Slovenian Economic Mirror


Slovenian Economic Mirror

Slovenian Economic Mirror No 3/2021

The export-oriented part of the Slovenian economy was not notably affected due to the deterioration in epidemiological conditions at the end of last and the beginning of this year; export market share strengthened significantly in the last quarter of last year. In the first two months, household consumption was still lower than a year earlier, but in March it picked up significantly according to data on fiscal verification of invoices and reached pre-crisis levels. The decline in domestic demand during the epidemic, together with energy prices, had a strong impact on the movement of consumer prices, as well as on the widening of the current account surplus. The decline in the number of registered unemployed persons strengthened somewhat further in March. At the beginning of the year, employment otherwise fell the most year on year in accommodation and food service activities and administrative and support service activities, which were hit hardest by containment measures, while it rose the most in health and social work. This segment also recorded the largest year-on-year increase in wages, particularly due to allowances for hazardous working conditions and additional workload. As a consequence of measures to mitigate the impact of the epidemic, the deficit of the consolidated general government budgetary accounts was significantly higher year on year at the beginning of the year. Economic prospects for the international environment are improving gradually. With the continuation of considerable monetary and fiscal policy support, euro area economic activity should grow by 4.4% this year and by 3.8% in 2022, according to the IMF forecast. The IMF assumes that in the first half of the year, economic activity will still be affected by high infection rates, the spread of virus mutations and thus the extension or tightening of containment measures, but then it should strengthen with a gradual easing of containment measures due to higher vaccination coverage.

The available economic indicators indicate a renewed contraction of economic activity in the euro area in the first quarter of this year compared with one quarter earlier. Owing to the rise in COVID-19 infections, many euro area countries extended or tightened containment measures at the beginning of the year. According to the available economic indicators, containment measures had no major impact on manufacturing, but they continued to impede activity in the service sector. While retail sales fell almost by 6% at the monthly level in January, manufacturing fared relatively better. In the first quarter, the composite Purchasing Managers’ Index (PMI) remained low (below 50), indicating a renewed moderate contraction of euro area economic activity in the first quarter compared with the previous quarter. 

 

Global economic activity will strengthen this year after a deep fall in 2020, according to IMF forecasts. At the beginning of April, the IMF upgraded its January forecast for global economic growth for this year and next particularly due to the large fiscal stimulus package in the US. With the continuation of substantial support of monetary and fiscal policy measures and the strengthening of global demand, euro area GDP is projected to grow by 4.4% this year and 3.8% in 2022. The IMF assumes that in the first half of the year economic activity will still be restricted by high infection rates, the spread of virus mutations and the related extension and tightening of containment measures, but then it should start strengthening with a gradual easing of containment measures due higher vaccination coverage. The key factor in the recovery will be private consumption, amid a decline in uncertainty and the consequent cessation of forced and precautionary saving. Uncertainty remains high, however. On the one hand, the strengthening of global demand and progress in vaccination are encouraging, but on the other, there is still a high risk of the spread of the epidemic and the associated negative consequences for the economic and financial situation.

 

The price of Brent Crude rose above its pre-epidemic levels in March. In March, the average dollar price of Brent Crude climbed to USD 65 a barrel, up 104% year on year. The year-on-year increase in euro prices was somewhat smaller. The rise was mainly due to reduced oil supply from Saudi Arabia and improving global demand underpinned by the robust recovery in manufacturing. Increased global demand, along with limited supply from some major world exporters, was also reflected in significantly higher metal prices in the first quarter. Food prices also rose well above their pre-epidemic levels.

 

The value of the euro against a basket of foreign currencies was stable in the first quarter of 2021. The spread of the COVID-19 epidemic across the world has also caused major exchange rate fluctuations. The euro, which was perceived as one of the safer currencies, had started to appreciate against the currencies of most trading partners in March 2020 but had largely stabilised by the autumn. In the first quarter, Slovenia’s nominal effective exchange rate (NEER), which indicates the ratio of the euro to a basket of trading partners’ currencies, thus remained at a similar level for the second consecutive quarter. The pressure on the price competitiveness of Slovenian exporters (as measured by the REER_hicp indicator) had already been mitigated by the weaker growth of final prices (measured by inflation) in comparison with trading partners in the period of the appreciation of the euro, and in the first quarter the indicator of price competitiveness of Slovenian exports improved again.

