Slovenian Economic Mirror
Slovenian economic mirror No 5/2019
At the beginning of the second quarter, economic activity in Slovenia increased further in most sectors, while the growth of industrial production was lower than at the beginning of the year, reflecting more moderate imports. Activity in construction remains high. Strong growth also continued in most service activities, boosted by positive labour market developments. Employment is increasing further, amid a significant lack of appropriately skilled workers mainly on account of the hiring of foreigners, but also due to the hiring of unemployed.
Short-term indicators of euro area GDP growth point to somewhat weaker growth in the second quarter than in the first. Although the impact of certain one-off factors in the euro area has waned, elevated uncertainties (rising protectionism, increased possibility of an unregulated withdrawal of the UK from the EU, etc.) continue to hamper the acceleration of economic growth. After recovering in the first quarter, industrial production contracted in April, partly owing to a further decline in the volume of external trade. Turnover in retail trade and construction output in particular also swung downwards following the strong growth in the first quarter. The confidence indicators (ESI and PMI) for the euro area point to a continuation of similar trends in the coming months. Manufacturing confidence deteriorated significantly again in the second quarter, partly on account of the expected continuation of weak growth in global trade. Confidence in construction was somewhat lower than in the previous quarter, albeit still high. Consumer confidence and confidence in service activities also remained high.
Yields to maturity of euro area government bonds dropped further in the second quarter. The decline was to a great extent due to the announcement of the introduction of additional monetary policy measures of the ECB. In most euro area countries bond yields thus dropped to, or close to, record lows. The yield to maturity of the Slovenian bond declined to 0.52% (down 43 basis points quarter on quarter), while the spread between the Slovenian and German bond yields narrowed notably after widening in the previous quarter.
Real exports of goods remained high after significant growth at the beginning of the year, while the growth of real imports of goods accelerated. In the first four months to April, exports were up 9.2% year on year. According to our estimate, high-technology industries made the greatest contribution to growth, particularly exports of medicinal and pharmaceutical products. The growth of imports was 12.3% during this period. It continued to arise mainly from higher imports of consumer and intermediate goods. Slovenia traditionally trades the most with countries in the EU (around 76% of exports and imports), but this year the share of trade with countries outside the EU increased somewhat, particularly with Switzerland, where pharmaceutical products account for a significant share (78% of goods trade).
Exports of services continued to rise at the beginning of the second quarter, while the growth of services imports moderated. In the first four months of the year, nominal exports of services were up 9.5% year on year, driven primarily by 50% higher exports of construction services. Exports of travel services also recorded higher growth than in the same period of last year, while the growth of exports of transport services has slowed somewhat in recent months. Imports were up 3.5% year on year in the first four months, despite a decline in the last month of the period. As in exports, growth was mainly driven by imports of transport, travel and construction services. Imports of administrative and support service activities have dropped in recent months, particularly imports of technical, trade-related business services, which made a significant contribution to growth in total imports of services in 2017 and 2018.
In April manufacturing production increased further, following the surge at the beginning of the year. Its growth was mainly driven by high-technology industries, particularly, according to our estimate, the pharmaceutical industry. Production also strengthened in most other industries. In the first four months it was up 6.4% year on year on average, in addition to the pharmaceutical industry, the most in some industries of lower technological intensity (in the wood-processing and leather industries, the manufacture of other non-metallic mineral products, and the repair and installation of machinery and equipment). The production of motor vehicles was down year on year, while the production of some intermediate goods (particularly in the metal and rubber industries) remained roughly the same, to a great extent due to the slowdown in the EU car industry.
The value of construction output declined in April but remained high. Following the strong growth at the beginning of the year, this partly on account of favourable weather conditions, it otherwise declined in March and April. The high level of activity is attributable to higher investments on the part of the Government, municipalities and infrastructure companies, but also to favourable results of the corporate sector and the lack of building in previous years. The value of the indicators of contracts, which suggest future activity in construction, increased this year. The values of the stock of contracts and new contracts, having declined towards the end of last year, strengthened again this year, the most in residential buildings.
Turnover in trade remained high at the beginning of the second quarter; in the first four months it was more than a tenth higher year on year. This was a consequence of further growth in household consumption (particularly in the segments of household appliances and furniture, certain semi-durable goods, and also food products in recent months) and strong sales of motor vehicles. Turnover in wholesale trade remained high as well, after last year’s acceleration, which had also been partly due to increased sales of some energy products.
