Slovenian Economic Mirror

Slovenian Economic Mirror

Slovenian Economic Mirror No 1/2021

With stringent containment measures, turnover in trade and some service activities, particularly those related to private consumption, dropped significantly in Slovenia at the beginning of the last quarter of 2020. The epidemic and the measures to contain its spread have, due to lower demand, also strongly affected the movement of some prices of goods and services. The year-on-year fall in consumer prices deepened somewhat at the end of 2020, which was attributable to a significant moderation of price rises in services and food. Export-oriented activities have been less affected during the second wave of the epidemic; as a result of a strong drop during the first wave, the Slovenian export market share declined in the first three quarters. Following growth in the third quarter, exports of goods to EU countries, to which Slovenia exports around three quarters of all goods, and manufacturing output continued to rise towards the end of the year. With the retention of intervention labour market measures and the expected smaller contraction of economic activity than during the first wave of the epidemic, the number of registered unemployed persons increased slightly in December, mostly as a consequence of seasonal factors. A total of 87,283 persons were unemployed at the end of December, 3.7% more than at the end of November. Economic activity in the euro area presumably also contracted again in the last quarter of 2020 with the tightening of containment measures during the second wave of the COVID-19 epidemic. The decline appears to be somewhat smaller than in the first quarter, as businesses and consumers have already partly adapted to the new situation. For 2021 a gradual recovery is forecast. Euro area GDP fell by 7.5% and 7.3% in 2020, respectively, according to OECD and ECB forecasts; in 2021 it will increase by 3.4% and 3.9%, respectively. The greatest risk to the realisation of the forecast and the gradual recovery remains associated with the course of the epidemic, i.e. the accessibility and effectiveness of vaccines and the related relaxation of measures.

Economic activity in the euro area recovered strongly in the third quarter of 2020, particularly due to a sharp rebound in private consumption; in the last quarter, it is estimated to have contracted again. GDP grew by 12.5% quarter on quarter (seasonally adjusted). The year-on-year fall was smaller (-4.3%, seasonally adjusted). The pronounced increase in activity was underpinned by domestic and foreign demand, most of all by private consumption. Amid the easing off of forced savings, the sharp rebound was mainly driven by demand for durable goods and higher expenditure on services. In the last quarter of 2020, economic activity in the euro area is estimated to have declined again due to the reintroduction of containment measures, but less so than in the spring. The containment measures during the second wave of the epidemic, while mainly focused on service activities, are less disruptive to manufacturing and construction. The smaller decline in activity also reflects the adaptation of businesses and consumers to the new situation. A smaller contraction of activity than in the spring is also indicated by current economic indicators such as the composite Purchasing Managers’ Index (PMI). In manufacturing, the latter in fact showed an improvement in December, reaching its highest level since May 2018, while in services, it again indicated a decline in activity in the last quarter but remained well above the values seen in the spring. 

After contracting sharply in 2020, euro area economic activity will rebound in 2021, according to the forecasts of international institutions. The recovery of activity in the third quarter of 2020 was stronger than expected by international institutions. In their latest (i.e. December) forecasts, they improved slightly their projections for the contraction of economic activity in 2020, despite the expected renewed deterioration in the last quarter. According to OECD and ECB forecasts, euro area economic activity will decline by 7.5% or 7.3% respectively. Assuming a gradual relaxation of containment measures and a decline in uncertainty due to the prospects of effective vaccines, economic activity will start picking up gradually in 2021. With significant support of monetary and fiscal policy measures and the strengthening of foreign demand, euro area GDP is projected to grow by 3.6% or 3.9% according to OECD and ECB forecasts. The greatest risk to the realisation of the forecast is associated with the duration and severity of the epidemic. A faster improvement in epidemiological conditions and widespread use of an effective vaccine or medicine would lead to a faster recovery of the euro area economy, while in the event of further large-scale closures of the economy due to a continued worsening of epidemiological conditions, the recovery would be weaker than predicted in the central forecast. 

