Slovenian Economic Mirror
Slovenian economic mirror No 2/2019
Favourable economic conditions continued at the beginning of the year. Confidence in the Slovenian economy has remained almost unchanged since the middle of last year. Economic growth was also reflected on the labour market, where rising demand for labour contributed to high employment and a further decline in registered unemployment. Stronger wage growth, alongside growth in social transfers, is increasing disposable income, which – amid relatively high consumer confidence – has a favourable impact on household spending. The surplus of the current account of the balance of payments remains high.
Confidence indicators indicate a further moderation of growth in the world economy and in Slovenia’s main trading partners. At the beginning of the year the slowdown was the most pronounced in manufacturing. The values of the Purchasing Managers Index (PMI) for the global economy and Slovenia’s main export markets reached the lowest levels in the last few years. Global trade declined further. The Economic Sentiment Indicator (ESI) also dropped again in the first quarter (particularly in industry) in all our main trading partners. In recent months international institutions thus substantially lowered their growth forecasts for this year and slightly for next. According to the ECB’ most recent forecast, euro area GDP will increase by 1.1% and 1.6% respectively in real terms this year and next (instead of the previously expected 1.6% and 1.7%).
Following the moderation in the second half of last year, exports recorded fairly strong growth in January; the strong growth of imports also continued. Last year’s moderation, amid the slowdown of economic activity in Slovenia’s main trading partners, was affected by lower growth in most key manufactured goods and significantly lower vehicle exports (owing to the petering out of a one-off factor). Meanwhile, exports of medical and pharmaceutical products and some primary products strengthened significantly, including at the beginning of the year according to our estimate. Growth in imports was affected particularly by further growth in imports of consumer goods, as growth in intermediate and investment goods imports slowed notably towards the end of the year.
The growth of nominal exports of services has eased off in recent months, while the level of imports of services remains high. Slower growth is recorded for exports of transport services, which are strongly related to the moderation of international trade, and foreign tourist spending in Slovenia, while exports of construction and technical, trade related services continue to increase. In January, exports of services were up 11.3% year on year, while imports – with minor fluctuations – maintained a similarly high level in the whole period since the beginning of last year.
After the modest strengthening in the second half of 2018, manufacturing output increased notably at the beginning of this year, the most in high-technology industries, where it was more than one-fifth higher year on year (according to our estimate, mostly as a result of the pharmaceutical industry). Movements in the production of motor vehicles and most intermediates, particularly those for the European car industry, reflect the petering out of the one-off effect of the start of the production of a new passenger car in 2017, which was still strongly felt in the first months of last year, and the new global standard for measuring fuel consumption and emissions introduced in September 2018. In these industries, January’s production was lower than or similar to that one year before.
The value of construction output rose again in January after December’s decline. Activity increased in all three segments (civil engineering works, residential and non-residential buildings), over a longer period (one year) the most in the construction of civil-engineering works. The indicators of contracts, which suggest future activity in construction, dropped both in January and towards the end of last year. The stock of contracts in construction was thus down year on year in January.
In 2018 the growth of average residential property prices accelerated further, while the number of transactions moderated after increasing strongly in previous years. On average, prices were 15.1% higher year on year. Prices for all residential property categories went up. The average price of existing flats, which account for 70% of all transactions, rose by around one tenth for the second consecutive year. Prices of existing family houses otherwise rose the most (by one fifth), this being the only category (alongside new family houses) where prices still lag behind the average price from 2008. With limited supply, sales of new flats again dropped the most last year, accounting for only one tenth of those in 2007, the highest thus far. For the first time after four years of strong growth, the number of transactions in existing flats also dropped last year, but remained relatively high.
