Slovenian Economic Mirror
Slovenian economic mirror No 8/2019
Year-on-year GDP growth in the first three quarters was 2.7%, which is a significant slowdown relative to last year and close to IMAD’s autumn forecast for 2019 as a whole (2.8%). Data on GDP growth in the third quarter otherwise show a faster-than-expected moderation of investment growth in particular. The slowdown in export growth is in line with expectations, while it is encouraging that growth in private consumption is on the rise. If there are no major negative surprises from the international environment, where uncertainty remains heightened, this year’s GDP growth will be close to that projected in our Autumn Forecast of Economic Trends 2019.
Confidence indicators for the euro area economy suggest a continuation of weak growth at the end of the year. Seasonally adjusted, GDP increased 0.2% in the third quarter (1.2% year on year). Economic growth, which continued in all our main trading partners in the euro area, was driven primarily by growth in private consumption. With regard to confidence in the euro area economy, a continuation of weak growth can be expected in the last quarter of the year. According to the ESI and the PMI, the greatest contribution to growth continues to come from services, while confidence in manufacturing remains very low.
Moderate euro area growth will continue next year. International institutions (the IMF, EC, OECD and Consensus Economics) have lowered their forecasts for euro area GDP growth for this year and next since the summer. Increased uncertainties globally, together with structural changes, have contributed to a slowdown in manufacturing, which is gradually spilling over to the services sector. Euro area GDP is projected to increase by around 1.0% this year and in the next two. Its growth will continue to be driven by domestic demand. With the continuation of favourable labour market conditions, relatively high consumer confidence and favourable borrowing terms, the bulk of growth will be due to private consumption. A supportive fiscal policy will have a favourable impact on the contribution of government consumption. With increased uncertainty, the contribution of investment will be ever smaller, while the contribution of net exports will be slightly negative due to subdued foreign demand. The risks to the forecast are strongly negative (the intensification of trade and geopolitical tensions, a greater-than-expected slowdown in Chinese economic growth, a hard Brexit and a possibility of a greater moderation of growth in services).
In the third quarter of this year, GDP was by 2.3% higher year on year (in total by 2.7% in the first three quarters). Reflecting a global slowdown in economic growth, Slovenia’s GDP growth is more moderate than in the exceptional year 2017 and last year, but it was still higher than in the EU as a whole in the first quarter.
Growth continued to be driven primarily by domestic consumption. Growth in household consumption (4.3% year on year) strengthened further. It continued to be supported by favourable labour market conditions, but also year-on-year higher payments of social transfers. Growth in final government consumption (1.8%) was also somewhat higher than in the previous quarter, while growth in gross fixed capital formation (1.2%) slowed down markedly. This is largely a consequence of a halt in year-on-year growth in construction investment, which moderated after the strong growth seen in previous quarters. Investment in machinery and equipment was up, but its growth remains lower than in the last three years. Inventories rose considerably in the third quarter, accounting for 0.7 pps of year-on-year GDP growth, after their contribution was strongly negative in the first half of the year (it was revised downward with November’s release).
Exports did not increase further in the third quarter, while their year-on-year growth declined slightly. The moderation of the year-on-year growth of exports recorded since last year thus continued, which is more clearly indicated by data after November’s revision (see Box 2). While the moderation mainly reflects lower growth in foreign demand, it is also partly due to the pressure of rising labour costs on export competitiveness. Amid solid growth in domestic consumption, imports increased (6.7%) more than exports (4.5%) in the third quarter, so that net exports made a negative contribution to GDP growth this time (-1.2 pps).
Lower growth in foreign demand is reflected in a greater slowdown in export growth in some main product groups. Total growth in goods exports remains high (12.4% year on year) mainly as a consequence of strong trade and distribution activity in medicinal and pharmaceutical products, but also in oil and oil derivatives. Significantly lower growth is recorded for exports of other main manufactured goods, not only vehicles, but also intermediate goods (metal products, parts and accessories for transport equipment), which account for around half of Slovenian exports. This can be attributed to the moderation of growth seen in our main trading partners, particularly Germany, where exports remain roughly the same as last year. Growth in Slovenian imports is still high, driven by similar factors as growth in exports.
Balance of payments data on exports and imports of goods for this year were revised significantly in November. In line with the principle of change in ownership, external trade flows where no change in ownership occurred (i.e. goods in transit) were excluded from the series of balance of payments data for exports and imports for this year. The values of goods exports and imports are therefore accordingly lower. A smaller part of the value of goods in transit, if processed before being re-exported (inward processing), is recorded as exports of processing services (for example packaging, assembly and labelling). With this change, a large part of the rapidly rising re-exports of medicinal and pharmaceutical products to Switzerland was excluded from total Slovenian exports. Quarterly data on exports and imports were also changed with the revision, as the balance of payments data also serve as the basis for national accounts statistics used for measuring GDP. The revision was limited to this year, meaning that changes can also be expected at the revision for 2018, which will be released in the first half of next year.
