Slovenian Economic Mirror
Slovenian economic mirror No 6/2018
Euro area GDP growth remained modest in the third quarter; in October the IMF lowered slightly its GDP growth forecasts for the euro area for this year. The growth of the export part of the economy has slowed, while the growth of activities oriented predominantly to the domestic market is similar to last year. Employment growth has also eased amid somewhat weaker economic growth and relatively low unemployment. Year-on-year consumer price growth, boosted largely by external factors, remains around 2%. The situation in the banking system is stable; loans to domestic non-banking sectors are steadily rising. After the favourable third quarter, the general government surplus was significantly higher year on year in the first nine months of 2018.
Economic growth in the euro area remained moderate in the third quarter of 2018. According to preliminary data, GDP rose by only 0.2%, the least in four years. Year on year, it was up 1.7%. Activity increased during the summer months in construction, while it remained moderate in manufacturing and retail trade. The values of economic sentiment indicators (ESI and PMI) continue to decline, suggesting a continuation of modest growth until the end of the year.
In October, as expected, the IMF reduced slightly its growth forecasts for the global economy for this year and next. The slowdown is a consequence of increased uncertainty in the international environment and weaker economic growth in the euro area and the largest Latin American economies. Global growth nevertheless remains higher than on average in 2012–2017. More protectionist trade policies in several areas significantly influenced the lower forecasts for international trade flows. The IMF points to notably higher risks of lower growth than forecast, which are mainly associated with uncertainty regarding US trade policy, a faster increase in Fed interest rates and renewed geopolitical risks. The downgraded IMF forecasts, along with the identified risks, are in line with IMAD’s assumptions in the Autumn Forecast.
October’s movements on the bond market were significantly affected by the situation in Italy. The yields to maturity of Italian 10-year euro bonds rose by more than 50 basis points in October. The yields to maturity of peripheral euro area countries’ bonds also increased, particularly those of more exposed countries with higher required yields (such as Spain and Portugal). We assess that part of demand shifted to securities of less risky core euro area countries, which was reflected in a lowering of the yields to maturity of their bonds. The yield to maturity of the Slovenian 10-year euro bond thus rose slightly in October, though less than for example those of Spain and Portugal. The spread to the German bond rose from 10 bps to around 70 bps.
The growth of the export part of the economy has moderated, while the growth of activities oriented predominantly to the domestic market is similar to last year. Reflecting lower growth in foreign demand, manufacturing output and turnover of more export-oriented market services are increasing somewhat more modestly than last year. The growth of goods exports is also weaker, in the absence of one-off factors. Meanwhile, activity continues to expand in sectors that mainly rely on domestic demand. In construction, particularly the volume of civil-engineering works is on the rise, amid increased general and local government investment. Turnover in trade continues to rise, boosted by further growth in household consumption.
Greater uncertainty in the international environment is significantly affecting export and import activity. The growth of goods exports, which continued during the summer months, remains more modest than last year. As expected, the contribution of vehicle exports is also declining gradually after last year’s considerable increase. Imports of goods are falling, particularly of goods for intermediate consumption, which is partly related to more modest export expectations in manufacturing than at the beginning of the year. Owing to last year’s growth, both exports and imports of goods were significantly higher year on year in the first eight months.
The growth of exports and imports of services is also lower than in 2017. During the summer months, a significant contribution to export growth came from increased arrivals of foreign tourists. Particularly exports of technical trade-related business services have declined, which were the main driver of last year’s growth alongside transport services. The slowdown in the growth of imports of services in the last few months is mainly due to more modest growth in imports of transport and other business services.
Production volume in manufacturing is rising more slowly this year amid weaker growth in foreign demand. As a result of last year’s surge, its year-on-year growth in the first eight months was the highest in the EU. It is still mainly driven by the manufacture of motor vehicles, but the contribution of the latter has been declining in recent months (due to the petering out of the base effect – the beginning of production of a new passenger car in the first half of last year). The prospects for this sector’s future exports have diminished considerably since the beginning of the year, which is partly related to the introduction of the new test procedure for determining fuel consumption and exhaust emissions. Expectations in manufacturing otherwise rose at the beginning of the last quarter, particularly in the export part of the sector, but export orders are down on the same period of 2017 according to data from the business tendency survey.
Activity in construction has been rebounding in the last few months. Construction activity has been gradually strengthening in the last two years, though its growth was interrupted temporarily at the beginning of this year due to unfavourable weather conditions. The growth is related to higher investment by the government (and municipalities in the run-up to the local elections), which is indicated in strong growth in civil-engineering works. The construction of buildings, which strengthened towards the end of last year, has stabilised at a somewhat lower level in the last few months. Owing to the increase at the end of last year, however, it remains higher than in the same period of 2017. The greater activity is also reflected in price pressures: price growth in construction prices was last so high in 2008.
