Slovenian Economic Mirror
Slovenian economic mirror No 4/2019
The growth of the Slovenian economy remained high in the first quarter; growth in exports and domestic consumption also continued. Growth in the export part of the economy is expected to moderate gradually in the remainder of the year, in line with the projections in our spring forecast of economic trends. Company performance indicators mostly exceeded their pre-crisis level.
Economic growth in the euro area was somewhat above expectations in the first quarter, but remained low. The increase of 0.4% (seasonally adjusted; 1.2% year on year) was underpinned primarily by private consumption and gross fixed capital formation, given the significant increase in construction activity and further growth in retail trade in the first three months. After the petering out of the effect of one-off factors related particularly to standstills in the car industry, positive growth was again also recorded for activity in manufacturing. Economic growth was higher than expected in Slovenia’s most important trading partner, Germany (0.4%), while economic growth in Italy, Austria and France was in line with expectations. The continuation of low euro area growth in the second quarter is also indicated by economic sentiment indicators, which – with the announcement of anti-trade measures – remain similarly low as in previous months.
Oil prices are notably higher than at the beginning of the year, despite the fall in the last two weeks. The dollar price of Brent crude oil per barrel has increased by around 20% since the beginning of the year, totalling USD 71 in May; prices in euros rose even somewhat more, owing to a lower value of the euro relative to the US dollar. Year on year, oil prices dropped slightly. According to international institutions, price rises are largely due to cuts in OPEC oil production. Dollar prices of non-energy commodities have also risen in recent months, though significantly less (by around 6%).
Year-on-year growth in real GDP remained relatively high in the first quarter (3.2%). Excluding the impact of seasonal and calendar factors, year-on-year and quarterly growth rates of real GDP (3.7% and 0.8% respectively) were somewhat higher than in the previous quarter (3.5% and 0.7%). Growth was driven by exports and domestic consumption. The period of higher GDP growth in Slovenia than in the EU as a whole (3.7% compared with 1.5%, seasonally adjusted) thus continued.
The increase in domestic consumption was attributable to all components except changes in inventories, whose contribution was highly negative. The growth of private consumption strengthened somewhat amid favourable labour market developments. The strong growth of gross fixed capital formation continued; year on year, construction investment made the greatest contribution to growth. Investment in machinery and equipment also rose, but less year on year than last year, primarily owing to more moderate growth in foreign demand and increased uncertainty. Gross capital formation was nevertheless slightly lower than in the first quarter of last year, this as a consequence of a change in inventories, whose negative contribution to GDP growth was the largest since 2013. Growth in domestic consumption was also driven by considerable growth in final government consumption.
Real exports and imports rose in the first quarter. Despite the decline in March, exports were up 7.7% year on year in the first quarter, largely owing to increased exports of pharmaceutical and medical products. Uncertainty in the international environment is reflected in a further lowering of export expectations. On the import side, particularly imports of consumer goods increased more notably amid the strengthening of private consumption.
Exports of services maintained their high level in the first quarter, while imports of services increased slightly. Year-on-year export growth was mainly driven by higher exports of construction services, whose share has again been rising in recent years (they otherwise account for around 6.6% of total exports of services). The contributions of exports of transport and travel services remained positive, although smaller than in previous quarters. In the first quarter, exports of transport and travel services together accounted for almost two thirds of total services exports. On the side of imports, transport services account for the largest share (21.3%), followed by travel services (19.4%) and technical, trade-related services (16.8%). These also made a significant contribution to import growth in the first quarter of this year. As in exports, the contribution of construction services is on the rise.
Manufacturing output rose significantly in the first quarter owing to the acceleration at the beginning of the year. January’s strong growth was followed by a decline in the next two months, but production nevertheless remained high. In the twelve months to March, it otherwise increased the most in high- and low-technology industries. In medium-technology industries, growth was modest, reflecting the impact of last year’s easing of activity in the EU car industry on the production of motor vehicles and some intermediate goods (particularly in the metal and rubber industries).
In the first quarter construction activity increased further, with considerable monthly fluctuations. After February’s strong growth, the value of construction output declined in March, but remained high. The first quarter recorded further growth in the construction of civil-engineering works, driven by higher investment by the government, municipalities and infrastructure companies. Further growth was also recorded in the construction of buildings. In residential construction, this was related to the strong demand for flats and the low construction of flats in previous years, while growth in non-residential construction was mainly due to good business results. The vigorous growth in activity amid signs of labour shortages is also reflected in pressures on prices: price growth in construction has not been so high since 2008. The values of the indicators of contracts, which suggest future activity in construction, also strengthened at the beginning of the year, the most in residential construction.
Turnover in trade increased further in the first quarter and was a tenth higher year on year in real terms. Since the end of last year, turnover has again been rising in the sale of motor vehicles, after dropping substantially with the introduction of the new test procedure for determining fuel consumption and exhaust emissions in the middle of 2018. Turnover growth in wholesale trade continues at a moderate pace, after last year’s strong growth, which was also a result of increased sales in some energy products. In retail trade – which is otherwise marked by significant fluctuations in the sales of automotive fuels – the sale of non-food products has been rising strongly for the fourth consecutive year, which is related to increased spending by households. After the decline in the first half of last year, moderate turnover growth is also recorded in the sale of food products, beverages and tobacco products.
