned by higher imports of transport services (maritime and road transport) and technical, trade-related business services.
Production volume in manufacturing is increasing amid a further strengthening of foreign demand. In recent months industrial production has again been rising in all technology categories, most modestly in low-technology industries, which generate the bulk of turnover on the domestic market, where sales are recovering at a slower pace. In the first eight months of 2017 production increased the most in certain export-oriented industries (manufacture of machinery and equipment and manufacture of motor vehicles among the more technologically intensive and the leather industry among the less technologically intensive sectors), where it was around 15% higher than in the same period of 2016. The prospects for the last quarter are also better for more export-oriented industries than for low-technology ones focused mainly on the domestic market, where growth in production and employment is expected to remain modest.
After strengthening at the beginning of the year, the value of construction output has fallen slightly in recent months. Activity dropped the most in the construction of non-residential buildings but was also lower in civil-engineering works. On the other hand, with favourable labour market conditions and the improvement in household creditworthiness, activity continues to rise in the construction of residential buildings.
With rising sales, residential property prices increased further in the second quarter. They were up 8.3% year on year and were 11.4% higher than their 2014 lows. With new record sales, prices of existing flats – which account for around two-thirds of total sales – again rose the most in Ljubljana. Prices of new flats were also up, but the number of transactions in these flats was the lowest in ten years owing to the limited supply.
Nominal turnover in market services increased further during the summer months. The increase in administrative and support service activities (N) continues to arise from growth in employment services, which, tied to the strengthening employment, has been very high for several years now. High turnover growth also continues in road and rail transport, boosted mainly by rising exports of these services. In information and communication services (J), growth has eased slightly in the recent period, despite further growth in exports of computer services, which are an important segment of J activities. Activity in professional and technical services (M) remains low; reflecting favourable domestic economic conditions, turnover is strengthening in legal and accounting services but it continues to decline in architectural and engineering services.
The growth of land freight transport has been strengthening since the second half of last year. Particularly transport carried out by Slovenian road hauliers entirely abroad has been rising noticeably in this period, which is related to favourable foreign demand. The demand for transport services in Slovenia is nevertheless not significantly lower, given the ever larger share of foreign hauliers on Slovenian roads. After a long period of stagnation, rail freight transport has been increasing particularly strongly amid higher growth in export revenues for the third quarter in a row.
Reflecting favourable labour market developments and high consumer confidence, household consumption continues to expand. August recorded further growth in purchases of durable goods, particularly passenger cars, which have already been rebounding for a fairly long time. Spending on semi-durable goods (products for personal care in particular) and services related to leisure activities at home and abroad also increased further.
Economic sentiment is improving, recording levels similar to those before the crisis. Since mid-year, confidence has again been rising across all sectors, the fastest in construction. In most sectors it is now higher than, or similar to, that before the crisis. At the beginning of the last quarter of 2017, consumer confidence indeed reached the highest levels since measurements began.
The number of employed persons continues to increase across most sectors, reaching high levels comparable with those in the pre-crisis year 2007. Short-term expectations of enterprises about future employment remain high. However, a certain segment of enterprises, particularly in manufacturing, is already facing a shortage of skilled labour. After last year’s relaxation of hiring restrictions, the number of employed persons in public service activities remained higher year on year, particularly in education (especially at the primary level) and the health sector.
The number of registered unemployed continues to decline, largely owing to the outflow into employment. In the first ten months of the year, the outflow into employment was in fact slightly smaller than in the same period last year, but the inflow into unemployment, stemming mainly from the termination of fixed-term contracts, was also smaller year on year. There were also fewer first-time jobseekers, which is related to better economic conditions and smaller generations of young people finishing school. At the end of October, 82,993 persons were registered as unemployed (14.7% fewer than in October 2016).
Despite favourable economic conditions, the growth of wages remains moderate. Nevertheless, having strengthened in the second quarter, average gross earnings in both private and public sectors also rose during the summer months. In the first eight months, both sectors recorded just over 2% higher nominal growth than one year earlier, with growth in the private sector rising year on year in industry and market services.
Having strengthened in the third quarter, the year-on-year growth of prices was down considerably in October. This was largely due to the negative contribution of prices of semi-durable goods (a decline in prices of clothing in particular), which saw slightly different dynamics than in the past owing to the removal of regulation of seasonal sales. The prices of durable goods continue to fall. The growth of services prices remains at around 1.5%, supported by favourable economic developments and consumption. The contributions of oil products and food (unprocessed food in particular) rose again, relative to mid-year, reflecting developments on international oil and food markets. The alcohol and tobacco component also made a larger contribution to growth, this owing to higher excise duties on tobacco products.
Cost competitiveness is improving this year, and price competitiveness remains close to last year’s favourable levels despite the deterioration in the third quarter. This was a consequence of the increase in the nominal effective exchange rate due to the appreciation of the euro, particularly against non-EU currencies. In the first nine months, price competitiveness nevertheless remained close to the favourable level of 2016, partly also on account of the slightly lower relative prices. Cost competitiveness improved year on year in the first half of 2017 as a consequence of a decline in relative unit labour costs.