Residential property prices continue to rise this year; the number of transactions is declining following vigorous growth in previous years. The year-on-year growth in the average residential property price accelerated further this year, having exceeded the threshold of 6% (used by the European Commission to determine the internal imbalances of EU Member States) last year. In the second quarter, the average price of existing residential properties – which account for the majority of all sales – was up 11.7% year on year and was almost as high as the average price in 2008. A strong increase (27.7% year on year) was also recorded for prices of newly built residential properties. The number of transactions in these properties (59) dropped further, however, and was the lowest since measurements began. The sales of existing properties are declining too, following strong rises in 2014–2017. This appears to be related not only to the limited supply of appropriate properties, but also to significant price rises in the recent period, which have made houses and flats less affordable and less attractive as an investment.
The volume of road freight transport, particularly abroad, is again strongly rising. The strongest growth is recorded for international road transport performed by domestic hauliers (measured in tonne km), particularly cross-trade transport. Export revenue in road transport (in EUR) is thus one-quarter higher year on year. Freight transport by rail has not been rising since the middle of last year. The rather extended periods when growth in the volume of goods carried by rail comes to a halt before picking up again can also be attributed to the small number of operators and the dominant market position of the largest operator, meaning that the volume of transported freight may also be influenced by the dynamics of acquiring large one-off orders.
The growth of the nominal turnover in market services continues after the moderation at the beginning of the year. Turnover is rising further in professional and technical activities. Higher investment demand and favourable trends in construction have a favourable impact particularly on architectural and engineering services. Further turnover growth is also recorded in administrative and support service activities, particularly employment services. Export turnover, especially of road transport services, is making a significant contribution to turnover growth in transportation and warehousing. Turnover in information and communication activities, on the other hand, is stagnating owing to a standstill in telecommunications, though it remains higher year on year, as is the case for other market service activities.
Growth in household consumption continues, reflecting further growth in disposable income and consumer loans. Amid rising wages and employment, the net wage bill increased further in the summer; social transfers (including pensions) and the volume of new consumer loans were also higher year on year. With higher income, household purchases of certain durable goods, particularly passenger cars, furniture and household appliances, strengthened further. Household spending on certain semi-durable goods and accommodation and food services at home and abroad also continued to rise.
Economic sentiment improved somewhat at the beginning of the final quarter. Confidence increased the most in manufacturing, mainly owing to more optimistic export expectations. Consumer confidence also improved, after deteriorating in the summer months, due to lower expectations about the economic situation in the coming year. Despite the improvement, confidence in the economy remains lower than a year ago.
Labour market conditions continue to improve, albeit more slowly than last year. The number of persons employed is rising more modestly amid somewhat weaker economic growth, relatively low unemployment and a greater shortage of workers. The decline in the number of registered unemployed eased, for the most part owing to a smaller outflow into employment. At the end of October, 76,232 persons were registered as unemployed, which is 8.1% less than one year earlier. Owing to the shortage of (appropriate) workforce, firms are increasingly hiring foreign nationals. These make up around one-tenth of all persons employed (the most in construction and certain service activities) and contribute one-half to growth in the total number of the employed. Owing to strong growth in 2017, in most private sector activities the number of employed persons increased more year on year in the first eight months than in 2017. As a consequence of growth in the education and health sectors, higher year-on-year growth was also recorded in the public sector.
In the first eight months of 2018, both the private and the public sectors saw higher year-on-year wage growth than in the same period of last year. Wage growth in the private sector is due to relatively low unemployment, good business performance and gradual productivity growth in previous years. Wages increased the most in manufacturing, construction and some market services (particularly in accommodation and food service activities and in administrative and support service activities), which is in part related to the shortage of skilled workers. Wage growth in the public sector, on the other hand, is a consequence of last year’s agreements with trade unions and the regular promotions of employees.
Year-on-year consumer price growth remains around 2%, as expected, being largely driven by external factors. Almost half of overall inflation is attributable to 8.4% higher prices of fuels and energy as a consequence of price rises on world markets. Growth in heat energy prices has also strengthened more notably in the last few months. Prices of electricity have also started to rise gradually. Moreover, somewhat stronger growth is recorded for prices of food, particularly fresh and unprocessed foods (fruits and meat). Growth in service prices remains around 2.5%. According to our estimate, this is to a great extent related to the favourable situation in the hotels and restaurants and tourism sectors. Prices of semi-durable and durable goods remain down year on year. The decline in the prices of used cars has slowed somewhat in the last few months, but is still pronounced, at 5.2%. Core inflation remains around 1%.
In the third quarter the growth of import prices accelerated further, while the growth of Slovenian industrial producer prices remained slightly above 2%. The faster growth of import prices in the last few months was mainly attributable to higher prices of oil, electricity and gas on international markets, but it was also partly due to the (again) slightly higher growth of commodity prices. Import prices of consumer goods remain down year on year owing to lower prices of non-durable goods, while prices of durable goods have been rising since the end of the first half of the year. Similar movements are recorded for Slovenian industrial producer prices, which this year are rising at similar rates in Slovenia and on foreign markets. Their growth is mainly driven by commodity prices, which are more than 3% higher year on year amid economic growth. Higher prices of oil, electricity, gas and steam supply are reflected in stronger growth in energy prices, but these are still rising more slowly than import prices. The growth of consumer goods prices remains moderate despite the rising household consumption.
