Slovenian Economic Mirror
Slovenian economic mirror No 7/2019
The moderation of growth in foreign demand is reflected in more modest growth in export-oriented sectors of the Slovenian economy this year. In sectors that are mainly related to private consumption, activity has mostly been strengthening. Growth in household spending continues, amid further growth in disposable income. Employment growth remains fairly high particularly due to the hiring of foreigners.
International institutions are lowering their forecasts for economic growth and global trade, while pointing to a significant risk of further moderation of growth. With the escalation of trade and geopolitical tensions, the growth of global trade and industry is weakening, which is also reflected in lower growth in investment. International institutions (the IMF, OECD and ECB) have thus revised downwards their global economy growth projections for this year, to only around 3%. Growth in global trade is expected to ease even more, to close to 1.0%. In 2020 growth is predicted to improve modestly, amid the assumed moderation of trade tensions. Euro area growth has been downgraded to only slightly above 1.0%, owing to lower value added in manufacturing and weaker growth in exports and investment; growth in 2020 will also be considerably lower than previously projected (around 1%). In response to the worsening of economic conditions and low inflation, the ECB announced a new package of measures, while the Fed cut key interest rates for the third time this year.
Economic growth in the euro area remained modest in the third quarter. According to preliminary data, GDP rose by 0.2% in quarterly terms for the second consecutive time. It was up 1.1% year on year, which is the lowest growth in six years. Economic growth remained modest in the majority of the main trading partners (Italy, Austria and France). Short-term confidence indicators suggest a continuation of the weak dynamics in the euro area economy The value of the Economic Sentiment Indicator (ESI) in October was at a four-year low, reflecting lower confidence in all sectors except construction and among consumers. The composite Purchasing Managers Index (PMI) remains low, suggesting the possibility of stagnation in the euro area in the last quarter of the year. The Ifo indicator also indicates that, amid lower orders, companies in Slovenia’s main trading partners expect no improvement in the situation in the short term, being optimistic only in Italy.
The growth of external trade eased in the summer months but maintained a high level owing to medicinal and pharmaceutical products. This is mostly related to increased trade and distribution activity in these (and certain primary) products, which has also contributed to significant monthly fluctuations in exports and imports in recent months. The slowdown of growth in Slovenia’s main trading partners in the euro area has already been reflected in deteriorating export expectations and less favourable export developments in other main manufactured goods for several months. Exports of vehicles and vehicle-related products (around 15% of total exports) and exports of metal products were down year on year, while growth in exports of other machinery and electrical equipment eased. Slower growth was also recorded for imports of intermediate goods, which is attributable to the moderation of growth in manufacturing.
Slovenia’s export market share in the EU increased by close to 3% in the first half of the year (last year by 4% on average). The year-on-year slowdown was largely due to the absence of the previously high growth in exports of passenger cars. Market share growth arose mainly from high exports of (i) oil, which is first imported and has no major impact on economic growth, (ii) more technology-intensive products (scientific and control instruments and pharmaceutical products) and (iii) metals (iron, steel and non-ferrous metals), amid a general decline in the EU’s nominal import demand for these goods. Among main trading partners in the EU, Slovenia’s market share increased in Croatia and Italy, while dropping in Austria and growing moderately in Germany and France. Outside the EU, it is rapidly rising in Switzerland, reflecting import-export flows of pharmaceuticals. According to preliminary data, Slovenia’s global market share rose by around 1% in the first half of the year (last year by 4.4% on average).
The growth of exports and imports of services eased during the summer months but remains high. Significant contributions to year-on-year export growth are still coming from exports of construction services, which are approximately one third higher than last year, and exports of transport services, where growth is slowing. Growth in the spending of foreign tourists, same-day visitors and transit passengers in Slovenia is also lower than last year. The easing of growth in imports of services in the last few months can be attributed mainly to more modest growth in imports of transport and other business services. The growth of imports of travel, construction and ICT services (computer services in particular) is weakening too, although at a somewhat slower pace.
Production volume in manufacturing in the summer months remained similar to that in the second quarter. In July and August it increased further only in high-technology industries. This year’s moderation was a consequence of more modest growth in foreign demand. More moderate growth was recorded particularly in the production of intermediate goods, i.e. in the medium-low-technology metal and rubber industries, which are more integrated in global value chains. In the eight months to August, manufacturing production was up 3.8% year on year, but in most industries (except high-technology ones) growth was lower than in 2018.