The strong growth of turnover in market services continued in the first quarter. Growth in accommodation and food service activities accelerated owing to higher spending by domestic and foreign tourists. Exports of road transport services remained the main factor of turnover growth in transportation. Turnover growth in information and communication activities continued to derive not only from computer, but also from telecommunication services, where turnover had stagnated for a long period of time. The growth of turnover in administrative and support service activities seen in the recent period has mainly been driven by growth of turnover in services outsourced to external providers.
Year-on-year growth in household consumption strengthened to 2.6% at the beginning of the year amid stronger growth in disposable income and relatively high consumer confidence. The increase in household means was – in addition to the accelerated growth in the net wage bill and social transfers (including pensions) – also due to stronger growth in newly extended consumer loans. With more resources available, households largely increased expenditure on durable goods (by 6.9%), while also spending more on other goods and services (by 2%). The latter otherwise account for almost 90% of total private consumption.
Economic sentiment deteriorated at the beginning of the second quarter. This was mainly due to a further decline of confidence in manufacturing, with expectations regarding export demand and production volume dropping further in particular. Confidence also declined in most other sectors, being down year on year not only in manufacturing but also in construction. Consumer confidence remained quite high, although lower than in the same period of last year due to lower expectations about the economic situation.
Labour market conditions continued to improve at the beginning of the year. In the first quarter the number of employed persons increased further – the most in construction, transportation and manufacturing. Labour market conditions continued to be marked by labour shortages amid high demand for labour, which is also indicated by the high job vacancy rate and increased hiring of foreigners. In the first four months, the number of registered unemployed declined further, though more slowly than in previous years amid the already low level of unemployment. At the end of May, 72,012 persons were registered as unemployed, 6.1% fewer than in the same period of 2018.
Wage growth strengthened in the first three months of this year, in line with expectations. Wage growth in the private sector was – in addition to economic and demographic factors (good business results and gradual productivity growth, labour shortages and thus upward pressure on wages) – also due to the increase in the minimum wage. Wages rose the most in sectors that face the greatest labour shortages and have a high share of minimum wage recipients, i.e. trade, accommodation and food service activities and administrative and support service activities. Wage growth in the public sector, on the other hand, was mainly a consequence of strong growth in the government sector owing to the agreed wage rises at the end of last year; to some extent, it was also due to the increase in the minimum wage.
Year-on-year growth in consumer prices dropped somewhat in May. Lower growth was recorded particularly for prices of services, which, amid rising household consumption, still contribute the most to inflation. The contribution of prices in the recreation and culture group declined due to somewhat lower growth in prices of holiday packages; this was still around 8%. The contribution of prices in communications was negative. Year-on-year growth in prices of goods remains low (just below 1%), as prices of semi-durable and durable goods continue to fall year on year.
The total year-in-year growth of Slovenian industrial producer prices remained just above 1% in April. Energy price growth strengthened further, primarily owing to higher prices in electricity supply. The growth of prices of investment goods slowed somewhat after strengthening in the first quarter, but remained higher than last year’s average. Higher prices of energy boosted the growth of industrial producer prices on the domestic market. Price growth on foreign markets continues to ease, primarily on account of moderating foreign demand.
The current account surplus widened further year on year in the first quarter. The year-on-year increase was mainly due to a higher surplus in trade in goods and services. This was attributable primarily to volume factors (higher growth in exports than imports), as the growth of import prices exceeded the growth of export prices (deterioration in the terms of trade). The surplus also strengthened owing to a further narrowing of the deficit in primary income, particularly net interest receipts. This was a consequence of lower government debt servicing costs and a net inflow of interest into the private sector due to a considerable decline in external debt of commercial banks and increased financial investment in foreign securities. The higher net outflows of secondary income were marked particularly by higher VAT- and GNI-based payments into the EU budget in the first quarter of the year.
The volume of loans and deposits of domestic non-banking sectors is increasing further. Lending to households is still rising at the fastest pace. The growth of housing loans is moderate. Slightly higher growth rates are recorded for consumer loans. According to our estimate, this is a consequence of both higher household demand for loans and banks favouring this type of loans given the improvement in households' creditworthiness amid low indebtedness and favourable labour market conditions. Moreover, interest rates for consumer loans are more than twice as high as, for example, for housing and business loans, which is an additional motivation for banks to issue this type of loans. The growth of domestic non-banking sectors’ deposits has strengthened further this year, driven by growth in both household deposits and deposits of the government, which – amid favourable public finance conditions – increased deposits at domestic banks. Good business results are also reflected in further growth in deposits of non-financial corporations. The quality of banks’ assets continues to improve gradually.
The surplus of the consolidated balance of public finances in the first four months was somewhat lower than in the same period of last year. After the deficit in the first quarter, the consolidated balance recorded a surplus, which was lower than last year due to stronger growth in expenditure (6.8%) amid lower growth in revenue (5.7%). The lower growth of tax revenues arose from the value added tax. Revenue from income taxes increased the most, in connection with favourable labour market conditions and good business results. Receipts from the EU budget made a considerably smaller contribution to revenue growth than last year, but their growth is expected to strengthen in the remainder of the year. This year’s strengthening of expenditure growth, which is expected with regard to the adopted budgetary documents, is driven by all major expenditure categories. It is related to the adopted agreements on wage rises, further employment growth (which is strongest in health care), measures in the area of transfers to individuals and households, and strong growth in investment in transport infrastructure, which was also facilitated by favourable weather conditions. Payments into the EU budget were also higher at the beginning of the year.