Turnover in trade continued to rise at a moderate pace at the beginning of the year. Last year’s turnover growth in wholesale trade was affected not only by stronger domestic consumption, but also vigorous trade in some primary goods. Since the end of last year, motor vehicle sales have also been picking up following a considerable decline after September’s introduction of the new global standard for measuring fuel consumption and emissions. In retail trade, marked by significant fluctuations in the sales of automotive fuels, the sales of non-food products are still on the rise, boosted by further growth in household consumption, while the sales of food, beverages and tobacco products continue to stagnate.
Most market services recorded further growth in turnover at the beginning of 2019. Growth in turnover in accommodation and food services remained high, reflecting higher spending of domestic and foreign tourists. Turnover growth in information and communication activities arose primarily from computer services (amid a further strengthening of export revenues) and, after a long period of stagnation, telecommunication services. Turnover growth in administrative and support service activities in recent months is mainly related to turnover growth in services that are often outsourced. Turnover in employment services and in transportation and storage remains high.
Household consumption continued to increase at the beginning of the year, underpinned by stronger growth in disposable income and relatively high consumer confidence. The growth of the net wage bill and social transfers (including pensions) accelerated further; the year-on-year growth of new consumer loans was also high. With more money available, households purchased more durable goods (particularly passenger cars, furniture and household appliances). Spending on certain semi-durable goods and tourist services at home and abroad also increased further.
Economic sentiment has not changed much since the middle of last year. At the beginning of the year confidence remained basically unchanged in most sectors and also among consumers. A significant increase was recorded only for retail trade, where sales expectations were also up owing to higher sales. Confidence in manufacturing dropped again. Manufacturing firms are faced with lower export orders. Their expectations about future orders are also deteriorating amid slower growth in foreign demand.
Labour market conditions improved further at the beginning of the year. The number of employed remained high. Amid the shortage of workers, firms are increasingly hiring foreigners. These contribute more than half to total employment growth (in January already around 63%). The decline in the number of registered unemployed continues, after already slowing last year amid the low unemployment rate and lower growth of employment from unemployment. At the end of March the number of registered unemployed was 76,533 persons or 5.8% lower than in the same period of 2018.
In January, wage growth was notably higher year on year. Wage growth in the private sector was, in addition to favourable economic factors such as low unemployment (and the related impacts of labour shortages) and good business results also due to the increase in the minimum wage. Wages rose the most in those sectors that have the largest labour shortages and employ a large number of workers with below-average wage (in trade, transportation, accommodation and food service activities, manufacturing and administrative and support service activities). In the public sector, wage growth was affected by strong growth in the government sector as a result of wage rises agreed at the end of last year and, to a lesser extent, a higher minimum wage.
Inflation remains relatively low. In March year-on-year price growth otherwise increased slightly. Growth in household consumption contributed to a rise in prices for both goods and services. Prices of health insurance were up; growth in prices of holiday packages strengthened further. Higher growth was also recorded for prices of services related to housing and water supply. A significant contribution to the increase in goods prices derived from higher prices of clothing and footwear – which increased somewhat more at the end of seasonal sales than in the comparable period of last year – and a more moderate decline in car prices.
Year-on-year growth in Slovenian industrial producer prices has been hovering just above 1% in the first months of the year. The growth of commodity prices continues to ease, which is reflected in lower year-on-year growth than in 2018. Energy price growth on the domestic market has increased in the last few months (owing to higher prices in electricity supply). Price growth on foreign markets is lower than on the domestic market, in our assessment also as a consequence of the moderation in foreign demand.
The surplus of the current account of the balance of payments remains high. In the twelve months to January it totalled EUR 3.4 billion (6.9% of estimated GDP). The higher surplus in current transactions relative to the previous 12-month period continued to arise from a higher surplus in services trade, especially trade in transport services and net inflows from travel, and a smaller deficit in primary income related to lower external debt servicing costs and higher net inflows of labour income. Meanwhile, the surplus in goods trade was lower, while net outflows of secondary income were higher, which was lowering the surplus. Net outflows of secondary income were marked especially by higher payments into the EU budget.
