Slovenian Economic Mirror


Slovenian Economic Mirror

Slovenian Economic Mirror No 2/2021

Amid stringent containment measures during the second wave of the epidemic, turnover in trade and some service activities declined considerably in Slovenia in the last quarter. As during the first wave, the most affected sector was accommodation and food service activities, where, with the closure of hotels and restaurants, turnover more than halved. Owing to lower demand, the epidemic and the measures to contain its spread also strongly affected the movement of some prices of goods and services. Export-oriented activities and construction were not visibly affected in the second wave of the epidemic. Exports of goods to EU countries and manufacturing production recovered to pre-crisis levels in the last quarter of 2020; construction activity also strengthened markedly. Confidence indicators point to a continuation of favourable movements at the beginning of this year. This is also corroborated by data on electricity consumption and traffic volume on Slovenia motorways, which were only slightly lower year on year in January. With intervention measures still in place, the increase in unemployment in December and January did not deviate significantly from seasonal increases in previous years, while at the beginning of February a decline was already observed. At the end of January, the number of unemployed was otherwise 14.6% higher year on year. The deficit of the consolidated general government budgetary accounts on a cash basis increased strongly in 2020 due to the deterioration in economic conditions and measures to mitigate the consequences of the epidemic. Similar movements were also recorded for economic activity in the euro area. According to Eurostat’s flash estimate, this contracted again in the last quarter of 2020 with the tightening of containment measures due to the second wave of the epidemic, albeit significantly less than in the first wave.

Euro area economic activity contracted again in the last quarter, albeit significantly less than during the first wave of the epidemic. After a strong rebound in the third quarter, economic activity declined again in the last quarter of 2020 due to the resurgence of the epidemic and the tightening of containment measures. According to Eurostat’s flash estimate, GDP fell 0.7% quarter on quarter (seasonally adjusted) and 5.1% year on year (seasonally adjusted). Among Slovenia’s main trading partners, in the last quarter of 2020 economic activity contracted the most in Austria (-4.3%) and the least in Germany (0.1%). The smaller decline in activity than during the first wave of the epidemic was a consequence of the adjustment of businesses and consumers to the new situation. In addition, the containment measures during the second wave are mainly focused on service activities and are less disruptive to manufacturing and construction. Current economic indicators indicate a continuation of similar dynamics of economic activity in the euro area at the beginning of this year. The composite Purchasing Managers’ Index (PMI) and the Economic Sentiment Indicator (ESI) point to further growth in activity in manufacturing and a further fall in the service sector, although this is likely to be considerably smaller than during the first wave. 

 

After contracting sharply in 2020, euro area economic activity will rebound in 2021 according to the forecasts of international institutions. According to Eurostat’s flash estimate, euro area GDP declined by 6.8% last year, somewhat less than expected by international institutions in their latest forecasts (for example IMF: -7.2%). Assuming a gradual relaxation of containment measures and a decline in uncertainty due to wider accessibility of effective vaccines, economic activity will start picking up gradually in 2021. With the continuation of substantial monetary and fiscal policy support, euro area GDP is projected to increase by 4.2% and 3.6% respectively according to the IMF and EC forecasts. Similar growth is also expected for 2022. Uncertainty remains elevated, however. A faster improvement in epidemiological conditions and widespread use of an effective vaccine or medicine could also lead to stronger-than-expected economic growth, while in the event of further large-scale closures of the economy due to a continued worsening of epidemiological conditions, the recovery of the euro area could be weaker than predicted in the central forecast. 

 

The second wave of the epidemic had a stronger negative impact particularly on some service activities, while export-oriented activities recorded further growth. The closure of non-essential shops and certain services in October and November led inevitably to a decline in sales. As during the first wave in the spring, the fall was sharpest in accommodation and food service activities. With the partial and temporary opening, sales in some segments of trade and services increased in December before falling again with the re-closure in January, according to data on the fiscal verification of invoices. Confidence and activity in construction and manufacturing were not noticeably affected by the second wave of the epidemic. This is also indicated by electricity consumption and the volume of freight transport on Slovenian motorways, which were both only slightly below last year’s levels in January. Construction activity strengthened significantly in November, particularly due to increased residential construction. Manufacturing output increased further, as did exports to the EU. 

 

The year-on-year fall in weekly electricity consumption in the second wave of the epidemic remained significantly smaller than in the spring. In January, weekly electricity consumption was 3% lower on average year on year (compared with around 15% in the second quarter of 2020). The smaller decline than in the spring months was mostly due to a smaller fall in industrial consumption, which accounts for the largest share of total electricity consumption. Among our main trading partners, the year-on-year fall in consumption was largest in Austria (8%) and Germany (4%), owing to their stringent containment measures. In Italy, consumption was roughly the same as last year, while in France and Croatia it was 3% and 4% higher respectively.

