Slovenian Economic Mirror
Slovenian economic mirror No 5/2018
Short-term economic activity and confidence indicators indicate a continuation of euro area GDP growth in the second quarter; uncertainty in the international environment is increasing. After the interruption early in the year, Slovenia has recorded a continuation of slightly more favourable GDP developments in the last few months. The labour market situation continues to improve. Inflation rose above 2% in the second quarter. Growth in loans to domestic non-banking sectors remains moderate. In the first five months the general government surplus was higher than in the same period of last year.
Short-term indicators of economic activity in the euro area indicate a continuation of similar quarterly growth in the second quarter. Economic growth was supported particularly by construction and retail trade. After dropping in the first four months, manufacturing output expanded in May, particularly in Germany. The values of economic sentiment indicators (ESI, PMI, Ifo) continue to decline, but are still high. In the last few months confidence has declined particularly in industry, trade and services, while it improved in construction. This year’s moderation is also reflected in GDP forecasts for Slovenia’s main trading partners, which are lower than in the spring (EC, ECB, IMF, Consensus).
In the first quarter the global economy lost the momentum from the previous year; uncertainty in the international environment increased. In the first quarter of 2018, GDP growth slowed in advanced economies in particular (the US and the euro area); in Japan it even declined. It remained high in China, at 6.8% year on year. The volume of world trade, particularly euro area trade, was also down, reflecting increased uncertainty in the international environment. The tariffs imposed have thus far affected only a small percentage of world trade, but a further implementation and tightening of protectionist measures could have serious consequences. This is the key risk to global economic activity, in addition to rising oil prices.
After the interruption early in the year, slightly more favourable developments in economic activity have continued in recent months. The slowdown of growth in main trading partners and, in turn, of growth in foreign demand has significantly affected economic activity and business confidence in the first months of the year. At the beginning of the second quarter, real exports and production volume in manufacturing rose again. More favourable developments than in preceding months were also recorded for construction, retail trade and market services. Private consumption continues to expand, boosted by favourable labour market conditions and high consumer confidence. The deterioration in business confidence came to a halt at the beginning of the second quarter. Positive developments are also reflected in increased general government revenue.
After the interruption of growth at the beginning of the year, real exports and imports of goods rose at the beginning of the second quarter. In the first five months exports were up 8.7% year on year. Their growth was mainly underpinned by more technologically intensive industries, particularly vehicle exports, which represent 17.9% of Slovenian exports. We estimate that in the coming months vehicles exports will start falling due to the base effect. The growth of imports was 9.8% during this period. It mainly arose from higher imports of intermediate goods. The contribution of imports of investment goods has also been rising this year.
The growth of exports and imports of services remained high at the beginning of the second quarter. In the first five months of the year, nominal exports were up 8.8% year on year, mainly on account of higher exports of transport and technical, trade-related business services. Imports increased 10.4% during this period. Technical, trade-related business services also made a significant contribution to imports, alongside other activities such as professional and management consultancy services, maintenance and repair and, in the last two months, advertising and public opinion polling.
After falling at the beginning of the year, the volume of manufacturing production is again rising. Its growth is lower than in the previous two years mainly owing to slower growth in foreign demand. Owing to their integration in global value chains, low growth is recorded particularly by medium-technology industries, which mainly produce intermediate goods. These industries mostly saw lower year-on-year growth rates in the first five months than in the same period of last year. On the other hand, similar or higher year-on-year growth than last year was reported by most low-technology industries, which mainly produce consumer goods, and industries making investment goods (in particular the manufacture of transport equipment, machinery and equipment and repair and installation of machinery and equipment).
Activity in construction has increased in the last few months, after adverse weather conditions at the beginning of the year. Construction activity, which has been gradually strengthening in the last two years, was interrupted temporarily at the beginning of this year due to unfavourable weather conditions. In April and May it continued to grow. The strengthening in the construction of buildings in recent months mainly reflects greater optimism in the private sector, while the higher value of civil-engineering works arises primarily from increased government investment. Higher activity and greater optimism are also reflected in higher prices in construction: in May they were up more than 4% year on year for the first time since 2008.