Activity in the export-part of the economy is strengthening, but the part of the economy where operations are restricted due to the nature of the activity remains affected. As most hotels and restaurants remained closed, turnover in accommodation and food service activities fell further in January. Turnover in trade remained at December’s level in January, amid an improvement in motor vehicle sales, while in February it increased more strongly due to the re-opening of most non-food stores. Manufacturing output and goods exports to EU countries, which had already been close to pre-epidemic levels year on year at the end of 2020, rose in January. Confidence in manufacturing also climbed above pre-epidemic levels in March. The continuation of relatively favourable developments in the export-oriented part of the economy is also indicated by the volume of freight traffic on Slovenian motorways, which was higher than in the pre-crisis year 2019 in March. 

 

In March, electricity consumption was 2% higher compared with the same month of 2020 but 4% lower compared with the same period of the pre-crisis year 2019. The year-on-year increase was mainly due to the base effect, as last year electricity consumption dropped notably in the middle of March as a result of stringent containment measures adopted at the beginning of the epidemic. Year-on-year higher consumption was also recorded in our main trading partners, from 3% in Austria to 18% in Italy. However, compared with March 2019, most countries recorded declines, the largest being in Austria (-9%). In Italy, consumption declined by 5%, in France by 2% and in Germany by 3%. The exception was Croatia, where consumption was 4% higher than in March 2019.

 

In February, the year-on-year decline in industrial electricity consumption deepened slightly compared with the previous months of the second wave of the epidemic, while the year-on-year decline in small business electricity consumption decreased. In February, industrial electricity consumption was 8.1% lower year on year (in the last three months of 2020 as a whole: 3.7%; in January this year: 6.5%). The year-on-year fall in electricity consumption by small business consumers, which mainly include service activities and trade, decreased slightly (to 12.1%) in February with the partial relaxation of measures, after amounting to around 14% in November and January, when non-essential services and shops were closed. On the other hand, household electricity consumption was higher year on year (7.7%) in February, as people spent more time at home due to the epidemic, but the increase was smaller than at the peak of the second wave of the epidemic. 

 

Freight traffic on Slovenian motorways in March was up 40% year on year and up 11% compared with the same period of 2019. Domestic vehicle traffic was 18% and foreign vehicle traffic 60% higher year on year. These strong growth rates were recorded mainly because of the base effect, as in March last year traffic had already been greatly restricted since the middle of the month due to the adoption of stringent containment measures during the first wave of the epidemic. In comparison with the same period of 2019, domestic vehicle traffic was 15% higher and foreign vehicle traffic 9% higher in March (partly due to there being two more working days in the month).

 

According to data on fiscal verification of invoices, in March turnover was 34% higher year on year and 8% higher than in the same period of 2019. In the first two weeks of March, turnover was still below last year’s level, then exceeded it strongly due to the base effect. Strong year-on-year growth in turnover in the second half of March was mainly a consequence of high growth in trade, as last year all non-essential shops had been closed in this period. Growth was also partly related to increased sales before the re-closure of some shops, the distribution of Easter holidays and two more working days, because of which turnover in trade also remained relatively high compared with the same period of the pre-crisis year 2019. With the opening of bar terraces and gardens in some regions and some accommodation establishments, in the second half of the month strong year-on-year growth was also recorded in food and beverage services and accommodation activities. 

 

After the recovery of goods trade came to a halt at the turn of the year, February saw more favourable developments. Real goods exports to EU countries rose and exceeded pre-crisis levels. Exports recovered in the majority of main activities; particularly the movements in exports of intermediate goods and some high-technology consumer goods remained favourable. In March, export expectations improved noticeably, companies being more optimistic regarding future foreign demand than before the beginning of the epidemic. Goods imports recovered too, underpinned mainly by imports of intermediate goods and activity in industrial sectors and, to a lesser extent, the movements in private consumption due to the relaxation of some containment measures.

