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Economic Mirror No. 6/2020: Gradual recovery of economic activity in uncertain conditions

The COVID-19 epidemic caused a significant contraction of economic activity in the second quarter in the entire euro area; amid a relatively robust recovery of activity in the summer months, international institutions have upgraded slightly their forecasts for this year but nevertheless predict considerable GDP declines. Slovenia has also witnessed a recovery since May, which, in the presence of the virus and due to the retention or reinstatement of containment measures, is and will be gradual and uneven across activities. Some indicators of economic activity had already been very close to pre-crisis levels in the summer, but according to more recent short-term indicators, the recovery eased in September. With the renewed rise in coronavirus cases across Europe, the high uncertainty has increased further, meaning that we can expect further fluctuations in economic activity and a slow recovery in 2021. With a rebound of economic activity in the summer and the extension of job-retention measures, labour market conditions did not deteriorate further. After a sharp decline during the retention measures, household consumption also picked up in most segments in the summer months. Slovenia recorded deflation at the annual level again in September, mainly on account of lower energy prices. The deficit of the consolidated general government budgetary accounts amounted to EUR 2.2 billion in the first eight months of the year, reflecting deteriorated economic conditions and the temporary measures to mitigate the impact of the crisis. Year-on-year revenue growth otherwise eased in the summer months.

In the second quarter, economic activity in the euro area declined sharply under the impact of the COVID-19 epidemic, but as the contraction was somewhat less pronounced than previously expected, international institutions have improved slightly their forecasts for this year amid the robust recovery of activity in the summer months. The pandemic has affected all euro area economies, particularly Spain, Italy and France. The 14.7% year-on-year decline in euro area GDP in the second quarter was largely the result of a steep fall in private consumption and investment, as households cut back on major purchases, consumer confidence was low, business operations were limited and uncertainty was high. To alleviate the negative consequences of the epidemic, comprehensive packages of measures have been adopted at the level of countries and by the ECB and the European Commission to help businesses and citizens bridge liquidity problems due to loss of income and to support a rebound in economic activity. Given the robust recovery in the summer months, the ECB and the OECD now predict 8% annual contraction (in June, around 9%) of the euro area economy. With the number of coronavirus cases in Europe again rising, however, the high uncertainty has increased further, meaning that further fluctuations in economic activity can be expected.  
 
Figure 1: Weekly short-term indicators point to a renewed slowdown in September

Electricity consumption short-term indicator

  
The deep decline in activity in Slovenia in the second quarter has been followed by a recovery, but as the virus is still present and some restrictions have remained in place, this recovery is and will remain gradual and uneven across sectors. Given the closure of all non-essential service activities and stores due to the measures to contain the spread of the epidemic, the GDP decline in the second quarter (-13.1% year on year) arose mainly from service activities, especially the group of trade, transportation, and accommodation and food service activities. However, according to the movement of short-term indicators, most activities started to recover from April’s decline already in May and continued to do so until July, when some indicators already almost reached pre-crisis levels. However, more recent short-term indicators of activity, such as electricity consumption and freight traffic on motorways, suggest that the recovery then lost momentum in August and September, as their values fluctuated and remained somewhat lower than in the same period of last year.

With a rebound in economic activity and due to the extension of job-retention measures, labour market conditions stopped deteriorating in the summer. In July, employment remained at almost the same level as in June and May.Year on year, it was around 1.5% lower. Relative to the previous year, the fall in employment was most pronounced in accommodation and food service activities (-6.9%) and administrative and support service activities (-12.6%), i.e. in sectors that were the most affected by containment measures. The number of registered unemployed persons soared in April (13.9% compared to March), then remained stable at around 89,000 until August, before even falling slightly in September (83,766). That unemployment stopped rising after the initial upsurge was, in addition to a rebound in economic activity, also due to the introduction and then extension of measures to preserve jobs. 

Figure 2: The slowdown of unemployment growth reflected job-retention measures

Unemployment growth chart
 

Having fallen substantially during the epidemic, household consumption strengthened in most segments in the summer months. Purchases that had been postponed during the epidemic increased in particular, i.e. purchases of non-food products (furniture, sports equipment, household appliances, and computer and telecommunications equipment) and passenger cars, the sales of which were already 8% higher year on year in July. Among services, the number of overnight stays increased sharply, particularly due to the introduction of tourism vouchers, while spending on cultural, sports, recreational and other leisure services remained significantly lower than in the same period of last year. 

Slovenia recorded deflation at the annual level again in September. It was still mainly driven by lower energy prices, prices of oil products in particular due to low oil prices on world markets, and year-on-year lower prices of semi-durable and durable goods. 

The deficit of the consolidated general government budgetary accounts amounted to EUR 2.2 billion in the first eight months of the year, reflecting deteriorated economic conditions and the temporary measures to mitigate the impact of the crisis. Revenue was 3.8% lower and expenditure 15.1% higher than in the same period of last year. Revenue has recovered under the influence of improving economic conditions, while year-on-year expenditure growth, which had otherwise been highest in May and June when the most temporary measures to mitigate the consequences of the epidemic were financed, slowed considerably during the summer months. The deficit of the state budget (after revision), which accounts for the largest part of the general government deficit, is expected to reach EUR 4.2 billion by the end of the year – provided that the significant reserve set aside for financing measures to mitigate the consequences of COVID-19 is used. 
 

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