The appreciation of the euro against a basket of currencies halted towards the end of 2020. From the beginning of the COVID-19 pandemic (March 2020) to the end of 2020, the euro appreciated against most currencies of Slovenia’s more important trading partners, particularly against the currencies of countries that already had unstable macroeconomic and financial environments before the pandemic (e.g. the Turkish lira) and energy exporting countries (e.g. the Russian rouble). Towards the end of the year, the euro also again appreciated more markedly against the US dollar. However, in the last quarter of 2020, the euro started to depreciate more noticeably against the currencies of certain Asian countries (e.g. the Chines juan), where the economic consequences of the epidemic were less severe in that period due to its more successful containment. In the last quarter, the nominal effective exchange rate (NEER) of Slovenia, which indicates the ratio of the euro to a basket of currencies of trading partners,  thus no longer recorded the strong appreciation typical of the previous two quarters. The pressure on the price competitiveness of Slovenian exporters (measured by the REER_hicp indicator) as a consequence of the strengthening of the euro was otherwise mitigated by weaker growth of final prices (measured by inflation) in comparison with trading partners. 


The second wave of the epidemic had a stronger negative impact particularly on some service activities, while in more export-oriented activities growth continued. The closure of non-essential shops and certain services at the beginning of the last quarter led to a decline in their sales. As during the first wave in the spring, the decline was largest in accommodation and food service activities. Construction activity also fell somewhat in October. Production in export-oriented manufacturing activities increased further, as did exports to the EU. Turnover in transport also rose slightly. Confidence in the economy, which deteriorated in the last quarter of 2020, as expected, remained more favourable than in the spring in all activities. 


The year-on-year fall in weekly electricity consumption during the second wave of the epidemic remained significantly smaller than in the spring. Weekly electricity consumption was 3% lower  on average in November and December (compared with around 15% in the spring). The smaller decline than in the spring was primarily a consequence of a smaller fall in industrial consumption, which accounts for the largest share of total electricity consumption. Among Slovenia’s main trading partners, the largest year-on-year fall in consumption was in Austria (8%). In Italy and France, as in Slovenia, it was around 3%, while electricity consumption in Germany and Croatia was at the same level as in the previous year. 


In December 2020, freight traffic on Slovenian motorways was slightly higher year on year, though this was partly due to two more working days. As a result of the measures implemented during the first wave of the epidemic, traffic fell more than 35% year on year in April. Its decline was larger than the decline in manufacturing output and turnover in services. With the relaxation of containment measures and the recovery of industry and services, the lag narrowed in the next few months. In the third quarter, it amounted to around 6%. The containment measures during the second wave, with restrictions in service activities, did not have a major impact on freight traffic. It improved particularly in November and even more in December, when it again exceeded the comparable levels of 2019, though this was also related to one and two more working days in those two months respectively. In December, freight traffic was up 0.2% year on year, of which domestic vehicle traffic by 1.8%, while foreign vehicle traffic was still 1.0% lower. 


Goods trade continued to recover in the autumn months despite the unfavourable epidemiological conditions in Slovenia and the EU as a whole. The renewed spread of the epidemic and the adoption of containment measures in Slovenia’s main trading partners in October and November did not have a significant impact on export activity with other EU countries. In November, real exports to the EU even increased and came close to pre-crisis levels. In contrast, the recovery of imports came to a halt, which was mainly related to a fall in private consumption in Slovenia due to the adopted containment measures and, given the functioning of industrial activities, somewhat less to imports of intermediates. In the first 11 months, imports from EU countries (-11.6%) declined more than exports (-9.9%). Export expectations did not change significantly in December compared with the previous few months, but companies were more optimistic about future foreign demand than during the first wave of the epidemic in the spring. 


The Slovenian export market share increased again in the third quarter of 2020, following a sharp fall during the first wave of the epidemic. The spread of the COVID-19 pandemic around the world caused a strong decline in global import/export flows. With an even deeper decline in Slovenian exports – partly also due to their orientation to the epidemically more affected EU market – the Slovenian market share on the global market fell significantly in the spring months of 2020. The third quarter of 2020 recorded renewed growth (0.6% year on year), which could be partly related to the realisation of export flows that had been interrupted in the previous quarter. In the first three quarters, the Slovenian market share declined by 1.7% on average year on year on the world market and by 0.3% in the EU. Based on more detailed data on export/import flows of EU countries, to which Slovenia exports around three quarters of all goods, we estimate that the decline in the Slovenian market share was to a great extent also due to export specialisation, particularly owing to a large share of passenger vehicle exports, which were strongly affected at the outbreak of the coronavirus crisis. The unfavourable impact of the composition of exports was mitigated by stronger demand for pharmaceuticals, which also account for a large share of Slovenian exports.