 

Slovenia’s export market share strengthened significantly in the last quarter of 2020. After the first epidemiological wave led to a sharp decline in global import/export flows of goods and an even deeper decline in Slovenian exports – and thus a fall in Slovenian export share on the global market –, the first data for the last quarter of 2020 are more encouraging. Poor epidemiological conditions did not have a major negative impact on the movement of Slovenia’s export market share at the end of 2020. According to preliminary data, Slovenian market share on the global market even increased in the last quarter,  after being 1.7% lower year on year on average in the first three quarters of the year. In the last quarter of 2020, Slovenian market share on the EU market also rose (4% year on year, after being slightly below its 2019 level on average in the first three quarters of 2020).  A breakdown by main product groups shows that, despite the improvement towards the end of the year, EU countries’ import demand for road vehicles remained among the most affected, while demand for medicinal and pharmaceutical products was significantly higher than in the previous year. In addition, the last quarter of 2020 also recorded pronounced growth in EU countries’ import demand for electrical machinery and equipment, with even stronger growth in Slovenian exports in this segment.

 

External trade in services was significantly lower year on year at the beginning of 2020. After recovering for several months, exports of services fell again in January and were more than a quarter lower year on year; imports also remained significantly lower than a year earlier (-17%). Measures to contain the epidemic, particularly the closure of hotels and restaurants and restrictions on crossing state borders, significantly affected tourism, where export and import revenues were down more than 85% year on year in January. The several-year decline in trade in ICT services (especially telecommunications) and personal, cultural and recreational services also continued. Some other important service activities recorded more favourable developments in the second wave. However, trade in transport and construction services nevertheless fell more noticeably in January, mainly as a result of weather conditions.

 

In February, manufacturing production remained similar month on month. Production in medium-high-technology industries strengthened after a fall in January. Medium-low- and low-technology industries recorded further growth, while production in high-technology industries declined. Manufacturing production was down year on year, as in the previous month. With last year’s high base, this was largely a consequence of a fall in high- and low-technology industries. The worse performance in high-technology industries was a consequence of a year-on-year decline in pharmaceutical production, while in low-technology industries the fall was more broad-based. Production in medium-low- and medium-high-technology industries stagnated year on year. Among the latter, the largest negative contribution was made by the car industry.

 

Construction activity increased in January. The value of construction output rose by 8.3% and was 4.2% higher than a year before. Compared with 2018 and 2019, in the last few months, activity was considerably higher in non-residential buildings, slightly higher in civil engineering and at a similar level in specialised construction activities. 
Data on the stock of contracts and new contracts in construction do not paint a uniform picture. The value of the stock of contracts, having already been slowly falling since mid-2020, declined sharply in January and was 15% lower year on year. On the other hand, the value of new contracts rose towards the end of 2020 and in January and was around a third higher year on year in the last three months.

 

In January, total turnover in trade was similar to that in the previous month, while in February it strengthened more markedly, according to preliminary data, due to the opening of all non-food stores. In January, turnover fell in wholesale trade, while strengthening in the sale of motor vehicles and retail trade. In the latter, it increased due to stronger sales of food and automotive fuels, despite a significant fall in non-food sales due to the renewed closure of most non-food stores. With the opening of all shops and the removal of restrictions on movement between municipalities, turnover strengthened in all trade segments in February according to preliminary data, the most, almost by a third, in the retail sale of non-food products.

 

Turnover in most market services rose in January. Real turnover growth in professional and technical activities accelerated further with renewed growth in architectural and engineering services. Strong growth was also recorded in administrative and support service activities, largely due to a halt in the decline in turnover in employment services. Turnover also increased in information and communication activities, with turnover in computer services rising on both the domestic and foreign markets. Turnover in transportation dropped due to a deterioration in road and port freight transport, and in accommodation and food service activities due to a further closure of most hotels and restaurants.

 

After deteriorating in January, household consumption increased somewhat in February but remained lower than one year earlier. With the opening of some shops and services and the lifting of the ban on movement between municipalities, household expenditure in the retail sale of non-food and food products and on some personal services increased in particular. The sharp year-on-year fall in household expenditure continued in those service activities that remained mostly closed (especially in accommodation and food service activities and arts and entertainment activities). The household savings rate remained high at the beginning of the year, with disposable income stable (partly due to government measures to contain the impact of the epidemic).  We estimate that, amid slightly increased household consumption, it was somewhat lower than in the last quarter of 2020, when, at 30.2%, it was as much as 20.8 p.p. higher than in the same period of 2019.   