Average residential property prices rose further at the beginning of the year. Vigorous trading with existing residential properties continued. They represented 96% of all transactions in the first quarter. Their average price, which has been rising since the beginning of 2016, was more than one tenth higher year on year and a solid fifth higher than the lowest average price in 2014. The prices of existing flats in Ljubljana again rose the most year on year. The prices of newly built residential properties also rose strongly (by one quarter year on year). Owing to the limited supply, the number of transactions in these properties (91) was the lowest since measurements began.
Real turnover in market services rose slightly at the beginning of the second quarter. After last year’s strong growth, turnover in professional and technical and administrative and support service activities remained at the level seen at the end of last year, while turnover in transportation and warehousing declined. Further growth was recorded for information and communication activities, with exports of computer services rising in particular.
Land freight transport declined in the first quarter of 2018. In the second half of last year the volume of freight transport by rail started to decrease, thus contributing to a slowdown of growth in land transport at the end of last year. The decline in land transport in the first quarter of this year was mainly due to the lower road transport performed by domestic hauliers, where cross-trade transport also dropped under the impact of less favourable foreign demand.
Reflecting favourable labour market conditions and high consumer confidence, household consumption continues to increase. Amid rising wages and employment, the net wage bill increased further in April; social transfers were also higher year on year. Higher income was reflected in a further strengthening of household spending on some durable goods, particularly passenger cars, furniture and household appliances. Spending on some semi-durable goods and services related to leisure activities at home and abroad also remained high.
Following last year’s strong growth, the number of persons employed has seen more moderate growth in the last few months. The slowdown has been a consequence of somewhat slower growth in economic activity, but also of labour shortages in some segments of the economy. In the first five months of this year, the number of persons employed, which has otherwise already reached its 2008 levels, was up year on year in all private sector activities, the most in manufacturing, construction, accommodation and food service activities and transportation. In public services, the increase in the number of persons employed arises particularly from the education and health sectors.
The share of enterprises reporting a shortage of workers has risen substantially in the last year, to levels similar to those before the crisis. The inability to fill vacancies is also indicated by the labour shortage rate, which rose further in the first quarter of the year. More than 19,000 vacancies were recorded in the first quarter of the year, one third more than in the same period of last year. The number of persons employed also increased due to the hiring of foreign workers. These accounted for around 40% of the year on year increase in the total number of the employed.
The decline in the number of registered unemployed slowed in the second quarter. The main reason was a smaller outflow into employment and a slightly larger inflow into unemployment owing to the expiries of fixed-term employment contracts. The total inflow in the first half of the year remained lower year on year. There were also fewer first-job seekers, partly on account of smaller generations of young people finishing school. The outflow into employment was also slightly smaller than last year. At the end of June, a total of 74,988 persons were registered as unemployed, 11.6 % less than one year earlier.
In the first five months both the private and public sectors recorded higher year-on-year wage growth than in the same period of last year. Amid growing difficulties in finding workers with the right skills, the stronger wage growth in the private sector mainly reflected good business results and the shortage of labour. Wages were up year on year particularly in construction, manufacturing and certain market services. In the public sector, wage growth arises from the implementation of agreements with trade unions and the regular promotions at the end of last year.
Unit labour costs stopped declining in the first quarter of the year. Year-on-year, they were otherwise still slightly lower (by 0.1%), but mainly as a consequence of favourable movements in previous quarters. In both the tradable and non-tradable sectors the growth of productivity slowed relative to 2017 (from 4.2% to 3.7% on average) and the growth of employee compensation rose (from 2.8% to 3.6%). At the level of the whole economy, unit labour cost movements in the first quarter were comparable with the euro area average.
Year-on-year consumer price growth strengthened in the second quarter. The contribution of fuels and energy increased significantly. The contribution of service prices was also larger. Service prices were up primarily owing to higher prices of package holidays, which had been rising strongly in April and May. The higher growth of services prices has contributed to somewhat higher core inflation in recent months, though this remains relatively low, mostly on account of a further decline in prices of semi-durable and durable goods. The contribution of food to inflation was similar to that in previous months (0.6 pps).
