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Slovenian Economic Mirror 9/2021: stronger-than-expected growth in economic activity, mainly due to the increase in private consumption and related activities
Economic activity in Slovenia remained high in the third quarter of this year, exceeding pre-epidemic levels. Private consumption in particular is growing faster than expected, meaning that economic growth in the year ending 2021 will be half a percentage point to one percentage point higher than predicted in our Autumn Forecast. In addition to the adjustment of consumers and activities related to private consumption to the changed situation, private consumption is also supported by the more favourable conditions in the labour market. In the third quarter, activities related to international trade, particularly manufacturing, were already affected by supply chain disruptions, especially semiconductor shortages, and the slower growth was in line with our forecasts. Available data for the last quarter point to the possibility of a slowdown in economic growth in the last quarter, mainly due to the deterioration of the epidemic situation and stricter containment measures, as well as continued production problems and constraints. Inflation will be higher this year and next than forecast in the autumn, mainly due to the sharp rise in energy prices in recent months and ongoing supply chain disruptions. Expectations for economic growth next year, which continue to be accompanied by a high degree of uncertainty, are in line with our autumn forecasts. A new forecast of economic trends will follow in March 2022. These are the main findings of this issue of Slovenian Economic Mirror published by the Institute of Macroeconomic Analysis and Development (IMAD).
Following strong growth in the previous two quarters, the growth of economic activity in the euro area weakened in the last quarter, according to the available indicators. In its latest forecast, published in early December, the OECD expects euro area GDP to grow by 5.2% this year and 4.3% in 2022. The OECD also predicts slightly lower growth next year for Slovenia’s main trading partners. The latest forecasts by international institutions are largely in line with IMAD’s assumptions for the international environment in its Autumn Forecast of Economic Trends.
Economic activity in Slovenia remained high in the third quarter of this year, exceeding pre-epidemic levels. In the third quarter, real GDP grew by 1.3% quarter-on-quarter and 5% year-on-year, exceeding the pre-crisis level of Q4 2019. The recovery or increase in private consumption and turnover in trade, entertainment, sports, recreation and personal services and in accommodation and food service activities was faster than expected in IMAD’s Autumn Forecast. In addition to the adjustment of consumers and activities related to private consumption to the changed situation, private consumption is also supported by the more favourable conditions in the labour market.
Activities related to international trade, especially manufacturing, were already affected by supply chain disruptions in the third quarter, and slower growth was in line with our forecasts. Problems due to supply chain disruptions, especially semiconductor shortages, have a particular impact on the decline in activities related to the automotive industry. Available data for the last quarter indicate the possibility of a slowdown in economic growth, mainly due to the deterioration of the epidemic situation and stricter containment measures, as well as continued production problems and constraints.
Economic developments, especially the growth of private consumption and related activities, indicate that economic growth in 2021 will be half a percentage point to one percentage point higher than the 6.1% expected in the Autumn Forecast.
With high commodity and energy prices and supply chain problems, inflation rose sharply again year-on-year in November (to 4.6%). About half of the inflation was due to higher prices for petroleum products and heat energy, while prices of goods also increased notably due to rising import and producer prices. Prices of semi-durable goods rose significantly due to higher prices for clothing and footwear, and prices of durable goods also continued to rise, mainly due to higher car prices. Inflation will be higher than expected in the autumn, both this year and next, mainly due to the sharp rise in energy prices in recent months and ongoing supply chain disruptions. It will most likely exceed 4% year-on-year in December this year (IMAD’s Autumn Forecast predicted 2.5%) and approach 2% on average this year (IMAD’s Autumn Forecast predicted 1.4%). Higher inflation is expected to persist for at least a few more months, which could mean that average inflation could exceed 3% in 2022 (IMAD’s Autumn Forecast predicted 2%).
Labour market conditions remain very favourable. In November, the number of unemployed was 1.9% lower than the previous month, about a fifth lower year-on-year and almost a tenth lower than in November 2019. Wage growth has slowed year-on-year in recent months, mainly due to lower wage growth in the public sector as a result of lower epidemic-related bonus payments. The growth of wages in the private sector this year is influenced by the increase in the minimum wage at the beginning of the year, but also to the return to employment of workers who participated in job-retention measures and to labour shortages in some sectors.
The general government deficit was lower in the first ten months of this year than in the same period last year and is expected to increase by the end of the year due to the usual increase in capital expenditure in the last months of the year and again somewhat higher payments to mitigate the impact of the epidemic.
Expectations regarding economic growth for next year, which continue to be accompanied by a high degree of uncertainty, are in line with IMAD’s Autumn Forecast of 4.7% GDP growth. The risks to the realisation of IMAD’s Autumn Forecast projections for 2022 are mainly on the downside due to health conditions and bottlenecks, although growth could also be stronger than forecast in the autumn. Economic development will continue to depend on the epidemic and health situation, the adaptation of measures to contain the epidemic and mitigate its consequences, and generally on the further adaptation of the population and the economy to the changed conditions. The epidemic situation and the associated uncertainty will have an impact on the speed of unwinding of the accumulated excess savings. A possible prolonged continuation of supply-side bottlenecks, in particular a shortage of certain raw materials and semi-finished products, would have a significant impact on manufacturing and consequently on exports and would increase the risk of increased cost pressures. A great deal of uncertainty also arises from energy prices, which could further increase and remain at these levels for longer than currently expected (international institutions estimate that this price pressure should ease by mid-2022). Persistently higher inflation could translate into demand for higher wages, which are already affected by a shortage of skilled labour. On the positive side, it is possible that supply-side bottlenecks will ease faster than expected, which would have a positive impact on global economic activity and weaken the associated price pressure. The recovery will also be significantly influenced by the effective absorption of the entire package of EU funds, both in Slovenia and among its main trading partners, which will provide an opportunity to strengthen the development content and increase the long-term potential of the region. In this context, the realisation of the planned public investment projects will play a significant role. The introduction of tax relief could increase private consumption in the short term, while in the medium and long term it could increase the pressure to cut other spending, given the need to ensure the sustainability of public finances.