The revised balance of payments data on exports and imports of goods point to more moderate growth in 2019 than data before the revision and data from the external trade statistics. The accelerated growth of exports and imports in the first eight months almost halved with the revision, indicating a moderation. The revision lowered total goods exports in this period by almost EUR 1 billion and imports by EUR 1.3 billion. The balance of trade in goods was, consequently, EUR 337 million higher. In exports of services, processing services in the amount of EUR 33 million were thus also taken into account additionally. These data therefore show less favourable export and import dynamics than data according to the external trade statistics released monthly by SURS, which is based on the cross-border principle (and therefore also includes the above-mentioned type of re-exports). In the third quarter, real exports were 2.3% higher than in the previous quarter according to external trade data (12.4% year on year), while after the revision of quarterly national accounts data, their growth was only 0.2% (5.0% year on year).
Exports and imports of services maintained their high levels in the third quarter, but particularly growth in exports slowed down notably and was lower than in the same period last year. The greatest contributions to the year-on-year slowdown in export growth came from lower growth in exports of transport and travel services, which together represent almost half of total services exports. Growth in exports of construction services also eased more notably in the last quarter, while growth in technical, trade-related services and processing services related to distribution activity in the area of medicinal and pharmaceutical products is again strengthening. The growth of exports of services remains similar to that in previous quarters, driven particularly by growth in imports of transport and other administrative and support services.
Production volume in manufacturing has remained practically unchanged since it increased early in the year. In the third quarter, production volume in high-technology industries increased further. Production in medium-low-technology industries, which are more integrated in global value chains, has mostly been hovering at the level achieved at the beginning of the year. The moderation of foreign demand also had a considerable impact on medium-high-technology industries; in addition to a year-on-year decline in motor vehicle manufacturing, the third quarter also recorded a significant deceleration of growth in the production of machinery and equipment. The greatest fall in production volume since the beginning of the year was recorded in low-technology sectors, especially in some less-productive industries (the textile, leather and furniture industries).
The value of construction output dropped further in September. Activity was 8.1% lower year on year. After strong growth early in the year, which was also due to favourable weather conditions, the value of construction output fell in the middle of the year. The decline was the most pronounced in the construction of non-residential buildings, which is related to deteriorated expectations of the business sector and its investment activity. The slowdown in civil-engineering works was more moderate, while activity in the construction of residential buildings increased further, amid significant monthly fluctuations. The indicators of the stock of contracts and new contracts in construction, which fell towards the end of last year, have strengthened again this year and are already higher than last year. They have improved the most in the construction of residential and non-residential buildings, while in civil-engineering works they remained at similar levels as at the beginning of the year.
Turnover in trade increased somewhat in the third quarter. This was mainly a consequence of a more pronounced strengthening of turnover in wholesale trade (which stagnated in the first half of the year) and further turnover growth in retail trade with non-durable non-food goods. Turnover in durable goods, food products, beverages and tobacco products and from the sale of motor vehicles remained similar to that in the previous quarter. Turnover from the sale of motor fuels has been declining this year after last year’s strong growth. Overall, turnover was 6.5% higher year on year in the first nine months.
In the third quarter, turnover growth continued in most market services. It accelerated the most in professional and technical activities, especially in architectural and engineering services. Further growth was also recorded in accommodation and food service activities, particularly owing to strong growth in enterprises serving food and beverages. However, strong turnover growth in administrative and support service activities moderated somewhat amid renewed turnover growth in employment services. In the transportation sector as a whole, turnover growth slowed, especially in air transport. Turnover in information and communication activities has stagnated since the beginning of the year.
Growth in household consumption continued in the third quarter amid further growth in disposable income. It arose from further growth in the net wage bill and social transfers (including pensions) and accelerated year-on-year growth in newly granted consumer loans. Households spending on non-durable goods and services in particular strengthened year on year, while growth in purchases of durable goods moderated this year after strong growth in the last five years. With increased uncertainty about the future economic situation in the country, which was also reflected in a deterioration of consumer confidence in the last four months, household saving continued to rise.
Economic sentiment deteriorated further in November and is close to the long-term average. In November, confidence deteriorated particularly among consumers, who are the most pessimistic about future economic developments in the economy and retail trade. The latter is a consequence of deteriorated assessments of current sales. Confidence also worsened somewhat in manufacturing because of lower expected production, which is related to lower expected export orders amid the moderation of growth in the euro area. Confidence in construction and service activities remained unchanged. In November, economic sentiment deteriorated for the fourth consecutive month and remained only slightly above the long-term average. It was last so low at the end of 2014.
The growth of employment and the decline in unemployment are easing. The number of employed persons increased by 2.7% year on year in the first nine months, which is somewhat less than in the same period last year (3.2%). It rose the most in construction, transportation and storage, and accommodation and food service activities, i.e. sectors with a high job vacancy rate and a large share of foreign workers. The contribution of the hiring of foreign workers to total employment growth remains high (around 70%). The number of registered unemployed persons continues to decrease, although more slowly than in previous years. At the end of October, it amounted to 72,416, which is 5.0% less than one year before.