The volume of road freight transport increased in the second quarter of 2019, while the volume of transport by rail declined. Road transport abroad strengthened in particular, being almost 13% higher year on year. Significantly lower growth was recorded for road transport at least partly connected to the territory of Slovenia. In freight transport by rail, where growth is more volatile due to the small number of operators and the dynamics of one-off orders, the Q2 decline means a return to a similar level as recorded last year.
In August the value of construction output fell for the third consecutive month. Activity was 7.5% lower year on year, which is also related to last year’s strong base. After strong growth early in the year, which was partly due to favourable weather conditions, the value of construction output fell in the middle of the year. The largest decline was recorded in non-residential buildings, which is related to the deteriorated expectations of the business sector and its investment activity. The slowdown in the construction of civil-engineering works was more moderate, while activity in the construction of residential buildings increased, however, with significant monthly fluctuations. The indicators of the stock of contracts and new contracts in construction had fallen towards the end of last year, but in the middle of the year their values were higher than in the same period last year. Similarly, the indicators of business trends in construction have stabilised this year, after dropping in 2018.
During the summer months, turnover from trade remained roughly the same as at the beginning of the year. Turnover in the sale of motor vehicles has been stagnating this year, after strong growth rates in the previous four. In retail trade, turnover from durable goods remains high, turnover from non-durable food and non-food products is rising further, while turnover from motor fuels has been dropping after strong growth at the end of last year. Turnover in wholesale trade has also been strengthening after stagnation in the first half of the year.
During the summer months, turnover continued to rise across most market services. Strong growth was maintained in professional and technical services, particularly in management consultancy activities and architectural and engineering services. A continuation of strong growth was also recorded in accommodation and food service activities, mostly on the back of good business results in enterprises serving food and beverages. Turnover growth in administrative and support service activities moderated slightly, mainly on account of a further decline in employment services. The growth of export revenue from road transport moderated as well, thus contributing to a slowdown of growth in total transportation. Turnover in information and communication activities has stagnated since the beginning of the year.
Moderate growth in household consumption continued amid rising disposable income. In addition to further growth in the net wage bill and social transfers (including pensions), the increase in household assets also reflected newly extended consumer loans. With increased assets, households spent more on food and some non-food consumer goods and on services related to leisure activities at home and abroad. Purchases of durable goods, having strengthened notably in the last five years, have stagnated at a high level in recent months. Furthermore, household savings also continued to grow, amid increased uncertainty regarding the future economic situation in the country, which was also reflected in a worsening of the confidence indicator in the last three months.
The deterioration in business confidence has slowed in the second half of the year. The decline of confidence in manufacturing moderated, while retail trade confidence and confidence in service activities have been hovering at similar levels since the middle of the year. In recent months, confidence has been falling among consumers, who are pessimistic particularly regarding the future economic situation and employment. Confidence in construction has also been declining for quite some time.
Employment growth remains fairly high mainly due to the hiring of foreigners. In the first eight months, the number of employed persons was up 2.8% year on year, somewhat less than in the same period of 2018 (3.2%), which reflects lower growth in economic activity, low unemployment and a greater shortage of (appropriate) workforce. The strongest growth in this period was recorded in construction and transportation and storage, the sectors with the largest shares of foreign labour. The fall in the number of registered unemployed persons also slowed in the middle of the year. In total, 69,834 persons were registered as unemployed at the end of September, which is 5.3% less than one year before.
Year-on-year wage growth in the first eight months (4.3%) was higher than in the same period last year (3.6%). Wages increased the most in the general government sector, reflecting the agreed wage rises at the end of last year, promotions and, to a lesser extent, the increase in the minimum wage. The increase in the minimum wage at the beginning of the year, amid the still strong GDP growth and labour shortages, was also reflected in wage growth in the private sector. Wages rose the most in administrative and support service activities, accommodation and food service activities, and trade, i.e. sectors marked with the greatest labour shortages and a large share of minimum wage recipients.