The growth of turnover in the majority of market services remained high at the beginning of the second quarter. In accommodation and food service activities, it accelerated slightly amid higher spending by both domestic and foreign guests. Higher growth was also recorded for turnover from sales of services outsourced to external providers. This has been the main factor of further strong turnover growth in administrative and support service activities, amid a decline of turnover in employment services. The growth of turnover in more export-oriented services, such as road transport and computer services, remained high. With turnover in telecommunications services dropping for the third consecutive month, the growth of total turnover in information and communication activities came to a halt. Meanwhile, turnover in professional and technical activities has maintained its level for several months.
Growth in household consumption continued at the beginning of the second quarter amid further growth in disposable income. In addition to the growth in net wages and social transfers (including pensions), the increase in household means also reflected strong growth in newly extended consumer loans. Household purchases of some durable goods thus strengthened further. Households also spent more on some semi-durable goods and on services related to leisure activities at home and abroad. Following a decline in the first half of 2018, purchases of food, beverages and tobacco products also continued to increase moderately
Economic sentiment deteriorated slightly in June. The further decline was again mainly due to the lower confidence in the manufacturing sector, which recorded deteriorations in the assessment of the current situation and of orders and expected imports and production. Confidence in construction and service activities did not change, following a period of decline, and remained above the long-term average. Consumer confidence, which has been fairly stable in recent times, has also remained relatively high.
Employment continues to rise, albeit at a slower pace than in previous years. In the first four months of this year, the number of employed persons rose the most in manufacturing and construction. Labour shortages, amid high labour demand, continue to be reflected in increased hiring of foreigners, who already contribute more than two-thirds to total employment growth. The growth of employment is also due to the hiring of unemployed persons, but the number of the unemployed is falling more slowly than in previous years amid the already relatively low level of unemployment. At the end of June, 70,747 persons were registered as unemployed, 5.7% fewer than in the same period of 2018.
Wage growth strengthened in the first four months of this year, this in line with expectations. In the private sector, wage growth was – in addition to economic and demographic factors (good business results, labour shortages and thus upward pressure on wages) – also due to the increase in the minimum wage at the beginning of the year. Wages rose the most in administrative and support service activities, accommodation and food service activities, trade, and manufacturing, i.e. the sectors with the greatest labour shortages and a high share of minimum wage recipients. In the public sector, wage growth mainly reflected strong growth in the government sector as a result of the higher valuation of most positions agreed at the end of last year, promotions and, to a lesser extent, the increase in the minimum wage.
In the first quarter, wage growth exceeded productivity growth in most sectors. There were no major misalignments between growth in labour costs and productivity growth in 2018 as a whole, but in individual, more export-oriented parts of the economy cost pressures started to emerge gradually during the year. In the first quarter of this year, the movements towards higher wage than productivity growth were also reflected in most other sectors of the economy. A pronounced increase in real unit labour costs (RULC) was recorded particularly in manufacturing, where real productivity was down year on year for the third quarter in a row. RULC movements in manufacturing and the economy as a whole otherwise do not deviate significantly from the euro area average.
Price and cost competitiveness indicators were relatively stable at the beginning of this year. In the last quarter of 2018 and the first quarter of 2019, Slovenia recorded slightly higher growth in unit labour costs (ULC) than its main trading partners. The deterioration of cost competitiveness (REER_ulc) against non-euro area countries was mitigated to some extent by a slight depreciation of the euro against the basket of their currencies. Relative to competitors, there have also been no signs of major spillovers of cost pressures into final prices thus far. Inflation remained comparable to that in trading partners, which was reflected in the stability of the indicator of price competitiveness (REER_hicp).
Year-on-year growth in consumer prices increased somewhat in June (by 1.8%). In addition to favourable economic conditions and rising household consumption, inflation continues to be largely driven by higher prices of services, particularly those related to housing, package holidays, and restaurants and hotels. The increase in June’s inflation was to a large extent attributable to higher prices of goods, food in particular, the decline in clothing and footwear prices also being smaller than in previous years. Food prices, having largely been falling at the monthly level in June in previous years, rose by 0.3% this June (the strongest monthly growth since 2001), which is related to less favourable weather conditions in the spring. The contribution of prices of oil products was negative, unlike in the previous two months.