 

In January, freight traffic on Slovenian motorways was somewhat lower than a year earlier. It was down 8% year on year, similarly for domestic and foreign vehicles. The larger lag in January than in a few previous months reflected the volume of traffic at the beginning of the month, which was significantly lower due to a less favourable distribution of public holidays and heavy snowfall in some neighbouring countries. Moreover, this January also had one working day less. We estimate that the relatively smaller year-on-year decline in freight traffic during the second wave of the epidemic is related to the recovery of industrial production. The volume of freight traffic is still being negatively affected by lower levels of transshipment of goods in the Port of Koper.

 

According to data on the fiscal verification of invoices, the year-on-year fall in turnover increased in January. With the temporary opening of some shops and activities, it decreased before the Christmas holidays and then rose markedly again around the turn of the year. The fall in turnover remained largest in accommodation and travel agency activities. In January, the year-on-year fall swung again (decreasing in the middle of the month then increasing towards the end), mainly on account of the movement of turnover in all three main trade segments (the sale and repair of motor vehicles, wholesale trade, and retail trade). The larger year-on-year fall was also due to a lower number of working days and their distribution between the holidays. 

 

The recovery of goods exports continued in the last quarter of 2020, while the recovery of imports came to a halt. Export activity was not significantly affected by the resurgence of the epidemic and the adoption of containment measures in the last quarter. After a pronounced decline in the spring, exports to EU countries recovered to pre-crisis levels by the end of 2020. A stronger recovery was recorded for most main product groups, particularly goods for intermediate consumption. Exports were 7.7% lower on average in 2020. In the last quarter, the recovery of imports came to a halt, which was mainly related to a fall in private consumption in Slovenia due to the containment measures. Imports from EU countries thus fell by 11.7% in the year as a whole. In January, export expectations improved somewhat further, pointing to a continuation of export recovery at the beginning of this year.

 

External trade in services remained significantly lower year on year in November. After several months of recovery, exports of services fell again in November and were around a quarter lower year on year; imports also remained significantly lower than a year earlier (-17%). Measures to contain the epidemic, particularly restrictions for crossing the state borders and the closing of hotels and restaurants, significantly affected tourism. Spending by foreign tourists, same-day visitors and transit passengers in Slovenia and Slovenian tourists’ spending abroad were more than 90% lower year on year. On the other hand, some other more important service activities recorded more favourable movements than during the first wave of the epidemic. Particularly exports and imports of transport services increased. Exports of construction services were also higher. However, exports and imports of technical, trade-related services and administrative and support service activities fell further. In the first 11 months, the year-on-year decline in services trade mainly reflected the fall in tourism. Trade in transport services was also notably lower.

 

With a further increase in the last quarter of 2020, manufacturing production recovered to pre-crisis levels. In the last quarter, the recovery of production otherwise came to a halt in high-technology industries (which were the least affected during the first wave of the epidemic) and low-technology industries, while strengthening further in medium-technology industries. The latter thus exceeded their levels from the same period of 2019. Despite a sharp increase in the second half of the year, in 2020 production in medium-high and medium-low industries was down year on year in all sectors, particularly in the manufacture of motor vehicles and the metal industry. Lower production was also recorded in low-technology industries, with the exception of the wood-processing industry. High-technology industries remained the only industries that increased production year on year in 2020 (despite more modest year-on-year results of the pharmaceutical sector in the second half of the year). 

 

Construction activity strengthened significantly in November. The value of construction output increased by 12.2% and was 18.4% higher than a year before. In the last few months of last year, construction activity was significantly lower compared with 2018 and 2019 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; for non-residential construction, on the other hand, they look worse. The stock of contracts in the construction of civil-engineering works strengthened by 15% year on year, while in the construction of non-residential buildings, it declined by 28%. The number of issued permits for the construction of new flats, which had declined in the first half of 2020, increased again in the summer and autumn.
 

Turnover in trade declined further in November with the closure of some non-essential shops and other containment measures; with a partial opening, it improved in some segments in December. In November, turnover dropped in all three main segments, the most in the sale of motor vehicles, where it had also fluctuated the most in previous months. Turnover in retail trade also decreased significantly. In this segment, turnover in the sale of non-food products (particularly in the sale of clothing and footwear and the sale of furniture and household equipment) dropped the most. The already high sales via mail order or the internet strengthened further. With a temporary opening of some shops, the further decline in non-food product sales was interrupted in December, according to preliminary data.