Unit labour costs are increasing, especially in manufacturing. With low productivity growth and stronger wage growth, unit labour costs rose 2.2% year on year in the first half of 2019 (in the euro area: 0.7%). As in other euro area countries, they increased more in manufacturing (4.1%; in the euro area: 3.4%) than in the entire economy on average. This was a consequence of much weaker nominal growth in productivity, given that wage growth did not deviate significantly from the average wage growth in the entire economy (or was even slightly lower). Manufacturing has otherwise significantly contributed to the alignment between wage growth and productivity in the post-crisis period.
Cost and price competitiveness indicators have deteriorated somewhat. With faster growth in unit labour costs in Slovenia than in its trading partners, the cost competitiveness indicator (REER_ulc) for the Slovenian economy deteriorated more notably in the second quarter. In the third quarter, Slovenia also had relatively higher inflation, which contributed to a moderate increase (i.e. deterioration) in the price competitiveness indicator (REER_hicp). The exchange rate of the euro against the currency basket of 37 trading partners (NEER) had no major impact on competitiveness movements in the third quarter, and has hovered, amid fluctuations, at similar levels since 2017.
Year-on-year price growth has slowed significantly in the last two months. Significantly lower growth was recorded in the prices of goods, mainly owing to lower growth in the prices of all categories of non-energy industrial goods. The growth in the prices of semi-durable goods moderated the most, while the prices of durables dropped year on year again after modest growth. A significant contribution to the lower total year-on-year price growth also came from lower growth in food prices and lower prices of oil products. Growth in services prices has maintained a high level amid solid household consumption.
The total year-on-year growth of Slovenian industrial producer prices remained low (0.4%) in September. With the moderation of foreign demand, prices are falling on foreign markets. In the last few months they have fallen by around 1.5% year on year. Price growth on the domestic market remains at around 2%, which is largely a consequence of strong price rises in energy (due to higher prices in electricity, gas and steam supply, where year-on-year growth totals around 15%). Price growth in most other product groups was modest. Above-average rises were recorded only for non-durable goods (2.4%), as a consequence of solid growth in household consumption, according to our estimate.
The current account surplus totalled EUR 2.4 billion (5.0% of estimated GDP) in the 12 months to August and was lower year on year. The main reason for the year-on-year decline was the lower surplus in trade in goods, which was largely due to volume factors. Imports increased faster in real terms than exports. The terms of trade deteriorated as well. The deficit in secondary income was up year on year, primarily on account of higher VAT- and GNI-based contributions to the EU budget. On the other hand, the surplus in services trade was significantly higher than last year, while net outflows of primary income were lower, largely owing to lower costs of external debt servicing.
The situation in the banking system remains stable; growth in the volume of loans to domestic non-banking sectors remains at around 3%. Banks still mainly lend to households, which account for approximately 80% of the total net growth of loans to domestic non-banking sectors. Consumer loans are rising at the fastest pace (more than 10% year on year). According to our estimate, this is a consequence of both higher demand due to increased household spending and greater loan supply, as the interest rates on this type of loans are up to 300 basis points higher than in other loan transactions. The growth of non-banking sector deposits also remains stable. Given the low interest rates, particularly overnight deposits are still rising at the fastest pace, accounting for more than 70% of all non-banking sector deposits. The quality of banks’ assets continues to improve steadily with the share of arrears of over 90 days accounting for 1.4% of the banking system’s total exposure in August.
The surplus of the consolidated balance of public finances amounted to EUR 232 million in the first nine months, which is more than half less than in the same period last year. Revenue growth was significantly lower, while expenditure growth was higher than in the same period last year. The more moderate revenue growth is a consequence of lower receipts from the EU budget and lower tax revenue growth. This was lower particularly in personal income tax (mainly as a consequence of the lowering of the tax burden on holiday allowances) and value added tax, but has strengthened in recent months after a weak second quarter. The growth of social contributions was similarly high as last year, reflecting further growth in employment and stronger wage growth. This year’s strengthening of expenditure growth, which is mitigated somewhat by a further decline in interest payments, is attributable primarily to rises in public servants’ wages, along with further growth in their number (particularly in healthcare and education), and higher expenditure on social transfers. These rose in most categories, under the impact of adjustments for inflation, the relaxation of restrictions from previous years and some new measures. Payments into the EU budget were also higher year on year. Investment growth has eased relative to last year but remained strong.