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Economic Mirror No. 1/2021: Economic consequences of containment measures during the second wave of the epidemic are smaller than in the spring but considerably more concentrated on service activities

With stringent containment measures, turnover in trade and some service activities, particularly those related to private consumption, dropped significantly in Slovenia at the beginning of the last quarter of 2020. The epidemic and the measures to contain its spread have, due to lower demand, also strongly affected the movement of some prices of goods and services. The year-on-year fall in consumer prices deepened somewhat at the end of 2020, which was attributable to a significant moderation of price rises in services and food. Export-oriented activities have been less affected during the second wave of the epidemic; as a result of a strong drop during the first wave, the Slovenian export market share declined in the first three quarters. Following growth in the third quarter, exports of goods to EU countries, to which Slovenia exports around three quarters of all goods, and manufacturing output continued to rise towards the end of the year. With the retention of intervention labour market measures and the expected smaller contraction of economic activity than during the first wave of the epidemic, the number of registered unemployed persons increased slightly in December, mostly as a consequence of seasonal factors. A total of 87,283 persons were unemployed at the end of December, 3.7% more than at the end of November. Economic activity in the euro area presumably also contracted again in the last quarter of 2020 with the tightening of containment measures during the second wave of the COVID-19 epidemic. The decline appears to be somewhat smaller than in the first quarter, as businesses and consumers have already partly adapted to the new situation. For 2021 a gradual recovery is forecast. Euro area GDP fell by 7.5% and 7.3% in 2020, respectively, according to OECD and ECB forecasts; in 2021 it will increase by 3.4% and 3.9%, respectively. The greatest risk to the realisation of the forecast and the gradual recovery remains associated with the course of the epidemic, i.e. the accessibility and effectiveness of vaccines and the related relaxation of measures.

Due to the tightening of containment measures during the second wave of the COVID-19 epidemic, economic activity in the euro area presumably contracted again in the last quarter of 2020, while for 2021 a gradual recovery is expected. According to the Purchasing Managers’ Index (PMI), the decline in service activities, which have been more affected by the containment measures, was smaller in the last quarter than in the second quarter of 2020. Respondents in manufacturing, unlike in the first wave of the epidemic, did not expect a contraction of activity. After a pronounced rebound of economic activity in the third quarter and a presumably smaller decline in the fourth quarter than in the spring, euro area GDP fell by 7.5% and 7.3% in 2020, respectively, according to OECD and ECB forecasts; in 2021 it will increase by 3.6% and 3.9%, respectively. A significant factor in this year’s growth will be monetary and fiscal policy measures and growth in foreign demand. The greatest risk to the realisation of the forecast remains associated with the course of the epidemic, i.e. the accessibility and effectiveness of vaccines and the related relaxation of measures.

With the retention of intervention labour market measures and the expected smaller contraction of economic activity than during the first wave of the epidemic, the number of registered unemployed persons increased slightly in December mostly as a consequence of seasonal factors. At the end of December, 87,283 persons were unemployed, which is 3.7% more than at the end of November and 15.9% more than in the same period last year. The average gross wage has also been significantly affected by intervention measures since the spring. In the private sector, year-on-year wage growth has slowed gradually since April, when it increased significantly due to the impact of the methodology for the collection of earning statistics, which reflected the placement of a large number of people on temporary layoff. In the public sector, it increased again slightly with the declaration of the second wave of the epidemic and the renewed payment of crisis allowances.

Figure 1: Unemployment rose somewhat at the end of 2020, including as a consequence of seasonal factors. 

Chart showing registered unemployed 

With stringent containment measures, turnover in trade and some service activities, particularly those related to private consumption, also dropped significantly in Slovenia at the beginning of the last quarter of 2020. As during the first wave of the epidemic, the most affected sector was accommodation and food service activities, where employment also dropped significantly. The number of domestic tourist overnight stays plunged, after strengthening significantly due to the redemption of tourist vouchers in the third quarter (when a significant part of turnover in hotels and restaurants tends to be generated by foreign tourists, whose number was modest this year). Household expenditure on personal, entertainment, sports and other services also declined. As a result of the closure of non-essential shops, turnover from the sale of motor vehicles and the retail sale of semi-durable and durable goods also dropped sharply. Lower freight and passenger traffic and lower transit of foreign tourists were also reflected in lower retail sales of automotive fuels. Sales of food products in retail stores and sales via mail order or the internet strengthened again. Household consumption again fell sharply in October and November with the tightening of measures to contain the epidemic, while household savings increased further. Households also continued to increasingly repay consumer loans.

Figure 2: The second wave of the epidemic had the strongest negative effect on service activities. 

Chart showing negative effect on service activities

The epidemic and the measures to contain its spread have, due to lower demand, also strongly affected the movement of some goods and services prices. The year-on-year fall in consumer prices deepened somewhat at the end of 2020. This was attributable to a significant moderation of price rises in services and food, in the latter owing to increased supply due to the good harvest, modest activity in accommodation and food service activities and the complete closure of some other activities. Prices of semi-durable goods, particularly clothing and footwear, also fell sharply in the last months of 2020. The lower prices were, however, still largely due to the lower prices of oil products. 

After the improvement in the third quarter, the deficit of the consolidated general government budgetary accounts on a cash basis increased again towards the end of the year. In the first eleven months of 2020, it amounted to EUR 2.6 billion. Due to the deterioration in epidemiological and, consequently, economic conditions, revenue again fell below the previous year’s level in October and November. As in the third quarter, expenditure growth remained well below that in the second quarter, when the majority of expenditures related to the COVID-19 measures were paid. The deficit of the consolidated general government budgetary accounts, which originates mainly from the state budget, thus widened again, particularly in November. An even larger increase is expected in December. Nevertheless, it appears that, in the year as a whole, it will not reach the estimate from the adopted revised state budget (EUR 4.2 million). The gap is mainly attributable to lower growth in expenditure than estimated, which is also linked to the lower-than-planned realisation of measures to mitigate the consequences of the epidemic. 
 

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