Affected by the coronavirus epidemic, economic activity in the euro area was 3.3% lower year on year in the first quarter; international institutions predict a recession for the euro area and global economy for this year. Lower demand and extensive lockdowns in the economy due to the coronavirus epidemic at the end of the first quarter led to a 3.8% contraction in GDP compared with the previous quarter. As a result of the strict containment measures, international institutions expect an even sharper fall in activity in the second quarter. This is also indicated by confidence indicators (PMI and ESI), which deteriorated significantly in April. According to the latest IMF and EC forecasts, which take into account the moderation of the epidemic in this quarter, the euro area economy will contract by 7.5%-7.7% this year. Unemployment is expected to increase to 9.5% according to the EC forecasts. Although all euro area countries will fall into recession, the decline in GDP and then the pace of recovery in 2021 will not be uniform across countries. The higher borrowing requirements of euro area countries in these circumstances already contributed to an increase in yields to maturity of government bonds in April, but this was not uniform due to the different levels of countries’ debt before the beginning of the epidemic. With a high level of uncertainty, part of demand shifted to safer bonds of core euro area countries, while yields to maturity of peripheral countries increased. Among the most pronounced was also the rise in yields to maturity of Slovenian bonds. Slovenia last borrowed on 7 April, before the significant increase in yields.
Figure: In April, economic sentiment fell to a 15-year low; consumer confidence also reached its lowest level on record.
With the spread of the coronavirus and the adoption of measures to contain the epidemic, activity in Slovenia declined in most sectors in the middle of March. Owing to the ban on business activities, turnover in non-essential trade segments declined in March. Similarly, a significant decline in turnover is also expected in accommodation and food service activities, which will also be due to the plunge in tourist arrivals. The number of domestic and foreign tourist overnight stays was two thirds lower year on year in March. The decline in foreign demand and disruptions of global supply chains contributed to a fall in manufacturing output and exports. A decline in economic activity in the middle of March is also indicated by data on electricity consumption, which has been around one fifth lower year on year since the outbreak of the epidemic in Slovenia in the middle of March. It has also fallen noticeably in the EU. Lower economic activity in Slovenia and the EU also has a significant negative impact on freight traffic on Slovenian motorways, which has declined by around 40% year on year since the epidemic broke out in the middle of March. With the relaxation of measures after Easter, the fall started to decline gradually, but the decline in foreign freight traffic in particular has remained significant. Reflecting uncertain economic conditions, expectations have deteriorated notably in all activities. Consumer confidence has also fallen strongly.
The labour market situation also began to deteriorate with the coronavirus epidemic. In the first two months of this year, the number of persons in employment was still rising, as there was a shortage of domestic workers, mainly due to the hiring of foreigners. However, data on unemployment already point to a turnaround in labour market conditions due to the epidemic. While the number of unemployed persons in the first two months was still similar to that at the end of last year, it started to increase rapidly in the middle of March. In the second half of April and the beginning of May, the increase moderated somewhat. At the end of April, 88,648 persons were registered as unemployed, one fifth more than in the same period last year and 14.4% more than in February, i.e. before the epidemic. According to unofficial EES data, the number of unemployed persons increased further to 89,635 by 10 May.
Consumer prices were lower year on year in April, largely due to a decline in energy prices. The consequences of the measures taken by countries to contain the coronavirus spread significantly contributed to a fall in demand for oil products and thus a decline in their prices. In April, oil prices plummeted to record lows. International institutions expect that they will remain low and volatile until the imbalance between supply and demand is eliminated. Lower energy prices together contributed 2.2 pps to deflation, which was a consequence of a fall in prices of oil products, but also lower electricity prices as a result of the Slovenian government’s measure. Food price rises strengthened further due to higher demand. Growth in services price moderated.
Year-on-year growth in corporate loans intensified in the first three months of the year, while growth in consumer loans slowed markedly. Corporate borrowing already strengthened somewhat more noticeably in the first two months, while the monthly growth in March was among the highest in the last 12 months. In our estimation, this could be a consequence of both a faster execution of already agreed transactions and the already approved deferrals of payments of liabilities on the basis of the Act on the Intervention Measure of Deferred Payment of Borrowers’ Liabilities. Household borrowing moderated gradually. Growth in consumer loans has declined since the introduction of a binding macroprudential instrument, by almost two thirds in the last five months (to 4.5%), while growth in housing loans remained over 5%. The share of arrears of more than 90 days in the banking system was low in the first two months, just above one percent. However, despite the intervention measures, there is a high risk that it will start increasing again due to the deterioration of economic conditions at the outbreak of the epidemic.
In the first quarter of this year, the deficit of the consolidated balance of public finance doubled year on year. The consequences of the coronavirus epidemic already showed in lower revenues from VAT and excise duties, which significantly slowed total revenue growth. Revenue from corporate income tax was higher, while growth in revenue from personal income tax moderated strongly due to legislative changes. Total revenue growth derived mainly from higher social contributions. Non-tax revenues were also higher. Receipts from the EU were lower year on year. Growth in expenditure was only slightly lower than last year and for the most part did not yet reflect the consequences of the epidemic. It was underpinned by increased transfers to individuals and households and stronger growth in wages and other compensation of employees. Growth in expenditure on goods and services also increased significantly. Investment growth halved and arose solely from local government investment. Total expenditure growth is expected to strengthen in the remainder of the year, while revenue will decline year on year, which will increase the deficit of the consolidated balance and the broader government sector.