Slovenian Economic Mirror
Slovenian economic mirror No 6/2019
GDP growth in Slovenia continues at a moderate pace; the deterioration of export expectations is reflected in lower export growth in some goods segments. The growth rates of goods exports and imports remain relatively high, which is, according to our estimate, to a great extent related to stronger trade and distribution activity in medicinal and pharmaceutical products. The growth of exports of other main manufactured goods is significantly lower, given the moderation of activity in Slovenia’s main trading partners and uncertainty in the international environment. Employment growth is slowing, but remains high amid increased hiring of foreigners. Favourable labour market conditions continue to boost growth in private consumption. Further growth is also recorded in activities related to domestic demand.
Short-term indicators of economic activity and confidence indicators in the euro area suggest a continuation of weak economic growth in the third quarter. GDP growth dropped from 0.4% to 0.2% in the second quarter (1.2% year on year). A positive contribution to quarterly growth came from domestic demand, while the contribution of net exports was negative owing to modest foreign demand. At the beginning of the third quarter, activity declined in manufacturing (particularly in Germany) and construction, while remaining relatively high in retail trade. The values of confidence indicators in manufacturing (ESI, PMI) deteriorated significantly, which is attributable to weak world trade and global uncertainty. Confidence also declined in service activities and construction while remaining stable in retail trade and among consumers. The ECB and OECD lowered slightly their forecasts for euro area GDP in September, expecting 1.1% growth this year and a continuation of similar growth next year.
The volume of external trade increased at the beginning of the third quarter. In the seven months to July, real goods exports were up 9.4% year on year, their growth being mainly driven by exports of medicinal and pharmaceutical products. The growth of exports of other main manufactured goods was significantly lower, which is related to cooling growth in Slovenia’s main trading partners, particularly Germany. The growth of imports remains high, driven by factors similar to those in exports.
The growth of exports and imports of services continued at the beginning of the third quarter. Nominal exports were up 8.8% year on year in the first seven months. More than half of their increase was attributable to exports of transport (road transport in particular) and construction services. Spending of foreign tourists is increasing as well, albeit more slowly than in previous years. The growth of imports (5.6%) was also based on imports of transport service, but also, to a somewhat lesser extent, on imports of construction, travel and ICT services (computer services in particular).
The volume of production in manufacturing has remained practically unchanged after increasing at the beginning of the year. Production has strengthened particularly in high-technology industries. Amid further growth in the ICT manufacturing sector, it has also risen in the pharmaceutical industry according to our estimate. Production in more export-oriented medium-low- (metal and rubber) and most medium-high-technology industries remains almost unchanged. Production in those medium-low-technology industries that are less dependent on foreign demand, i.e. less integrated in global value chains, is rising (the repair and installation of machinery and equipment and the manufacture of other non-metal mineral products). Low-technology production has dropped somewhat in recent months after a longer period of steady growth.
The value of construction output declined in the middle of the year but remains high. This year’s fluctuations in construction output are related to weather conditions, which also contributed to the mid-year decline. The relatively high level of activity is attributable to both higher investment on the part of the government, municipalities and infrastructure companies and favourable results of the corporate sector following relatively weak construction activity in previous years.
Following stagnation in the second quarter, turnover in trade increased in July. This was a consequence of turnover growth in wholesale trade and in some goods in retail trade, particularly those related to further growth in household consumption (food, household appliances, telecommunication and computer equipment, medicines, personal care products, sports equipment, etc.). Turnover growth in retail trade is otherwise significantly marked by motor fuel sales, which have been declining this year after the high growth rates seen at the end of 2018. Meanwhile, turnover in the sales of motor vehicles maintains its level from the beginning of the year, following the strong growth rates in the previous four years.
At the beginning of the third quarter, turnover growth continued across most market services. In professional and technical activities, turnover strengthened on account of July’s considerable growth in architectural and engineering services. Turnover growth also continued in transportation (amid slower growth in exports of road transport services). With rising turnover in services that businesses often outsource to external providers, turnover growth in administrative and support service activities remained high. Turnover in information and communication activities has stagnated since the beginning of the year, its growth being impeded by a decline in telecommunication services (amid a significant strengthening in computer services). Meanwhile, turnover growth eased in accommodation and foods service activities, largely owing to a decline in the number of tourist overnight stays.
Growth in household consumption continued at the beginning of the third quarter amid further growth in disposable income. In addition to stronger growth in the net wage bill and social transfers (including pensions), the increase in household assets also reflected the easing of the tax burden on holiday allowance and strong growth in newly extended consumer loans. This encouraged households to increase spending on purchases in several segments. Their saving rate also continued to rise. According to SURS data, the household saving rate (which increased by 0.2 pps to 12.6% in 2018) rose by a further 1.8 pps year on year in the first half of this year.
Economic sentiment has not changed significantly following the decline at the beginning of the year and remains above the long-term average. Prospects in retail trade and service activities remain favourable. The outlook for manufacturing remains unchanged. Business expectations about production and exports have remained at the achieved levels, while expectations about orders, export orders in particular, are declining amid slowing growth in the international environment. Confidence in construction and among consumers has weakened slightly in recent months.
Employment growth is slowing, but remains high amid increased hiring of foreigners. In the first seven months the number of the employed increased somewhat less year on year (2.9%) than in the same period of last year (3.3%). The strongest growth was recorded in construction, transportation, storage, accommodation and food service activities, and manufacturing, i.e. activities with a high job vacancy rate. The contribution of foreigners to total employment growth remains high, at around 70% in July. Amid the already low level of unemployment and the softening of economic activity, the decline in the number of registered unemployed persons slowed in the middle of the year. At the end of August it amounted to 71,544, which is 5.8% less than one year before.