With the acceleration of wage growth, unit labour costs rose somewhat (0.9%) in the second quarter following last year’s modest decline. More specifically, growth in compensation per employee outpaced productivity growth (4.4% and 3.4% in nominally terms respectively). In the non-tradable sector, wage growth has already (mostly) been higher than productivity growth for a longer period, while in the tradable sector this happened for the first time in two years. Similar current year-on-year dynamics to Slovenia’s were also recorded for the euro area average, but the total increase in unit labour costs was somewhat smaller (0.4%).
The second quarter recorded further growth in Slovenia’s export market shares abroad, but it was somewhat lower than in previous quarters. Growth in Slovenian goods exports has been higher than growth in foreign import demand for the six consecutive year, which means that the market share on foreign markets continues to increase. Year-on-year market share growth is otherwise declining, more so on the global market, but also in the EU. Broken down by product group, market share growth in the EU was relatively broad-based. As expected, the road vehicle segment had the largest impact on growth (and the slowdown thereof).
The price competitiveness of the Slovenian economy against its main trading partners has not changed significantly since the beginning of the year, but on individual markets Slovenia's competitive position could deteriorate due to significant exchange rate changes. The real effective exchange rate deflated by the HICP, into which the ECB includes 36 trading partners, remained more-or-less unchanged in the last three quarters. However, the indicator of price competitiveness for a broader group of trading partners (56) has deteriorated significantly, to a great extent as a consequence of a notable appreciation of the euro against the Turkish lira (i.e. a devaluation of the Turkish lira against foreign currencies). While Slovenia’s direct trade in goods with Turkey is not large, Slovenian and Turkish exporters compete on other markets (for example in Germany), which, in the case of related products, could be reflected in lower sales of certain Slovenian products.
The surplus of the current account has reached the highest level thus far. The cumulative 12-month surplus to August amounted to EUR 3.5 billion, which is 7.6% of GDP. The higher surplus than in the same period of last year is mostly due to the high surplus in international trade in goods and services, which reflects relatively favourable export movements and moderate growth in domestic consumption. The deficits in primary and secondary incomes are lower year on year – the former primarily owing to lower costs of servicing external debt and lower net outflows of dividends and profits abroad and the latter because of higher receipts from the EU budget.
The net outflow of financial assets abroad continues; in the last 12 months it has been mainly due to the net outflow of portfolio investment. On international financial markets, banks and insurance companies increased financial investments in foreign debt securities, while the government repaid a portion of its liabilities to foreign portfolio investors. A net outflow was also recorded for other investment, particularly owing to financial transactions of the remainder of the sector. Enterprises and other financial corporations were deleveraging abroad. Enterprises also increased short-term commercial credits to the rest of the world, which can be attributed to favourable export trends. In direct investment, net inflows of equity predominated. Slovenian direct investment abroad remains modest, while foreign direct investment in Slovenia has been rising since 2014, though not more than in most new EU Member States.
The situation in the banking system remains stable; loans to domestic non-banking sectors continue to strengthen at a moderate pace, while the quality of banks’ assets is improving. Loan growth is mainly driven by household borrowing in the form of housing and consumer loans. Loans for other purposes are also on the rise. On the other hand, the volume of corporate and NFI loans is again falling gradually, which is related to somewhat higher loan repayments, as the volume of newly extended loans increased slightly in recent months. Banks are still deleveraging abroad. The falling volume of foreign funding is more than offset by domestic non-banking sectors’ deposits, where – owing to the low deposit interest rates – only overnight deposits continue to rise. At EUR 1.6 billion, liabilities to foreign banks thus account for only 4% of the banking system’s total assets, compared with over 35% before the crisis. The quality of banks’ assets is steadily improving, the share of arrears of over 90 days accounting for 2.7% of the banking system’s total exposure.
After the favourable third quarter, the general government surplus was significantly higher year on year in the first nine months of 2018. The continuation of the improvement in the general government balance was supported by favourable economic developments and by increased absorption of EU funds. The surplus accumulated by the end of September (EUR 483 million) is likely to drop somewhat by the end of the year, which is in line with the latest adopted documents and reports.
Year-on-year growth in general government revenue strengthened significantly in the third quarter with the increased inflow from the EU budget and totalled 8.5% in the first nine months of 2018. The rapid year-on-year growth in revenues from social contributions and taxes – particularly personal income tax, corporate income tax (CIT) and value added tax (VAT) – continued. This was a consequence of favourable economic developments, including labour market conditions, and past improvement in business results. Other major revenue categories were also up year on year, particularly receipts from the EU budget, which are partly related to the previous financial perspective. Increased absorption of EU funds is also the main reason for the higher year-on-year growth of revenue in the first nine months of 2018 than in the same period of last year.
The year-on-year growth of general government expenditure remained high and dispersed in the third quarter; in the first nine months it totalled 5.1%. In the third quarter, similarly to the second, it was mainly driven by higher expenditure on social transfers (particularly pensions, financial social assistance and sickness benefits), investment, wages, and goods and services. Higher payments into the EU budget also made a contribution to year-on-year expenditure growth. Although slightly mitigated by lower interest payments, expenditure growth in the first nine months was noticeably higher than in the same period of last year.