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Economic growth in the euro area slowed significantly in the third quarter and, according to the European Commission’s forecast, the euro area economy will slip into recession in the last quarter of this year. After real GDP growth of 0.8% in the second quarter, when the services sector in particular recovered as COVID-19 measures were eased, current growth slowed to 0.2% in the third quarter. Confidence indicators point to a weakening of the euro area economy in the coming months. In November, the EC revised its forecasts for 2023 significantly downwards. For the euro area, the EC expects GDP growth of 0.3% on the back of a modest recovery, which should resume in the spring as the effects of high inflation gradually fade. Economic growth is expected to increase to 1.5% in 2024. Inflation in the euro area is expected to peak at the end of this year, with the average yearly inflation rate in 2022 reaching 8.5%. Inflation is expected to decline in 2023, but to remain high at 6.1% before moderating in 2024 to around 2.6%. Uncertainty related to the limited availability and high prices of energy related to the war in Ukraine remains high, but with natural gas stocks currently high, it is moving towards the next winter. The risks of high inflation over the long term associated with energy prices and other factors, if materialised, could lead to greater tightening of monetary policy, which would have a negative impact on economic activity. The COVID-19 pandemic also remains a significant downside risk.

In the third quarter of this year, GDP in Slovenia fell by 1.4% compared to the second quarter; the year-on-year growth (3.4%, not seasonally adjusted) was lower than in the first half of the year and in line with the 5% GDP growth forecast for 2022 as a whole published by IMAD in its Autumn Forecast of Economic Trends. Household consumption growth moderated year-on-year in the summer months as consumer confidence fell and real income declined. It was underpinned by sales of non-food products and services. Investment remained strong in the third quarter, especially in construction. At the end of the third quarter, deterioration in confidence indicators, uncertainty and a decline in new orders affected manufacturing activity, which increased only modestly in the third quarter after a sharp decline in September. In recent months, production in more energy-intensive industries has been lower year-on-year, while activity has been higher especially in some important high-technology industries (manufacture of pharmaceuticals and electrical equipment). The deterioration in export expectations has not yet had a noticeable impact on goods exports, where quarter-on-quarter growth continued in the third quarter, but since the spring this segment has been subject to strong monthly fluctuations given the great uncertainty in the international environment. Growth in trade in services also continued, albeit at a somewhat slower pace. The overall growth of exports exceeded the growth of imports, which contributed to a positive external trade balance. General government expenditure declined year-on-year after a period of increased growth, with lower spending on containment measures and lower government budget spending on certain types of goods and services at the time of the adoption of the revised state budget. The contribution from the change in inventories, after high positive values in the first half of the year, was neutral in the third quarter compared to the same period last year. Data on the economic sentiment at the beginning of the last quarter of this year point to a further deterioration. Compared to the previous month, confidence fell the most in October in retail trade, followed by manufacturing and service activities. Consumer sentiment was slightly more upbeat than in September, which we believe is related to the government’s measures to mitigate the impact of high energy prices; sentiment also improved in construction. Compared to last October, economic sentiment indicator has dropped significantly, with confidence falling most sharply among consumers, where it is at the level of April 2020, and in manufacturing. 

Despite the cooling of the economy, unemployment is still falling and employment is rising. Employment of foreign citizens is increasingly contributing to overall growth in the number of persons in employment (already over 70% year-on-year), with particularly high shares in construction, transportation and storage and administrative and support service activities. At the end of October, a fifth less people were registered as unemployed than in the same period of 2021. The number of long-term unemployed also continued to decline and was almost a third lower than a year ago. In the face of high inflation, the average gross wage again fell year-on-year in real terms in August. The decline was more pronounced in the public sector due to last year’s base effect, which was related to the payment of COVID-19 bonuses.

Year-on-year consumer price growth remains high and is increasingly broad-based. Inflation, which exceeded 10% in the third quarter as a whole, moderated slightly year-on-year in October for the second month in a row (to 9.9%), mainly due to the higher base of last year and also to month-on-month lower oil derivatives prices. The year-on-year price increase for food and non-alcoholic beverages intensified in October and reached 17.2%. Core inflation, which excludes changes in energy and food prices, has been above the euro area average in recent months and continued to rise slightly in October (to 6.7%). The increase in Slovenian producer prices, which had slowed down in recent months, rose again slightly year-on-year in September (to 21.3%).

The general government deficit in the first eight months (EUR 378 million) was significantly lower than in the same period last year (EUR 2.1 billion). Due to the good business performance last year, revenues increased mainly from corporate income tax and, with the strengthening of household consumption and inflation, from VAT. Due to the reduction in excise duties on energy and electricity as part of measures to mitigate the impact of rising prices and changes in personal income tax, these revenues recorded only a modest increase. Receipts from the EU budget also increased significantly. As the scale of COVID-19 measures was lower, expenditure on wages, transfers to individuals and households, and subsidies was lower year-on-year, which contributed to a low overall growth in expenditure this year.