The year-on-year growth of Slovenian industrial producer prices remained around 1% in May. Boosted by favourable developments in the Slovenian economy, price growth on the domestic market strengthened further, exceeding 2% year on year for the first time since August 2018. This was mainly due to the 15.1% higher prices in energy, gas and steam supply; prices of non-durable consumer goods were also higher year on year. The moderation of foreign demand had a negative impact on the movement of Slovenian producer prices on foreign markets, which were down year on year in May for the first time since September 2016, this by 0.3%.
In the first quarter, the average prices of residential properties continued to rise, while the number of transactions dropped further amid limited supply. Following the acceleration in 2017–2018 and further growth in the first quarter of this year, prices were up 8.4% year on year. The strong growth reflects the increase (of one-tenth) in the prices of existing dwellings. The prices of existing family houses rose the most, but remained lower than before the crisis. The average price of new dwellings, which accounted for only 3% of all transactions, was somewhat lower than one year before, when it had increased strongly (by a quarter).
The surplus of the current account of the balance of payments declined again in April; in the last 12 months, it was lower year on year (at 6.2 % of estimated GDP). The lower surplus in comparison with the previous 12-month period was mainly due to the lower surplus in trade in goods. The contribution of the terms of trade also remained negative, given the higher growth of import than export prices amid a rise in energy prices. The lower current account surplus year on year was also due to the higher net outflow of secondary income, mainly owing to higher VAT- and GNI-based payments into the EU budget. The surplus of services was higher, mainly as a result of the higher surplus in trade in transport and construction services and higher net revenues from travel. Net outflows of primary income remained lower due to lower net interest payments on external debt.
Outflows of financial assets continued to exceed inflows in the 12 months to April. The main factors of the net outflow (EUR 2.3 billion) remain portfolio investment and other investment of Slovenian residents abroad, which exceed the net inflow of direct investment. The high net outflow in the segment of portfolio investment was largely a consequence of the repayment of part of the government debt to foreign portfolio investors, while banks, insurance companies and pension funds continued to buy long-term debt securities on international financial markets. A net outflow was also recorded for other investment. The Government placed long-term deposits in accounts abroad, where interest rates are higher than in the domestic banking system. In addition, companies increased their short-term trade credits abroad, which is related to strong growth in exports. In the net inflows of direct investment, equity capital predominated, the increase in the recent period reflecting the takeovers in the insurance and business sectors. Outward FDI remained modest.
Loan volume continues to increase gradually, the main source of financing being domestic bank deposits. Growth is underpinned by household loans, which are used to finance spending on both consumption and property purchases and renovation. The volume of consumer loans is rising at a rate of more than 10% year on year, but is still 3.5% lower than the October 2008 peak. The volume of corporate loans is again declining slowly. According to data from financial accounts, particularly the volume of long-term loans is falling, while the volume of short-term loans is rising moderately. We estimate that enterprises are mainly borrowing for financing current production, while using own sources (profits, direct capital investment, assets of affiliated companies) to finance investments. An increasingly important source of funding for the banking system is deposits of domestic non-banking sectors. Liabilities to foreign banks also increased slightly in the last two months following a longer period of decline, but they still account for less than 5% of the banking system’s total assets (compared with over 35% at the onset of the financial crisis).
The surplus of the consolidated balance of public finances in the first five months was higher than in the same period of last year. Revenue growth exceeded last year’s growth during this period due to stronger growth in tax revenues and a smaller decline in non-tax revenues. Amid favourable developments in economic activity, the stronger growth of tax revenues was mainly due to VAT and corporate income tax. The growth of receipts from the EU budget was similar to that last year. The largest share of funding was from structural funds (more than two-fifths), nearly as much was from the implementation of the Common Agricultural and Fisheries Policy, and around one-tenth was from the Cohesion Fund. The inflows are still relatively low with regard to those envisaged in the adopted state budget, which is also related to problems in the implementation of the information system processing claims for reimbursement. The growth of expenditure has also been stronger this year, in line with expectations. It is mainly related to the adopted agreements on wage rises and further growth in employment, which is the strongest in healthcare, and measures in the area of transfers to individuals and households. Stronger growth is also recorded for investment, particularly in the area of transport infrastructure, and payments into the EU budget.