Slovenian Economic Mirror
Slovenian economic mirror No 3/2019
In the last month international institutions again lowered slightly their forecasts for this year’s economic growth in the euro area. This year uncertainties in the international environment have not yet significantly affected the Slovenian economy. Business expectations are however declining. Given the expected developments in main trading partners in the euro area and deteriorating business expectations regarding production volume and export demand, growth in exports and manufacturing is expected to ease off in the remainder of the year. Activity in sectors that are largely dependent on domestic demand continued to increase at the beginning of the year.
In the spring international institutions revised further their forecasts for global economic growth, among Slovenia's main trading partners the most for Germany. The IMF projects a 3.3% increase in the global economy for this year, while next year growth will accelerate somewhat again, to 3.6%. The forecasts mainly reflect the cyclical slowdown in advanced economies (euro area, US) and greater risks. Growth is however also slowing in some emerging and developing economies (China). The EC lowered its forecasts for Slovenia’s main trading partners, the most for Germany (by 0.6 pps to 0.5% in 2019). According to both institutions, the risks to growth have increased in recent months, reflecting trade tensions (US relations with China and the EU), uncertainty regarding the time and terms of the UK's withdrawal from the EU and the tightening of global financial conditions.
Real exports and imports of goods recorded strong growth at the beginning of this year. Year on year, exports were up 11.5% in the first two months. As at the end of last year, the greatest contributions to growth were made by exports of medical and pharmaceutical products and some primary products. Expectations about exports have otherwise already been deteriorating for several months. The movements in exports of other main manufactured goods were less favourable. Exports of vehicles and related products (around 15% of total exports) and metal products were lower year on year. Growth in imports remained high, driven mainly by further growth in imports of consumer goods.
Growth in the nominal exports of services eased off at the beginning of the year, while imports of services remained at levels similar to those in 2018. Despite the year-on-year easing of services exports, growth in transport services and foreign tourist spending in Slovenia remains high. Particularly exports of construction services continue to increase strongly. Within imports of services, particularly imports of technical, trade related services eased significantly.
In the first two months production was up in the majority of industries and was mostly higher year on year. Following the slowdown of activity in the European car industry in mid-2018, motor vehicle production remained lower year on year (after last year’s strong year-on-year growth, mainly owing to the beginning of the production of a new passenger car model in 2018), while the growth of production of some intermediate goods (metal, rubber products) was modest. Year-on-year growth was the strongest in some low-technology industries, particularly the wood-processing (owing to the remediation of the consequences of natural disasters in forests) and leather industries.
The value of construction output rose significantly in February. After January’s growth, this was also due to favourable weather conditions. The impact of weather conditions was particularly pronounced in comparison with last February, as activity was up 40.3% year on year. The largest increase was recorded in the construction of flats (up 79.6% year on year), following the growth of construction permits in previous months. The indicators of contracts also strengthened after a long period of decline, suggesting future activity in construction. The stock of contracts in construction nevertheless remains lower year on year.
Turnover in trade continued to rise at the beginning of the year. In the first two months turnover was up in most sectors and was more than one tenth higher year on year. The good results were attributable to growth in household consumption (particularly in the segments of durable and some semi-durable goods) and high demand in sectors related to wholesale trade (manufacturing, transportation and construction).
Turnover growth in market services accelerated further in February. Underpinned by higher spending of domestic and foreign tourists, significantly stronger growth was recorded in accommodation and food service activities. The greatest contribution to turnover growth in computer and road transport services came from exports of these services. Turnover in employment services, the main driver of turnover growth in administrative and support service activities, strengthened again after several months of stagnation. Turnover in professional and technical activities maintained its high level seen at the end of last year.
At the end of last year, the volume of road and rail freight transport increased further. Despite the slower growth of economic activity in Slovenia’s main trading partners, the growth of international road transport, especially cross-trade transport, remained high in the last quarter of 2018. Year-on-year growth in export revenue in this segment otherwise declined somewhat at the beginning of 2019. Transport volume in rail freight transport, where growth is more volatile due to the small number of operators and the dynamics of one-off orders, increased. Growth in export revenues was also higher.
With stronger growth in disposable income and consumer loans, household consumption continued to increase at the beginning of the year. The increase in household financial assets reflected the accelerated growth in the net wage bill and social transfers (including pensions), but also stronger growth in newly extended consumer loans. These had otherwise already risen more noticeably last year, so that the volume of total household liabilities, which also include housing loans and other liabilities, was up EUR 790 million year on year at the end of 2018. Owing to higher growth in disposable income and GDP, household indebtedness nevertheless remained low. The ratio of household liabilities to GDP was below 31% for the first time since 2008, while the ratio of liabilities to disposable income remained similarly low as in the last three years (slightly below 52%, which is significantly lower than the EU average).
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 activities, being lower year on year not only in manufacturing, but also in construction. Confidence of consumers, who have lowered their expectations about the economic situation in recent years, is also lower than in the same period of last year.
Labour market conditions continued to improve at the beginning of the year. The number of employed persons increased further, particularly in manufacturing and construction. Labour market conditions are increasingly marked by labour shortages and increased hiring of foreigners, who already contribute almost two thirds to total employment growth. The number of registered unemployed declined further in the first four months, though more slowly than in previous years amid the already low level of unemployment. At the end of April, 73,965 persons were registered as unemployed, 5.8% fewer than in the same period of 2018.
Year-on-year wage growth in the first two months was higher than in the same period of last year. Wage growth in the private sector was, in addition to economic and demographic factors (good business results, gradual productivity growth and labour shortages and related upward pressure on wages), also due to the increase in the minimum wage. Wages rose the most in activities with high shares of minimum wage recipients and large labour shortages (trade, accommodation and food service activities and administrative and support service activities). In the public sector, wage growth mainly reflected strong growth in the government sector as a result of the higher valuation of most positions agreed at the end of last year and promotions.