The situation in the banking system remains stable; the volume of loans to domestic non-banking sectors continues to strengthen steadily; the quality of banks’ assets is improving. Year-on-year growth in the volume of loans to domestic non-banking sectors continues to arise from household borrowing in the form of consumer and housing loans. The year-on-year fall in the volume of loans to domestic non-financial corporations is gradually easing, which is a consequence of slightly more pronounced net borrowing early in the year. Besides on bank loans, firms are also relying on other sources for financing current operations and investment. The quality of banks’ assets keeps improving. In 2018 the share of arrears of more than 90 days dropped by more than one third, to 2.3%. We estimate that this is a consequence of a gradual repayment of bad claims and better credit ratings of borrowers amid good business results.
The yields to maturity of euro area government bonds declined slightly more at the end of the first quarter. According to our estimate, this was a consequence of the introduction of the ECB’s new monetary policy measure (TLTRO-III) and the postponement of the expected increase in key interest rates. The yield to maturity of the Slovenian bond thus dropped to 0.81%, the lowest value since the end of 2017, while the spread between the Slovenian and German bond yields narrowed to 76 basis points.
The general government deficit in the first two months was somewhat higher than in the same period of last year. Revenue growth was similar (5.7%) to that last year, amid the continuation of favourable labour market conditions and domestic consumption. Receipts from the EU were low. Expenditure growth accelerated (8.6%), with all major expenditure categories contributing equally to growth. Higher growth in transfers to individuals and households reflects legislative changes and the relaxation of austerity measures in the area of family benefits and social security and a higher regular adjustment of pensions (2.7%). The higher growth in the wage bill is a consequence of the higher valuation of most positions based on last year’s agreement. Strong growth was also recorded for investment, driven by the accelerated implementation of projects in the areas of transport and transport infrastructure, as well as for expenditure on goods and services; this had been low in the same period of last year and strengthened only later in the year. The general government deficit, which arose solely from the state budget, is expected to turn into surplus by the end of the year (EUR 193 million) according to the revised budget.
The public finance position improved further in 2018. In 2017 it was balanced, while in 2018 revenue exceeded expenditure by EUR 303 million (0.7% of GDP). The steady improvement in Slovenia's balance since 2013, when the general government deficit was at its highest, is a consequence of stabilisation measures, improved economic conditions and measures for increasing revenue and containing expenditure. In the last two years the decline in flexible expenditure, particularly investment, came to a halt. Last year investment increased strongly (24.8%) as a result of faster implementation of projects financed from national sources and from EU funds.
The improvement in the general government balance in circumstances of strong economic growth has led to a rapid decline in the general government debt as a share of GDP in recent years. The rising of Slovenia’s indebtedness after 2008, one of the highest in the EU amid double-dip recession and a longstanding persistence of high general government deficits and due to one-off factors, came to a stop in 2015 (at 82.6% of GDP). Since then the debt-to-GDP ratio has been rapidly falling, also when compared with other countries and faster than required by the Stability and Growth Pact. In 2018 it totalled 70.1% of GDP. The decline in the debt-to-GDP ratio took place under the impact of an improvement in the primary balance (surplus); the contribution of economic growth was also positive – in the last three years it has exceeded the counter-effect of interest expenditure, which also declines.
Slovenia’s net budgetary position against the EU budget amounted to EUR 360.1 million in 2018 (EUR 8.8 million in 2017). Slovenia received EUR 793.5 million into the state budget (71.4% of the amount envisaged in the budget), while its payments into the EU budget totalled EUR 433.4 million. The majority of funding was from structural funds (68.3% of the planned amount). Receipts from the Cohesion Fund (62.3%) and under the Common Agricultural and Fisheries Policy (90.8%) were lower. The gap between the payments from the state budget and the reimbursements from the EU budget narrowed with the elimination of systemic errors in transferring data between the three information systems. Delays in the payment of EU funds into the state budget nevertheless remain one of the greatest challenges in the absorption of cohesion funds.