In October, external trade in services increased further but remained significantly lower year on year. A recovery of exports continued in most main groups of services, with the exception of travel. The smaller year-on-year decline in services exports in the last few months was to a great extent due to increased exports of construction services and other business services, which together account for around a third of total services exports. Their exports were higher year on year. Despite the favourable developments in the last months of the year, exports of transport services remained lower than in the same period of 2019. Spending by foreign tourists in Slovenia remained markedly lower year on year. The developments in services imports were less pronounced than in exports and the recovery was somewhat slower. As in exports, the decline was mainly due to Slovenian tourists’ spending abroad. In September and October, the year-on-year lag increased further due to additional restrictions for crossing the state border. In the first ten months of the year, nominal exports of services otherwise declined by 20.5% and imports by 17.3%.

Manufacturing production increased further towards the end of last year, despite the worsening of epidemiological conditions in Slovenia and the EU as a whole. Growth was mainly driven by medium-technology industries, which in November again exceeded the levels from the same period of 2019. The recovery remained slowest in motor vehicle manufacturing, which still lagged behind year on year. On the other hand, in the last months of the year production increased markedly in the metal industry and most other industries producing intermediate goods. In November, they mostly exceeded the levels from the same period of 2019 (particularly the rubber and chemical industries). Production in high-technology industries, which was the least affected during the first wave, remained high. Production in low-technology industries declined; in November it was also lower year on year, except in the wood-processing industry. The prospects remain favourable, as most enterprises surveyed also expected production growth at the beginning of this year.


After strengthening in the third quarter, construction activity declined slightly in October. The value of construction output fell by 2.3% but was still significantly higher than in the spring months. Compared with 2018 and 2019, in the last months of 2020 construction activity was significantly lower in non-residential buildings, slightly higher in civil-engineering works and considerably higher in residential buildings (where data for the last months are less reliable). Short-term prospects remain favourable for civil-engineering works and residential buildings, while they look worse for the construction of non-residential buildings. The stock of contracts in the construction of civil-engineering works increased by 23% year on year, while in the construction of non-residential buildings it declined by 11%. The total floor area of residential buildings planned by issued building permits in the last half of the year was 14% higher than in the same period of the previous year.

Growth in dwelling prices moderated in the third quarter; after the containment measures were lifted, the number of transactions in dwellings increased significantly and was similar to that one year before. In the first nine months of 2020, prices were 4.4% higher on average year on year (in the third quarter 3.3%), indicating a slowdown in price growth compared to the last three years (with average annual growth at almost 8%). The price increase in the first nine months of 2020 was largely a consequence of higher prices of existing dwellings, particularly flats (5.5%). Prices of newly built dwellings were also higher year on year, but these dwellings accounted for less than 3% of all transactions. Among prices of newly built dwellings, prices of family houses recorded strong growth. Only these (along with prices of existing family houses) were lower than in 2008 (by 14.5%).


In October, turnover in trade dropped further with the closure of some non-essential shops and due to other containment measures; in November, it fell further in most segments according to preliminary data. In October, turnover dropped in all three main segments, the most in sales of motor vehicles, where it had also fluctuated the most in previous months. Turnover in wholesale and retail trade also declined slightly. Within the latter, a sharp fall was recorded for the already low sales of automotive fuels, which in the first ten months of 2020 also lagged the most (almost by a quarter) behind the results from 2019. This was a consequence of lower volumes of freight transport, less tourist transit in the summer and lower sales of fuels to households. As at the beginning of the first wave of the epidemic, retail sales of food also strengthened at the beginning of the second wave. Sales of non-food products via mail order or the internet also remained high.