 

After a smaller decline in the previous month, turnover in market services strengthened in most services in November. Despite a further contraction of turnover in travel agencies, the strongest monthly growth in turnover continued in administrative and support service activities, mostly due to further growth in rental and leasing activities and office administrative and support activities. Turnover growth accelerated in professional and technical activities (especially in architectural and engineering services) and transportation (particularly in road freight transport). In information and communication activities, turnover fell somewhat again despite rising exports of computer services. In accommodation and food service activities, it more than halved with the closure of hotels and restaurants in November.

 

After the recovery in the third quarter, household consumption dropped strongly in the last, mainly as a consequence of the renewed closure of non-essential shops and services. This was reflected in a sharp fall in passenger car sales and sales of most other non-food products in traditional shops. Sales via mail order and the internet, which accounts for around a fifth of total non-food product sales, strengthened in November and were more than half higher year on year in the first 11 months. With the closure of hotels and restaurants, the number of domestic tourist overnight stays plunged. Household expenditure on personal, entertainment, sports and other services decreased as well. Owing to the limitations on consumption and the postponement of non-essential purchases and amid relatively stable disposable income, the savings rate remained high at the end of the year, which is also corroborated by data on stronger volume of household deposits at the end of the year. 

 

The volume of road freight transport increased significantly in the third quarter of 2020 after the removal of containment measures; fluctuations in rail transport, which has been declining for quite a while, were insignificant. Slovenian hauliers carry out a large part of their journeys abroad. As a result of strict containment measures in the majority of EU countries in the first half of last year, road transport abroad declined significantly. With the relaxation of measures, it rose again and was only 5% lower year on year in the third quarter. The volume of road transport at least partially connected to the Slovenian territory (exports, imports and national transport combined) decreased less during the first wave of the epidemic, but it also recovered more slowly than transport abroad and was 8% lower in the third quarter than in the same period of 2019. The containment measures had a smaller impact on freight transport by rail, but this had already been declining for several quarters before the epidemic (in the third quarter, it was down 13% year on year).

 

Economic sentiment improved in January for the second consecutive month, after deteriorating since the beginning of the second wave of the epidemic. Confidence in manufacturing improved further and was the highest in two years. Confidence in services also improved noticeably for the second month in a row (particularly due to expected demand), but it remained considerably lower than a year earlier. A further strengthening of confidence was also recorded among consumers and in construction, which, along with manufacturing, remains one of the less affected sectors. The confidence indicator in retail trade deteriorated considerably in January, after December’s improvement due to the temporary re-opening of shops, but – like the confidence indicators in other activities – it remained above the levels from the first wave of the epidemic.

 

In January, moderate growth in the number of registered unemployed persons continued. At the end of January, 91,499 persons were unemployed, 4.8% more than at the end of December and 14.6% more than a year earlier. Growth in the number of unemployed persons, which, with intervention measures still in place, did not deviate significantly from seasonal increases at the end or the beginning of previous years (deriving largely from the expiry of fixed-term employment contracts), came to a halt towards the end of January. The number of employed persons was down 1.6% year on year in November, which is similar to previous months. Activities with the largest declines remained accommodation and food service activities (12.2%) and administrative and support service activities (10.3%).

 

Since the spring months, the year-on-year growth of the average gross wage (6.9% in November) has been significantly affected by the payment of crisis allowances and the inclusion of employed persons in intervention job retention schemes. In the private sector, growth has slowed noticeably since April, when it increased significantly due to the impact of the methodology for the collection of earnings statistics with the placement of a large number of people on temporary layoff. In the public sector, wage growth slowed in the middle of the year after the discontinuation of allowances (the extraordinary payment of allowances for hazardous working conditions and additional workloads and the payment of the bonus for work in crisis conditions in accordance with the collective agreement). Since mid-October, when the second wave of the epidemic was declared, it had strengthened somewhat due to the renewed payment of allowances in November, albeit somewhat less than during the first wave. Wage rises in social work and health stood out in particular (due to the payment of allowances). The payments of Christmas bonuses in the private sector, which otherwise had a significant impact on November’s increase in the average wage, were similar to November 2019.

 

The year-on-year fall in consumer prices decreased in January. This was mainly due to the relatively modest seasonal decline in prices of clothing and footwear. This was at 6.8% at the monthly level and around half smaller than in previous years, according to our estimates, mainly owing to a more pronounced decline in prices of clothing and footwear in previous months, when shops selling such goods were closed and retailers tried to redirect consumers to online purchases. Deflation was, however, still largely due to low oil product prices, but their year-on-year fall is gradually decreasing. Growth in food and non-alcoholic beverages prices, which had already slowed considerably at the end of the year, recorded only minimal year-on-year growth in January. Reflecting a pronounced year-on-year fall in prices of package holidays, growth in prices of services also remained low. The difference between inflation in Slovenia and the EU deepened significantly in January, mostly due to the end of the temporary reduction of VAT rates in Germany.