Year-on-year price growth, which declined notably at the end of last and the beginning of this year, is strengthening again, reaching 1.7% in April. Amid rising household consumption, prices of services have started to increase more rapidly again, accounting for more than two thirds of total price growth. The main contributing factor is higher prices of holiday packages, but also housing-related services. Among energy prices, particularly heat energy prices are rising at a rapid pace, being almost one fifth higher year on year. Prices of non-energy industrial goods have remained unchanged year on year, while the year-on-year fall in car prices, which have a significant impact on prices in this group, continues to ease off gradually.
Year-on-year growth in Slovenian industrial producer prices remains just above 1% in the first quarter of the year. Overall (both domestic and foreign markets), growth in commodity prices continues to decelerate, while growth in energy prices has strengthened somewhat, mainly owing to price rises in electricity. Stronger growth is also recorded for prices of investment goods, particularly on foreign markets. Prices of other groups on foreign markets mostly decline, amid the moderation of foreign demand. Price growth on the domestic market remains stable, only prices of durable consumer goods being lower year on year.
In 2018 as a whole, there were no major misalignments between growth in labour costs and productivity growth. Unit labour costs (RULC) thus remained almost unchanged in 2018 as a whole (+0.2%, year on year), despite strong growth in the last quarter (+1.3%). In contrast to past developments, in the second half of the year, RULC growth was limited by the non-tradable sector (particularly owing to the accelerated activity in construction), while in manufacturing, the sector that is the most exposed to international competition, wage growth started to outpace productivity growth over the course of last year. As similar manufacturing developments were also recorded in most of our competitors from the euro area, RULC movements did not deviate significantly from the euro area average.
After last year’s relatively stable price and cost indicators, the moderate depreciation of the euro had a favourable impact on the competitive position of exporters in the first quarter of 2019. The real effective exchange rates against the main trading partners in and outside the euro area were relatively stable in 2018. Cost competitiveness otherwise deteriorated slightly in the last quarter, amid somewhat faster growth in unit labour costs (ULC) in comparison with trading partners, but despite the quarterly fluctuations, there were no major deviations in the year as a whole. Relative to our competitors, there had also been no signs of major spillovers of labour costs into final prices up to the beginning of this year, and the level of inflation remained similar to that in trading partners. A slight improvement in price competitiveness in the first quarter of this year (REER_hicp: -0.7%, year on year) was mainly a consequence of the depreciation of the euro against the basket of currencies of main trading partners.
The current account surplus remains high, despite the deterioration in the terms of trade. In the twelve months to February, it totalled 7.0% of GDP (EUR 3.4 billion). The higher surplus in current transactions continued to derive mainly from the surplus in services trade (especially trade in transport services and net inflows from travel), while this year’s strong growth in exports of goods contributed to a higher surplus in goods trade. The terms of trade are deteriorating, particularly owing to the slowdown of growth in export prices. A significant factor contributing to the higher surplus in current transactions remains the smaller deficit in primary income related to lower external debt servicing costs. A factor lowering the surplus was the higher outflows of secondary income, particularly due to higher payments into the EU budget.
The volume of loans to domestic non-banking sectors is gradually rising. The year-on-year growth is mainly driven by households borrowing in the form of both consumer and housing loans. The year-on-year increase in the volume of loans to non-financial corporations in April was largely a consequence of the low base, as the volume of new loans remained modest. Enterprises are also financing current operations and investment from other sources besides bank loans. Data from financial accounts thus indicate that, on the basis of transactions, equity capital of Slovenian non-financial corporations increased by EUR 4.4 billion from 2015 to 2018. Almost 95% of inflows were from abroad.
Banks’ exposure to foreign sources of funding is low and the quality of banks’ assets continues to improve. After the intense deleveraging in the last decade, the share of liabilities to foreign banks stabilised around 4%. The strong growth (6.9%) of deposits of domestic non-banking sectors continues, driven not only by household deposits, but also deposits of non-financial corporations. Owing to the low level of passive interest rates, overnight deposits continue to increase. In the last months, short-term deposits and deposits redeemable at notice also recorded modest growth. Favourable economic conditions and the further cleaning of bank balance sheets contributed to a further gradual decline in the share of arrears of more than 90 days (2.1% in February 2019). The share of non-performing exposures under the EBA definition, according to which non-performing exposures include not only arrears of more than 90 days, but also exposures that meet the ‘unlikely to pay’ criterion, is otherwise somewhat higher (3.7%), but it is also declining.
The deficit of the consolidated balance of public finances in the first quarter was similar to that in the same period of last year, while long-term movements indicate a surplus, which is also expected at the end of the year. Revenue growth strengthened in the first quarter (8.3%) as a consequence of higher growth in VAT revenue and receipts from the EU budget. Expenditure growth (8.1%) was also significantly higher year on year, with all major expenditure categories contributing equally to growth. This is partly related to the adopted wage agreements and measures in the area of transfers to individuals and households. Strong growth was also recorded for investment, driven by the accelerated implementation of projects in the area of transport and transport infrastructure, as well as for expenditure on goods and services, which had been low in the same period of last year. Payments into the EU budget were also higher at the beginning of the year. The state budget, which represents the main part of consolidated balance flows, should be in surplus (EUR 193.4 million or 0.4% of GDP) by the end of the year according to the adopted revised budget. In the Stability Programme 2019, the surplus is also expected for the broader general government sector (EUR 462.4 million or 0.9% of GDP).