Wage growth is higher this year than last year. In the first nine months, it was 4.3% year on year, compared with 3.4% in the same period last year. Higher wage growth mainly reflected higher growth in the general government sector resulting from higher valuation of most positions (agreed at the end of last year), promotions and, to a lesser extent, the increase in the minimum wage. With relatively strong growth in economic activity and a shortage of appropriately skilled workers, wages also continued to rise in the private sector, where wage growth also reflected the increase in the minimum wage early in the year. Wages thus increased the most in activities with the greatest labour shortages and a large share of minimum wage recipients (administrative and support service activities, accommodation and food service activities and trade).
Data from the Labour Force Survey (LFS) show a moderation of labour market dynamics. In the third quarter of this year, the number of unemployed persons continued to rise, while the number of self-employed persons and unpaid family workers fell slightly. Unemployment rose somewhat both in terms of number and rate, but remained low.
Year-on-year price growth remained moderate in November. Growth in goods prices slowed somewhat again, largely owing to a stronger year-on-year fall in prices of oil products and stagnation in prices of non-energy industrial goods. Prices of durable goods dropped further. Prices of semi-durable goods were also lower year on year this time. Higher prices of food, in particular fruit, mitigated a larger decline in prices of non-durable goods, which remained roughly unchanged. Growth in prices of services remained slightly above the 3% level, amid favourable labour market conditions and solid household consumption. A significant contribution to growth came from services related to housing and catering. Supplementary health insurance premiums increased as well.
Total year-on-year growth in Slovenian industrial producer prices remained low in October (0.2%) due to lower prices on foreign markets. Producer prices on foreign markets have been around 1.5% lower year on year on average in recent months; the decline outside the euro area was somewhat smaller. Price growth on the domestic market remains at around 2%. This is still primarily a consequence of strong growth in energy prices (owing to higher prices in the supply of electricity, gas and steam, where year-on-year growth totals around 15%). Among other product groups, above average price growth is also recorded for investment goods and non-durable consumer goods (2.0%). In the latter, this is also a consequence of rising household consumption according to our estimate.
In September, the current account surplus narrowed; in the last 12 months, it was lower year on year (at 5.5 % of estimated GDP). The lower surplus compared with the previous 12-month period was largely due to a lower trade surplus in goods, which is attributable mainly to the easing of growth in the international environment. The lower current account surplus year on year was also a consequence of a higher net outflow of secondary income, which is mainly related to higher VAT- and GNI-based payments into the EU budget. Net outflows of primary income remained similar to those recorded one year earlier. The trade surplus in services was higher, mainly as a result of a higher surplus in transport and construction services and higher net revenues from travel.
The net outflow in external financial transactions continues. In the 12 months to September, net outflows of financial assets abroad exceeded net inflows (by EUR 1.8 billion) primarily due to transactions in the segment of other investment. The government and firms were placing deposits in accounts abroad, where interest rates are higher than in the domestic banking system. Firms were deleveraging abroad, commercial banks were increasing long-term lending abroad, while non-residents were withdrawing deposits from Slovenian banks. In direct investment, net inflows of equity predominated. Their increase is related to takeovers in insurance and business sectors. Net inflows of portfolio investment were largely due to investment by foreign portfolio investors in the domestic banking sector. Banks, insurance companies and pension funds continued to buy long-term debt securities in international financial markets.
The growth of loans and deposits of domestic non-banking sectors remained around the achieved levels in October. The volume of loans to non-banking sectors was slightly more than 3% higher year on year. Household borrowing again made a significant contribution to growth. Due to the announced introduction of a binding macroprudential measure at the beginning of November, particularly borrowing in the form of consumer loans strengthened somewhat in October. Growth in corporate and NFI loans remains moderate. Deposits of domestic non-banking sectors are rising twice as fast as loans, with overnight deposits continuing to increase in particular, which is a consequence of low interest rates. The maturity structure of sources of finance thus continues to deteriorate. The liquidity in the banking system is still favourable. Given the solid growth of domestic sources of funding, the banking system’s dependence on foreign sources of finance remains low.
The surplus of the consolidated balance in the first ten months was lower than last year; with regard to the budgetary plans, this is also expected to be the case at the end of the year. Revenue growth was considerably lower in this period, primarily on account of year-on-year lower non-tax revenues (these were at a high level last year due to high payments of dividends in October) and lower receipts from the EU budget (also as a consequence of last year’s one-off payments). The weaker revenue growth is also due to revenues from taxes, which increased less than last year as a consequence of changes in the taxation of holiday allowance and lower growth in domestic consumption. Expenditure growth already strengthened at the beginning of the year. It is mainly attributable to the adopted agreements on wage rises and further growth in employment, which is the highest in health and education, and measures in the area of transfers to individuals and households. Payments into the EU budget have increased as well. Investment growth declined somewhat more year on year than planned. The estimate of the realisation of the state budget, which is the main part of the consolidated balance, indicates a surplus of EUR 151 million for 2019, lower than envisaged in the adopted revised budget (EUR 194 million). It is also expected to be lower than in 2018 (EUR 537 million).