 

Slovenian industrial producer prices were 0.2% lower year on year in December. Due to a deeper fall in prices of intermediate goods, the year-on-year decline in Slovenian producer prices on foreign markets at the end of the year was even more pronounced than in previous months. Growth in durable consumer goods prices remained at around 1%. Prices of investment goods were also somewhat higher. A somewhat stronger year-on-year decline was again recorded for Slovenian producer prices in countries outside the euro area. Price growth on the domestic market remained close to 1% at the end of the year. Energy prices again recorded the highest year-on-year growth, this stabilising at around 4% in the last two months of the year.

 

The current account surplus remained high; this mostly reflected the movements in goods and services trade. The year-on-year higher surplus, which amounted to EUR 3.2 billion in the 12 months to November (6.9% of estimated GDP), was, amid improved terms of trade, mainly due to a higher surplus in trade in goods. The surplus in services trade declined further, mostly due to a fall in the surplus in travel and transport services. The surplus in services with higher value added (telecommunications, computer and information services) and, amid rising re-exports of medicinal and pharmaceutical products, the surplus in processing services (packaging, assembly and labelling) increased. The current account surplus also strengthened year on year as a result of net outflows of secondary income, which fell mainly as a consequence of lower payments of taxes and contributions abroad and lower VAT- and GNI-based contributions to the EU budget. Net outflows of primary income were higher year on year owing to a higher net outflow of income on equity and debt. In addition, the net inflow of labour income was lower, as income of daily migrants working abroad declined more than income of foreign workers in Slovenia.

 

The year-on-year fall in the volume of loans to domestic non-banking sectors increased further at the end of the year. Having gradually declined since mid-2020, the volume of corporate and NFI loans was more than 2% lower year on year in December. The volume of household loans was only slightly higher year on year (by 0.2%). Growth in housing loans remained just above 4%. Total growth slowed somewhat further due to a significant year-on-year decline in the volume of consumer loans (by 7.4%). According to our estimate, the latter was a consequence not only of the adopted binding macroprudential measure at the end of 2019, but also of lower household spending due to containment measures. As a consequence, growth in household deposits increased significantly – they were around a tenth higher year on year. The share of non-performing claims measured by arrears of more than 90 days remained at 1% in November. The share of non-performing claims according to the EBA definition,  however, increased slightly, mainly due to relatively significant increases in the services sector, which was the most affected by measures to contain the epidemic (accommodation and food service activities and tourism), but bank exposure to these sectors is relatively low.

 

The deficit of the consolidated general government budgetary accounts totalled EUR 3.5 billion in 2020. Revenue declined by 3.6%, mainly due to lower tax revenues amid the decline in economic activity. Their decline was also attributable to a decrease in tax burdens (income tax and excise duties), deferrals of tax liabilities, exemptions and reduced advance payments (especially of corporate income tax) made possible by intervention measures to mitigate the consequences of the epidemic. Amid wage growth, only the payments of social contributions were higher than in 2019. For people on temporary layoff and, during the first wave of the epidemic, also for those who worked, social contributions were financed from the state budget. Revenue from EU funds remained at the 2019 level. The bulk of the deficit arose from increased expenditure (by 16.4% year on year), for the most part due to temporary measures to mitigate the consequences of the epidemic. In addition to this expenditure, which strengthened particularly subsidies, transfers to individuals and households, and funds for wages, part of expenditure growth is also permanent in nature (for example due to the agreement on public sector wages from December 2018). Investment was also somewhat higher year on year in 2020 due to a stronger increase at the end of the year. The deficit was otherwise lower than planned, particularly the part arising from the state budget, which is a consequence of lower expenditure for financing the measures to mitigate the consequences of the epidemic with regard to the generated reserves (EUR 2 billion compared with EUR 2.6 billion budgeted for this purpose).

 

In 2020, Slovenia’s net budgetary position against the EU budget was positive (at EUR 198.1 million). Last year, Slovenia paid EUR 526 million into the EU budget (99.9% of the amount planned in the revised budget for 2020) and received EUR 724.1 million from it (76.9% of planned revenue). The bulk of receipts were resources from structural funds (44.3% of all reimbursements to the state budget) and resources for the implementation of the Common Agricultural and Fisheries Policy (36%). The share of resources from the EU Cohesion Fund was significantly smaller, at 13%. In these, the realisation deviated the least from the amount envisaged in the revised budget, which was significantly reduced with regard to the adopted budget.  According to SVRK data, 52% of funds available under the 2014–2020 financial perspective were paid by the end of 2020 (36% at the end of 2019) and 39% of available funds were reimbursed to the state budget (26% at the end of 2019).