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Economic Mirror No. 2/2021: The second wave of the epidemic had the largest negative impact on service activities; the impact on export-oriented activities was not significant

Amid stringent containment measures during the second wave of the epidemic, turnover in trade and some service activities declined considerably in Slovenia in the last quarter. As during the first wave, the most affected sector was accommodation and food service activities, where, with the closure of hotels and restaurants, turnover more than halved. Owing to lower demand, the epidemic and the measures to contain its spread also strongly affected the movement of some prices of goods and services. Export-oriented activities and construction were not visibly affected in the second wave of the epidemic. Exports of goods to EU countries and manufacturing production recovered to pre-crisis levels in the last quarter of 2020; construction activity also strengthened markedly. Confidence indicators point to a continuation of favourable movements at the beginning of this year. This is also corroborated by data on electricity consumption and traffic volume on Slovenia motorways, which were only slightly lower year on year in January. With intervention measures still in place, the increase in unemployment in December and January did not deviate significantly from seasonal increases in previous years, while at the beginning of February a decline was already observed. At the end of January, the number of unemployed was otherwise 14.6% higher year on year. The deficit of the consolidated general government budgetary accounts on a cash basis increased strongly in 2020 due to the deterioration in economic conditions and measures to mitigate the consequences of the epidemic. Similar movements were also recorded for economic activity in the euro area. According to Eurostat’s flash estimate, this contracted again in the last quarter of 2020 with the tightening of containment measures due to the second wave of the epidemic, albeit significantly less than in the first wave.

With the tightening of containment measures in the second wave of the epidemic, economic activity in the euro area contracted again in the last quarter of 2020, albeit significantly less than in the first wave. According to Eurostat’s flash estimate, euro area GDP dropped by 0.7% in the last quarter of 2020, which is considerably less than during the first wave of the epidemic (- 3.7% in the first quarter; - 11.7% in the second). The smaller decline is a consequence of the partial adjustment of businesses and consumers to the new situation. Also, the containment measures taken in the second wave are mainly focused on service activities and are less disruptive to manufacturing and construction. In the continuation of the year, activity should start strengthening gradually, assuming a gradual relaxation of containment measures and a decline in uncertainty due to wider accessibility of effective vaccines. Monetary and fiscal policy measures will also make a significant contribution to growth. After last year’s 6.8% decline (Eurostat’s flash estimate), euro area GDP is expected to increase by 3.8% according to the European Commission’s February forecast; the same growth is also expected in 2022. Uncertainty remains high. 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.

Amid stringent containment measures adopted in the middle of the last quarter of 2020, turnover in trade and some service activities fell considerably in Slovenia in the last quarter. As during the first wave of the epidemic, the most affected sector was accommodation and food service activities, where, with the closure of hotels and restaurants, turnover more than halved. Household expenditure on personal, entertainment, sports and other services also declined. As a result of the closure of non-essential shops, motor vehicle and retail sales dropped sharply. In retail trade, turnover fell the most in shops selling clothing and footwear and furniture and household equipment. With the partial and temporary opening, sales increased in some segments in December, only to fall again with the re-closure in January. 

Figure 1: The second wave of the epidemic had the strongest negative impact 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 prices of goods and services. The year-on-year fall in consumer prices in January was otherwise somewhat smaller, to the greatest extent due to the relatively modest seasonal decline in clothing and footwear prices. The lower prices were still largely due to low prices of oil products, but their fall gradually decreased. Growth in food and services prices remained low, which is related to increased supply due to the good harvest, modest activity in accommodation and food service activities and the complete closure of some other activities.

Export-oriented activities and construction were not visibly affected in the second wave of the epidemic. Goods exports to EU countries, to which Slovenia exports around three quarters of all goods, and manufacturing output recovered to pre-crisis levels in the last quarter of the year. Construction activity also strengthened strongly, particularly on account of increased residential construction. Confidence indicators point to a continuation of favourable movements at the beginning of this year, which is also corroborated by data on electricity consumption (the largest consumer is industrial companies) and traffic volume on Slovenia motorways, which were only slightly lower year on year in January.

With intervention measures still in place, the increase in the number of unemployed persons in December and January did not deviate significantly from seasonal increases in previous years, while at the beginning of February its seasonal decline was already observed. At the end of January, 91,499 persons were unemployed, 4.8% more than at the end of December and 14.6% more than in the same period last year. In the private sector, year-on-year wage growth has slowed noticeably since April, when it rose significantly due to the impact of the methodology for the collection of earning statistics with the placement of a large number of people on temporary layoff. In the public sector, it grew again slightly year on year with the declaration of the second wave of the epidemic and the renewed payment of crisis allowances in November.

The deficit of the consolidated general government budgetary accounts on a cash basis increased strongly in 2020 due to the deterioration in economic conditions and measures to mitigate the consequences of the epidemic and amounted to EUR 3.5 billion. The bulk of the deficit arose from increased expenditure, which was mostly due to the temporary measures to mitigate the consequences of the epidemic. In addition to this expenditure, which strengthened particularly subsidies, transfers to individuals and households and funds for wages, part of expenditure growth is also permanent in nature (for example, the agreement on public sector wages from December 2018). The deficit was otherwise lower than planned, particularly the part arising from the state budget, which is a consequence of lower expenditure for financing the measures to mitigate the consequences of the epidemic with regard to the generated reserves.

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