Year-on-year wage growth in the first seven months (4.4%) was higher than in the same period of last year (3.6%). The higher growth rate mainly reflects wage growth in the public sector (as a result of the higher valuation of most positions agreed at the end of last year) and promotions. Wage growth in the private sector, amid the still strong GDP growth and upward pressure on wages related to labour shortages, was also due to the increase in the minimum wage at the beginning of the year. This year wages rose the most in accommodation and food service activities, administrative and support service activities, manufacturing, and trade, i.e. sectors with the greatest labour shortages and a high share of minimum wage recipients.
After strengthening in the last few months, the year-on-year price growth slowed significantly in September. The growth of goods prices was notably lower, mainly as a consequence of external factors in energy and food prices. Owing to lower average oil prices, the negative contribution of motor fuel prices increased further. The contribution of food prices was also lower, according to our estimate largely due to month-on-month lower prices of fresh fruit. The growth of prices of non-durable and semi-durable goods also eased, while prices of durable goods were down again year on year after rising in August. The growth of prices of services, particularly those related to supplementary health insurance, housing, package holidays, and hotels and restaurants, continues to strengthen amid solid household consumption. Service prices in the euro area are rising more slowly, euro area inflation thus remaining lower than inflation in Slovenia.
The total year-on-year growth of Slovenian industrial producer prices eased further in August. The slight moderation was mainly a consequence of accelerated price falls on foreign markets. Prices declined across all product groups, according to our estimate due in part to weaker growth in foreign demand. Price growth on the domestic market remains around 2%, largely owing to strong growth in energy prices (on account of electricity prices, which were up 15% year on year). Price rises in most other product groups were modest; they were the highest in non-durable consumer goods (1.8%).
The average residential property prices increased further in the second quarter; the number of transactions also rose following a decline in the previous year. Prices were up 5.8% year on year. Their growth arose from the increased number of transactions and a rise in the prices of existing dwellings (8.3%). Prices of existing family houses rose the most, but they have not reached their pre-crisis levels yet. The average price of existing flats in Ljubljana, which had been growing at above-average rates in the previous four years, remained the same as one year before, while the average price in the rest of Slovenia increased more. The average price of new residential properties, which accounted for only 2% of all transactions, was more than a tenth lower than one year before, when it had risen strongly (by more than a quarter).
The current account surplus in the 12 months to July was down year on year, totalling EUR 2.5 billion (5.2% of estimated GDP). With imports rising faster than exports, the decline was mainly due to the lower surplus of trade in goods. Moreover, the deficit in secondary income was also higher year on year, primarily on account of higher payments into the EU budget (VAT-based and GNI-based contributions). Meanwhile, the surplus in services trade rose further, especially in the trade of road transport, travel, construction and R&D services. The net outflows of primary income also declined, mainly owing to lower costs of external debt servicing.
The growth of deposits in the banking system, the main factor of the moderate strengthening of banks’ lending activity, remains stable. In August, the volume of loans to domestic non-banking sectors increased 3.3% year on year, mainly as a result of household borrowing (accounting for more than 80% of total year-on-year loan growth). The volume of corporate and NFI loans is again strengthening, which we assess is still largely due to lower deleveraging, as new lending remains modest. The growth of non-banking sector deposits is approximately twice that of loans. Household deposits continue to rise, particularly overnight deposits. The growth of deposits of non-financial corporations has again strengthened slightly, after moderating at the end of the first half of the year, but remains lower than in the previous year. The quality of banks’ assets continues to improve steadily, the share of arrears of over 90 days accounting for 1.5% of the banking system’s total exposure in July.
Yields to maturity of euro area government bonds dropped significantly again in the third quarter. The decline was to a great extent attributable to the additional package of monetary policy measures adopted by the ECB in the summer months, which was reflected in a decline in government bond yields in most countries of the euro area. In the third quarter, the yield to maturity of the Slovenian bond fell to 0.0% (about 50 bps less than in the second quarter), while the spread in relation to the German bond (51 bps) narrowed.
The surplus of the consolidated balance of public finances reached EUR 95.2 million in the first eight months, which is half less than in the same period of last year. Revenue growth was significantly lower in this period, mainly owing to lower receipts from the EU budget and a loss of revenue from personal income tax due to the exemption of holiday allowance from taxes and contributions (for allowances in the amount of up to the average monthly wage). The lower growth in total revenue was also affected by lower growth in revenue from value added tax. The growth in expenditure has increased since the beginning of the year. This has mainly been related to the adopted agreements on wage rises and further growth in employment, which have been strongest in healthcare and education, and measures in the area of transfers to individuals and households. Payments into the EU budget have also been higher. The growth of investment has eased relative to last year but remained strong. The estimate of the realisation of the state budget for 2019 indicates a surplus of EUR 151 million, which is less than envisaged in the adopted revised budget (EUR 194 million). This is mainly related to the expected lower realisation in implementing projects financed from EU funds and their refunds into the budget.
In the first eight months of 2019 Slovenia’s net budgetary position towards the EU budget remained positive, though significantly less so than in the same period of last year (EUR 23.0 million against EUR 209.4 million in 2018). The difference is a consequence of the refund of part of the suspended funds under the previous programming period in 2018, higher payments into the EU budget in 2019 and lower-than-expected refunds under the current programming period this year. Refunds to the state budget (mainly from the structural funds and for implementing the Common Agricultural and Fisheries Policy) amounted to EUR 409.1 million, which is 40.2% of the revenue planned for this year. The realisation of projects under the EU cohesion policy was also lower than planned. Given the low absorption of EU cohesion policy funding thus far, the pace of EU funding absorption will, as in the previous perspective, intensify in the second half of the 2014–2020 programming period.