In October, turnover in market services declined again. With the re-closure of restaurants and hotels, turnover, as in the first wave of the epidemic, shrank the most in accommodation and food service activities, where it had strengthened strongly in previous months, including due to the redemption of tourism vouchers. Turnover also dropped in information and communication activities (due to a fall in both telecommunications and computer services) and, only slightly, in professional and technical activities (mainly due to a fall in architectural and engineering services). Despite a further fall of turnover in travel and employment agencies, turnover in administrative and support service activities strengthened, for the most part as a consequence of growth in rental and leasing activities and office administrative and support activities. In transport, turnover growth again slowed slightly. 


After the recovery in the third quarter, household consumption dropped strongly in October and November, mainly as a consequence of the renewed closure of non-essential shops and services. This was reflected in a sharp fall in passenger cars sales and sales of most other non-food products in traditional shops; sales via mail order and the internet, meanwhile, remained high in October and were more than half higher year on year in the first ten months. The number of domestic tourist overnight stays, which had surged with the redemption of tourist vouchers during the summer season, plunged with the closure of hotels and restaurants. Household expenditure on personal, entertainment, sports and other services, where certain containment measures had remained in place in the summer months, also declined. In contrast, sales of food products in retail stores strengthened, as they had at the beginning of the first wave of the epidemic.


Economic sentiment improved slightly in December, after deteriorating since the declaration of the second wave of the epidemic at the beginning of the last quarter. The December improvement in confidence in service activities, retail trade and among consumers was mainly attributable to the temporary relaxation of restrictions on some service activities and the opening of non-essential shops before the Christmas and New Year holidays. Confidence also improved in construction, which, along with manufacturing, remains one of the less affected sectors. In all activities confidence levels remained higher than in the first wave of the epidemic.


The number of registered unemployed persons increased somewhat in December, after maintaining a similar level in the previous three months. At the end of December, 87,283 persons were unemployed, 3.7% more than at the end of November and 15.9% more than in the same period last year. Amid the retention of intervention measures, the December increase was not much different from that of previous years, when it had mostly been due to seasonal factors. The smaller increase than in the spring months was also due to a smaller fall in economic activity than during the first wave. The number of employed persons was down 1.4% year on year in October, which was the same as in September. The activities with the largest declines (11.1% and 8.8% respectively) remained administrative and support service activities and accommodation and food service activities. In manufacturing, the decline was 3.4%. 


The year-on-year growth of the average gross wage in October was at 4.6%; since the spring months it has been significantly affected by the payment of crisis allowances and the inclusion of employed persons into intervention job retention schemes. In the private sector, year-on-year wage growth has gradually weakened since April, when it rose sharply due to the impact of the methodology for collecting earning statistics, which reflected the placement of a large number of people on temporary layoff. In the public sector, wage growth slowed after the discontinuation of allowances (the extraordinary payment of allowances for hazardous working conditions and additional workloads and the payment of bonuses for work in crisis conditions in accordance with the collective agreement) in the middle of the year. Since mid-October, when the second wave of the epidemic was declared, it has strengthened somewhat due to the renewed payment of allowances (albeit in a smaller amount than during the first wave). 


The year-on-year fall in consumer prices deepened somewhat at the end of the year. The epidemic and the measures to contain its spread have, due to lower demand, strongly affected the movement of some prices of goods and services. Year-on-year growth in services prices eased markedly and was the lowest since February 2016 (0.2%). Food price growth also slowed considerably, which has to do with increased supply of food due to a good harvest, lower activity of hotels and restaurants, and the complete closure of some other activities (e.g. schools). Prices of semi-durables also fell notably in the last months of the year, largely on account of lower clothing and footwear prices. The lower prices were still mainly due to the year-on-year fall in oil product prices, but their negative contribution was smaller than in previous months due to the current monthly growth.


Slovenian industrial producer prices remained unchanged year on year in November. The low price growth on the domestic market, which remained at around 1%, was to a great extent a consequence of year-on-year lower prices in the group of intermediate goods and more than 2% price growth in other groups. Energy prices again increased the most (3.8%), but their growth is gradually easing. The year-on-year fall in Slovenian producer prices on foreign markets remained at around 1%. Year on year, prices were down in all but the group of durable consumer goods, where they were almost 1% higher year on year due to somewhat more pronounced growth in November.


