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Slovenian Economic Mirror: Moderation of growth in export-oriented parts of the economy; further growth in the domestic segment

The situation in the Slovenian economy continued to improve towards the end of 2018, though more slowly than in 2017. Lower export growth is a consequence of one-off domestic factors and weaker growth in economic activity in main trading partners. Activity in sectors that are more dependent on domestic demand continued to rise rapidly in the last months of 2018.

The situation in the Slovenian economy continued to improve towards the end of 2018, though more slowly than in 2017. Unemployment fell at a moderate pace in the last months of the year, but, with an increased inflow of foreign workers, the growth of employment nevertheless remained relatively high. This, together with growth in wages and social transfers and a further increase in consumer loans, spurred households to increase consumption in several segments (particularly more durable goods and accommodation and food services). At the same time, they also continued to increase the share of disposable income saved. The rapid rise in investment continued, particularly in civil-engineering works. Besides investment, the government also slightly increased other primary expenditure, but at the same time – amid favourable economic developments and one-off inflows (NLB dividends) – notably widened the general government surplus. Exports also continued to expand, though at more moderate dynamics than in 2017.

Lower export growth is a consequence of one-off domestic factors and weaker growth in economic activity in main trading partners. The reasons for the slowdown of economic growth in main trading partners, which has been somewhat faster than anticipated by international institutions, include the increase in barriers to international trade and the partly related moderation of global economic growth. The cooling down in some countries is also partly related to cyclical factors and additionally, particularly in Germany, to temporary standstills of production in the automotive industry. These have already been reflected in somewhat lower growth in the Slovenian automotive industry. Production growth also remained more moderate than in 2017 in most other sectors, with the exception of high-technology ones. With more moderate growth in merchandise exports (which slowed somewhat more than the growth of merchandise imports), the high surplus of the current account of the balance of payments started to moderately decline.

Activity in sectors that are more dependent on domestic demand continued to rise rapidly in the last months of 2018. Amid increased investment by the government, municipalities and infrastructure companies, growth in construction mainly arose from the segment of civil-engineering works. Growth in construction, household disposable income and consumer loans, together with higher spending by foreign tourists, supported the continuation of relatively strong turnover growth in trade and other service activities, particularly accommodation and food service activities, professional and technical activities, road transport, and computer services.

Picture: Activity in manufacturing is increasing more slowly than in 2017, while growth in activities oriented predominantly to the domestic market remains high

The strengthening of the service sector is reflected in increasingly stronger growth in prices of services, while the lowering of inflation at the end of the year was a consequence of the fall in the price of oil. For the most part of 2018, consumer price growth was, besides by prices of services, to a great extent driven by higher prices of oil products and food, but in December their contribution dropped notably and inflation declined. In the last months of the year, a similar moderation was also recorded for some other financial indicators, such as corporate loans and, after almost three years of relatively strong growth, prices of flats.

Amid greater uncertainty, business expectations indicate a further slowdown of growth in the export-oriented part of the economy; the prospects for the remaining part of the economy remain favourable. Confidence in the Slovenian economy otherwise improved slightly in the last months of the year, though remaining lower year on year due to deterioration in the first half of the year. Amid lower export orders, the lag is most visible in manufacturing. Business expectations in main trading partners declined further in the last months of 2018, as did international institutions’ forecasts regarding their economic growth. In addition to uncertain conditions in international trade, this was also a consequence of increased uncertainties about (i) the conditions of the forthcoming UK withdrawal from the EU, which, with the rejection of the withdrawal agreement in the UK Parliament, remain unclear and the risk of an unregulated exit even greater, (ii) policies of individual EU countries, and (iii) possible further corrections on the world’s main stock markets. The prospects for the part of the economy that is focused predominantly on the domestic market are more favourable. Business expectations in the service sector and consumer expectations are still relatively high. We can also expect further high growth in construction investment, owing partly to the increased dynamics of absorption of EU funds.

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