The growth of industrial producer prices remains stable; import prices rose in the second quarter. The main reason was oil price rises on international markets and the depreciation of the euro, which, in our estimation, contributed to the slightly higher growth of non-energy commodity prices. Year-on-year growth in Slovenian industrial producer prices remains at around 2%. For the first time since January, price growth was slightly higher on foreign markets than at home, this attributable to stronger price growth in investment goods and non-durable consumer goods on foreign markets. Price rises on the domestic market slowed somewhat again amid lower growth in consumer good prices.
The appreciation of the euro contributed to a slight deterioration in cost competitiveness in the first quarter, but in the second quarter the euro depreciated again. The movement of unit labour costs in the first quarter of this year was similar to that in main trading partners. The deterioration in cost competitiveness was thus solely the result of the strengthening of the nominal effective exchange rate. In the second quarter the nominal effective exchange rate declined. The real effective exchange rate (price competitiveness) thus dropped as well, despite higher price growth in Slovenia (measured by inflation). The values of both competitiveness indicators (price and cost competitiveness) are hovering below the long-term average.
The surplus of the current account of the balance of payments has been rising in the last few months, reaching the highest levels thus far. The 12-month cumulative sum for the period ending May 2018 amounted to EUR 3.2 billion or 7.0% of GDP. The higher surplus year-on-year was largely due to the higher surplus in international trade in goods and services. The deficit in primary income was down primarily owing to lower net payments of interest on external debt and lower net outflows of dividends and profits abroad; the deficit in secondary income was lower because of higher net positive transfers of the government sector (receipts from the EU budget). Payments of taxes and contributions on income of Slovenian residents working abroad are rising.
The net outflow of financial assets abroad continues. External financial transactions recorded a net outflow of EUR 2.0 billion in the 12 months to the end of May, which was mainly a consequence of portfolio investment. Banks, insurance companies and the BoS increased their assets abroad, while the government repaid a portion of its liabilities to foreign portfolio investors. A net inflow was recorded for other investment, with the government and the BoS withdrawing deposits from their accounts abroad, and for inward FDI (an inflow of equity capital).
Growth in loans to domestic non-banking sectors remains moderate. The year-on-year growth of household loans remains at around 6%; within that, consumer loans are rising approximately twice as fast and account for around 45% of all new loans granted to households in the last twelve-year period. Like in Slovenia, these loans are also rising the fastest in the euro area. We estimate that in addition to the low indebtedness of Slovenian households and their high spending, the relatively rapid growth in consumer loans is due to the increased supply of these loans and looser non-financial borrowing conditions than for housing loans.
New lending to non-financial corporations continue to decline gradually. Year-on-year, it totals only EUR 5.1 billion, approximately 15% less than one year earlier. The total volume of corporate loans is shrinking further. Amid favourable business results, enterprises are thus to a greater extent relying on own resources. The importance of other sources of finance (equity capital, other liabilities, crowdfunding platforms) is also steadily rising. The quality of banks’ assets continues to improve, the share of arrears of more than 90 days having fallen to 2.4% by the end of May. The fastest decline is still recorded for arrears of more than 90 days in domestic enterprises.
The general government balance was positive in the first five months (EUR 138.4 million). The improvement in the general government balance continued to reflect positive economic trends. In April the balance turned into surplus, which increased further in May. Their impact is particularly pronounced on the revenue side (5.2% year on year), in the form of strong growth in revenue from taxes and social contributions. Receipts from the EU budget, which were very low in this period of last year, are also strengthening year on year, but are nevertheless below expectations. In contrast, non-tax revenues are lower year on year, primarily due to lower dividend payments into the budget. After stagnating in the first quarter, expenditure was up 3.8% year on year in the first five months, largely as a consequence of stronger growth in expenditure on goods and services and somewhat higher growth in expenditures on pensions and the wage bill. Payments into the EU budget were also higher year on year. Investment expenditure also rose notably from its low levels, though investment expenditure related to the absorption of EU funds remains lower than planned.