 

Growth in dwelling prices moderated somewhat in 2020 on average; the number of transactions declined further due to containment measures. In the year as a whole, prices were 4.6% higher year on year (in 2018 and 2019, 8.7% and 6.7% higher respectively). They rose particularly due to higher prices of existing dwellings, in particular flats (5.4%). Prices of existing flats outside Ljubljana increased more (6.5%), this for the third consecutive year. Last year, they exceeded the average 2008 price by a fifth. Prices of existing flats in Ljubljana, which started to rise earlier than in the rest of Slovenia, exceeded the 2008 level by 7.3%. Prices of newly built dwellings were also higher year on year, but these dwellings accounted for less than 3% of all transactions. Strong, more than 13% growth was recorded for prices of family houses, but they remained lower than in 2008 (by 14.6%). The growth of prices of new flats was down (by 2.1%), the number of transactions in such flats being at an 11-year low.

 

Economic sentiment improved further in March. Confidence in the export part of the economy and construction, which were not markedly affected in the second wave of the epidemic, again improved notably in March and was higher than before the epidemic. With the relaxation of some containment measures, confidence also improved significantly at the monthly level in the more affected trade sector, while in service activities the indicator stopped rising after two consecutive months of growth. Confidence among consumers, who are mainly pessimistic about the future economic situation, deteriorated in March and was, as in trade and services, lower year on year.

 

The decline in the number of registered unemployed persons again strengthened somewhat in March. With intervention measures still in place, December’s and January’s growth did not deviate significantly from seasonal increases in the same period of previous years. At the end of January, it came to a halt, and in February, a seasonal fall in unemployment was already observed, which then strengthened somewhat in March. At the end of March, 82,638 persons were unemployed, 6.1% fewer than at the end of February and 6.1% more than a year earlier.
The number of employed persons was down 1.5% year on year in January, which is similar to previous months. Employment again fell most sharply year on year in accommodation and food service activities and administrative and support service activities, which were hardest hit by containment measures, while it increased most in health and social work.

 

In January, year-on-year wage growth continued; it was still strongly influenced particularly by the payments of crisis allowances in the public sector. With the renewed payment 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), year-on-year wage growth in the public sector increased again towards the end of last year and in January this year, the most by far in social work and health (in January, by 41.9%; in the entire public sector, by 18.4%). In the private sector, wage growth did not strengthen in the second wave of the epidemic. The only exception was the increase in December (by 5.3%), due mainly to the payment of Christmas bonuses and 13th-month pay, while in January, wage growth was again somewhat lower year on year (by 3.7%).

 

Consumer prices were up year on year in March for the first time since July last year. The increase was mainly due to higher energy prices. Electricity prices were almost 40% higher than a year earlier, which was a consequence of the substantial price fall at the start of the first wave of the epidemic, when the government temporarily exempted households and certain small business consumers from paying contributions. The year-on-year fall in oil product prices also slowed significantly due to current oil price growth and a lower base. The decline in prices of semi-durables strengthened further year on year in March (-5.8%) and was the most pronounced since 2006. This was again mainly due to a markedly different seasonal movement in clothing and footwear prices than in previous years, reflecting lower demand as a result of containment measures. In addition, retailers are making even greater use of discounts and other sales channels (on-line sales) to promote sales. Prices of durable goods were also somewhat lower, by 0.3%. The year-on-year fall in prices of services remained at roughly the same level as in the previous month (-0.4%).

 

Slovenian industrial producer prices strengthened again in February and were 1% higher year on year. We estimate that, in addition to the relatively vigorous activity in industry, their growth was also driven by higher prices of intermediate goods on international markets. Year-on-year growth in prices of industrial products sold on the domestic market thus increased further and was, at 1.7%, the highest since January 2020. Prices of capital and intermediate goods were rising the fastest (3.2% and 2.4% respectively). Year-on-year price growth on foreign markets was more modest (0.4%), mainly as a consequence of a more pronounced price decline in the previous year, given that the current growth in the first two months of this year was even somewhat higher than on the domestic market.

 

The current account surplus remained high and mostly reflected developments in goods and services trade. The year-on-year higher surplus, which amounted to EUR 3.3 billion in the 12 months to January (6.9% of estimated GDP) was, amid improved terms of trade, mainly attributable to a higher surplus in goods trade. The year-on-year increase in the current account surplus was also due to lower net outflows of primary and secondary income. Net outflows of primary income were down year on year owing to a smaller net outflow of income from equity capital of direct investment and higher subsidies from the EU budget for the Common Agricultural and Fisheries Policy. The decline in net outflows of secondary income was largely a consequence of lower payments of current taxes on income and property and lower payments of social contributions abroad. The surplus in services trade declined further, largely due to a fall in the surplus in the travel segment, which was strongly affected by the epidemic.

