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Economic Mirror No. 7/2020: A tightening of the epidemiological situation and uncertainty about further recovery

Euro area economic activity increased notably in the third quarter and even exceeded the expectations of international institutions. After a sharp decline in economic activity in the second quarter due to the COVID-19 epidemic and the related containment measures, GDP growth increased in the third quarter. This was to a great extent due to the comprehensive packages of measures adopted at the national, EU and ECB levels, which were, among other things, also oriented towards ensuring liquidity and helping the economy to recover. In July and August, the euro area thus recorded a recovery of most sectors. The indicators of economic activity in Slovenia have improved markedly since May and indicate a strong rebound in the third quarter, but in August and September the recovery already slowed considerably in most sectors. The outbreak of the epidemic had a significant impact on the performance of companies and their solvency in the first nine months. The consequences of the epidemic were felt in almost all activities, particularly in those that were hardest hit by the crisis and found it most difficult to adapt quickly to the current situation (service activities, accommodation and food service activities, transportation, construction, and arts, entertainment and recreation). The available indicators of labour market developments did not deteriorate further in the third quarter, which was to a great extent due to the recovery of economic activity in the summer months and the extension of job retention measures. The impact of the epidemic on this year’s public finance developments remains significant despite the improvement in the third quarter. In October, deflation continued but declined somewhat in comparison with previous months. With the tightening of the epidemiological situation in September and October, confidence indicators indicate uncertainty about further recovery. According to the most recent confidence indicators, the economic recovery in the euro area is losing momentum at the beginning of the last quarter. Similar is also true for Slovenia, where economic sentiment deteriorated in October after several months of improvement. The renewed declaration of the epidemic is expected to have greater consequences particularly for the service sector, but the economic consequences of the renewed spread of the epidemic and the related restrictions on business operations could be less intense than in the spring.

Euro area economic activity increased notably in the third quarter and even exceeded the expectations of international institutions. After a sharp decline in economic activity in the second quarter due to the COVID-19 epidemic and the related containment measures, GDP growth increased in the third quarter (12.7% q-o-q, seasonally adjusted). This was to a great extent due to the comprehensive packages of measures adopted at the national, EU and ECB levels, which were, among other things, also oriented towards ensuring liquidity and helping the economy to recover. In July and August, the euro area thus recorded a recovery of most sectors. In August, manufacturing activity in some of Slovenia’s main partners nevertheless still lagged far behind last year’s levels (Germany: –11.2%; France: –7.3%), while retail sales already exceeded last year’s levels in most countries. 

Figure 1: Short-term indicators of economic activity in Slovenia 


  
The indicators of economic activity in Slovenia have improved markedly since May and indicate a strong rebound in the third quarter, but in August and September the recovery already slowed considerably in most sectors. After a sharp decline in March and April, most export-oriented parts of the economy started to recover in May, but in September, growth in external trade of goods slowed, while the recovery in manufacturing came to a halt. After the recovery in previous months, in August some activities oriented to the domestic market already saw more unfavourable movements than manufacturing, as activity declined in trade and most other market service activities. It strengthened further in accommodation and food service activities, which was a consequence of greater spending by domestic tourists (amid additional restrictions on travel abroad) and the continued use of tourism vouchers. Given the absence of foreign tourists, turnover in accommodation and food service activities nevertheless remained far below the pre-epidemic level. In construction, where the decline in March and April was the least pronounced, activity strengthened in the summer months. Household consumption, which had fallen substantially during the epidemic, strengthened in most segments in the summer months. Spending on durable goods has nevertheless remained lower year on year. Expenditure on cultural, sports, recreational and other entertainment services is significantly lower as well, as certain containment measures have also remained in place after the end of the epidemic. The impacts of the extended restrictions in selling goods and services to consumers after the renewed declaration of the epidemic in the middle of October will be even greater.

Figure 2: Selected indicators of private consumption

 

The outbreak of the epidemic had a significant impact on the performance and solvency of companies in the first nine months. The consequences of the epidemic were felt in almost all activities, particularly those that were hardest hit by the crisis and found it most difficult to adapt quickly to the current situation (service activities, accommodation and food service activities, transportation, construction, and arts, entertainment and recreation). The decline in business operations had a negative impact on the indicators of indebtedness and consequently contributed to lower solvency and an increase in overdue liabilities. The first wave of the crisis affected especially sole proprietors, as their matured outstanding liabilities almost doubled year on year in the first nine months, while those of companies declined. There was no increase in the number of solvency proceedings initiated, while the number of bankruptcy proceedings declined further in comparison with the same period last year. This is mainly attributable to the adopted intervention measures, but also to the non-functioning of the courts following the declaration of the epidemic.

The available indicators of labour market developments did not deteriorate further in the third quarter, which was to a great extent due to the recovery of economic activity in the summer months and the extension of job retention measures. In August, employment remained at almost the same level as in the previous two months. Year on year, it was around 1.6% lower. The year-on-year fall in employment was particularly pronounced in sectors that were the most affected by containment measures, i.e. accommodation and food service activities (–6.2%) and administrative and support service activities (–12.6%). After a marked decline in September, the number of unemployed persons remained practically unchanged in October (83,654). Year-on-year, the number of registered unemployed was otherwise 15.5% higher. 

With the tightening of the epidemiological situation in September and October, confidence indicators indicate uncertainty about further recovery. According to the most recent confidence indicators (PMI, ESI, ifo), the economic recovery in the euro area is losing momentum at the beginning of the last quarter. Similar is also true for Slovenia, where economic sentiment deteriorated in October after several months of improvement. With a strong increase in the number of COVID-19 infections and a consequent tightening of containment measures, October’s confidence indicators point to weaker confidence in service activities, while confidence about further recovery in manufacturing remains positive in the euro area and Slovenia. Particularly the indicators of confidence in retail trade, service activities (for example, accommodation and food service activities) and among consumers deteriorated in Slovenia, which is also related to the renewed declaration of the epidemic. The values of some more recent short-term indicators of activity, such as electricity consumption and freight traffic on Slovenian motorways, did not change much in the last weeks of October, while the value of fiscally verified invoices declined significantly in the last seven days of October. This indicates that the renewed declaration of the epidemic will have greater consequences particularly for the service sector, but the economic consequences of the renewed spread of the epidemic and the related restrictions on business operations could be less intense than in the spring.
 

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