This year Slovenia is in the group of euro area countries with more favourable price and cost competitiveness movements. Owing to the structure of Slovenian trade, the increase in the nominal effective exchange rate in Slovenia was among the smallest in the euro area, given that Slovenia performs an above-average share of its trade in the euro currency area. The share of trade in non-EU currencies, against which the euro appreciated, in the structure of Slovenian trade is smaller than on average in the euro area, while the share of EU currencies, against which the euro depreciated this year, is above average. The exception is the British pound, against which the euro has strengthened, but its share in Slovenian trade is one of the smallest in the euro area. Apart from that, the relatively more favourable cost competitiveness movements were also attributable to a larger decline in relative unit labour costs than in most other member states.
The fall in unit labour costs in the first half of the year was a consequence of stronger growth in labour productivity following two years of only modest growth. At the same time, growth in compensation of employees per employee slowed further owing to a modest increase in wages. The decline in real unit labour costs stemmed from both the tradable and the non-tradable sectors, in the former primarily from manufacturing, trade, transport, and accommodation and food service activities and in the latter mainly from construction. Particularly in manufacturing, employment and earnings increased more than in the economy as a whole amid strong value added growth. In recent years the movement of Slovenia’s cost competitiveness has been mostly consistent with the euro area average.
Slovenia’s merchandise market shares on foreign markets continued to increase in the first half of 2017. Further growth in the EU was largely the result of increases in market shares in Italy, Austria, France and the Czech Republic, coupled with renewed growth on most of Slovenia’s relatively less important EU markets. Among the most important products in the manufacturing sector, Slovenia increased its EU market shares of medical and pharmaceutical products, textile yarn, fabrics and textile products, power-generating machinery, machinery specialised for particular industries, electrical machinery and appliances, road vehicles, furniture, and miscellaneous manufactured articles. Among its main export markets outside the EU, Slovenia increased its market share in Russia. The weak growth in market share on the world market in the first half of the year was partly due to the base effect and also to more pronounced energy price rises and a consequent improvement in the market shares of energy exporters. The share of the EU on the world market fell in the first half of the year.
The surplus of the current account of the balance of payments is rising; in the last 12 months it totalled EUR 2.5 billion (5.9% of estimated GDP). The higher surplus in current transactions in comparison with the previous 12-month period was mainly due to the greater trade surplus in services, this primarily resulting from higher net revenue from travel and the surplus of trade in other, trade-related services. The deficit in primary income was also down, the main reason being lower net payments of interest on external debt as a result of lower yields on government bonds. With growth in domestic demand, imports of goods are on the rise, reducing the trade surplus in goods amid less favourable terms of trade.
The net outflow of external financial transactions continues. External financial transactions recorded a net outflow of EUR 1.7 billion arising from net outflows in portfolio investment, particularly financial investments of commercial banks and the BoS in foreign debt securities. Other investment recorded a net inflow, as the government and the BoS were withdrawing deposits from their accounts abroad. In direct investment – which is more modest this year following a significant inflow in 2016 – inflows of equity capital of foreign investors predominated.
In September the volume of loans to domestic non-banking sectors increased further. Household loans, in particular housing and consumer loans, continue to rise gradually. Since mid-year, the volume of corporate and NFI loans has also been picking up. The growth of corporate loans is estimated to be mainly due to lower deleveraging, given that the 12-month volume of new loans remained at around EUR 6 billion. The structure of banking system liabilities continues to change rapidly in favour of non-banking sector deposits. Owing to near-zero deposit interest rates, only overnight deposits are on the rise. The banks continue to make net repayments of liabilities to foreign banks, which thus now account for only around 5% of the banking system’s total assets. The quality of banking system claims continues to improve steadily.
Under the impact of favourable economic developments, the general government budget on a cash basis was almost balanced in the first eight months of 2017. As a result of strong growth in most main revenue categories and moderate expenditure growth, the primary surplus was also significantly higher than in the same period last year. The deficit is still expected to widen by the end of the year due to the covering of losses accumulated in public health institutes and faster growth in certain expenditures (for example in connection with EU funds), but it will be lower than in 2016.
The growth of general government revenue remained high during the first eight months (6.6%). In addition to certain measures and one-off factors, the rapid revenue growth in this period was attributable primarily to favourable economic conditions, including conditions on the labour market. The slight moderation of tax revenue growth in the last two months was due to delays in the payment of excise duties in the same period last year, fluctuations in minor personal income tax categories (revenue from rental income and other revenues) and April’s final settlement of corporate income tax. The absorption of EU funds remained modest.
The growth of general government expenditure is moderate (2.4% in the first eight months). Owing to the relaxation of austerity measures, the greatest contributions to growth came from compensation of employees, current transfers (particularly pensions and sickness benefits), and expenditure on goods and services. Investments are also picking up from their low level of 2016, while expenditure on reserves (budgetary funds) and payments into the EU budget are lower year on year.