The measures to contain the epidemic were reflected in the current account particularly in the segment of trade in goods and services. The current account surplus, which was up again in October, was the highest thus far. It amounted to EUR 3.2 billion (6.9% of estimated GDP) in the last 12-month period. The higher surplus in year-on-year terms was mainly underpinned by a higher surplus in trade in goods – a larger real decline in imports than exports. The terms of trade also improved. The surplus in services trade dropped further, mostly due to a decline in the surplus in travel, while the surplus in services with higher value added (telecommunications, computer and information services, and research and development) increased. The strengthening of the current account surplus was also due to lower net outflows of secondary income (mainly due to lower VAT-based contributions to the EU budget and lower payments of taxes and contributions abroad). Net outflows of primary income remained at a similar level. In the structure, net outflows of labour and capital income increased, but Slovenia received more subsidies for agricultural and fisheries policy. 


The year-on-year decline in the volume of loans to domestic non-banking sectors deepened slightly again in November. Most of the decline was a consequence of lower lending to enterprises, but their deleveraging eased in the last two months. Only household loans recorded moderate year-on-year growth, but this slowed slightly further in the last months of the year. This was to a great extent a consequence of stronger household repayments of consumer loans, which were down 7.2% year on year, while growth in housing loans remained just above 4%. Among sources of finance, deposits by non-banking sectors continued to expand and were almost a tenth higher year on year. Their maturity structure, however, keeps deteriorating, as only overnight deposits increase. Both household and corporate deposits are rising at a rapid rate. The dependence of banks on foreign bank sources thus remains low. The share of non-performing claims measured by arrears of more than 90 days remained at 1% in October. 


At the end of last year, the situation on euro area bond markets remained favourable despite the deterioration in epidemiological conditions. With investors expecting economic policymakers to extend existing measures for as long as necessary or adopt new ones if necessary, the yield to maturity of the Slovenian bond declined by slightly more than 20 basis points, to - 0.12%, in the last quarter of 2020. The narrowing of the spread to the German bond was somewhat less pronounced, but, at 45 basis points, this was lower than before the outbreak of the epidemic. 


The deficit of the consolidated general government budgetary accounts continued to widen towards the end of the year. It reached EUR 2.6 billion in the first 11 months of 2020. After the improvement in the public finance situation in the third quarter, when revenue was higher than in the same period of 2019, it fell below the 2019 level again in October and November due to the deterioration in epidemiological and thus economic conditions. Expenditure growth in these two months remained similar to the third quarter, while investment remained lower than in the same period of 2019. The deficit of the consolidated general government budgetary accounts, which mainly originates from the state budget, thus strengthened again especially in November. An even larger increase is expected for December. Nevertheless, it appears that the deficit will not reach the estimate from the adopted revised state budget (EUR 4.2 million) in the year as a whole. The difference is mainly attributable to lower-than-estimated expenditure growth, which is also related to lower realisation of measures to mitigate the consequences of the epidemic. Up to November, EUR 1.7 billion was paid to mitigate the consequences of the epidemic on the expenditure side (compared with the EUR 2.6 million directly budgeted for this purpose), of which around EUR 1 billion was used to finance labour market measures to preserve jobs. 


Slovenia’s net budgetary position against the EU budget was positive in the first 11 months of 2020 (at EUR 137.6 million). In this period, Slovenia received EUR 617.9 million from the EU budget (65.6% of receipts envisaged in the state budget for 2020) and paid EUR 480.3 million into the EU budget (91.2% of planned payments). The bulk of receipts were resources from structural funds  (42.0% of all reimbursements to the state budget) and resources for the implementation of the Common Agricultural and Fisheries Policy (38.8%). The share of resources from the EU Cohesion Fund was significantly smaller, at 13.6%. According to SVRK data, 44.5% of funds available under the 2014–2020 financial perspective were paid by the end of September 2020.