 

The volume of loans to domestic non-banking sectors remained lower year on year at the beginning of this year (in February by 2.5%). Lending to enterprises and NFIs has already been falling year on year since the second half of 2020; in the first two months, the volume of household loans was also lower year on year. As a result of the adopted binding macroprudential measures, which tightened borrowing conditions, and measures to contain the epidemic, the volume of consumer loans was more than 8% lower year on year; the volume of other household loans (overdrafts) also fell, by more than 5%. Growth in housing loans remained close to 4%. Lower spending of households and lower business and investment activity of companies are reflected in growth in domestic non-banking sector deposits, which is gradually strengthening – in February it amounted to 12.3% year on year. Given the low level of interest rates, only overnight deposits are on the rise. The share of non-performing claims, as measured by arrears of more than 90 days, remained at around 1% at the beginning of the year. 

 

The situation on euro area bond markets remained favourable in the first quarter. Amid rising consumer prices and the expected increase in public debt because of extensive support measures to mitigate the impact of the epidemic, the required yields on euro area government bond markets otherwise increased in the middle of the quarter. The situation then gradually eased following the ECB’s decision to significantly increase asset purchases under the existing emergency purchase programme (PEPP) in the second quarter. The yield to maturity of the Slovenian bond increased by around 10 basis points, to -0.01%, compared with the last quarter of 2020. The spread to the German bond fell to one of the lowest levels since 2007, to 40 basis points.

 

The deficit of the consolidated balance of public finances totalled EUR 633 million in the first two months of 2021. Revenue in this period was close to last year's level (-0.1%). Within that, some tax revenues declined due to limited economic activity and deferred tax payments and lower advance payments in line with the intervention legislation. Amid wage growth, revenues from social contributions and personal income were higher year on year. Non-tax revenues were up too. Expenditure remained significantly higher in the first two months of the year (by 17.7% year on year), reflecting the payments related to measures for mitigating the consequences of the epidemic. In January and February, EUR 522 million was thus paid from the state budget, the most for a partial subsidy of uncovered fixed costs, monthly basic income, reimbursement of wage compensation for temporarily laid-off workers and allowances for public sector employees. This was reflected in stronger growth in subsidies, transfers to individuals and households, and funds for wages. Investment, which is expected to increase strongly at the annual level this year, was still lower than last year in the first two months.

 

In 2020, the general government deficit amounted to 8.4% of GDP and general government debt to 80.8% of GDP. While growth in revenue had already slowed significantly in 2019 as a consequence of more moderate growth in economic activity, reduced taxation (holiday allowance) and lower revenue from property income due to the sale of equity stakes, in 2020, revenue declined (-4.6%). This was mainly a consequence of a cyclical fall in tax revenues and a further easing of the tax burden (personal income tax, excise duties on energy), but also of tax exemptions enabled by the intervention legislation. General government revenue from property income declined further. Growth in expenditure was gradually strengthening in 2018–2019 as a result of the relaxation of measures which had been in force for a number of years after the financial crisis, new legal obligations (particularly in the area of social transfers and wages) and a stronger increase in general government investment, which rose from historic lows seen in 2016 and 2017. The even sharper increase in expenditure in 2020 was related particularly to the intervention measures for mitigating the consequences of the epidemic (around 5.4% of GDP). Investment also strengthened further in 2020, as did, on a permanent basis, some other expenditures (compensation of employees due to rising employment and the agreement on public sector wages from 2018, expenditure on personal assistance, etc.). In addition to the large deficit, the increase in debt in 2020 was also due to the substantial pre-financing of state budget borrowing requirements (EUR 3.5 billion). 

 

Slovenia’s net budgetary position against the EU budget was negative in the first two months of this year (minus EUR 65.9 million). Slovenia paid EUR 161.6 million into the EU budget (28.6% of the annual amount planned in the budget) and received EUR 95.7 million from it (5.9% of revenue planned). In the following months, payments to the EU budget will be proportionally lower, as the payments of obligations for the first two months already covered more than a third of this year’s obligations of Slovenia’s state budget to the EU budget. The bulk of receipts were resources from structural funds (77.8% of all reimbursements to the state budget) and resources from the EU Cohesion Fund (22.%), while the share of receipts under the Common Agricultural and Fisheries Policy was considerably smaller (0.2%).