Slovenian Economic Mirror
Slovenian economic mirror No 1/2019
The situation in the Slovenian economy continued to improve towards the end of 2018, though more slowly than in 2017. Lower export growth is a consequence of one-off domestic factors and weaker growth in economic activity in main trading partners. Activity in sectors that are more dependent on domestic demand continued to rise rapidly in the last months of 2018.
Towards the end of 2018, the moderate growth of economic activity in the euro area continued, while economic sentiment again deteriorated slightly. The relatively rapid growth of activity in construction continued in the last months of the year. Activity also increased further in manufacturing, yet more slowly than a year earlier amid lower growth in foreign trade and standstills in the automotive industry (particularly in Germany). Retail trade stagnated. The Economic Sentiment Indicator (ESI) continued to fall. The lowering of expectations was more pronounced precisely in Slovenia’s main trading partners, among which Germany and Italy recorded a fall in GDP in the third quarter of 2018. The Purchasing Managers Index (PMI) in Italy and France already indicates a contraction of activity in manufacturing and service activities. In Germany enterprises, which reached a ten-year peak in capacity utilisation rate in 2018, experienced a decline in new orders (PMI and ifo index) and expect no improvement in the situation in a short time.
The moderation of euro area growth is projected to continue this year. The forecasts by international institutions (IMF, EC, OECD, ECB and Consensus Economics) for the euro area and Slovenia’s trading partners have declined slightly in the last few months. The risks to the forecast remain mostly negative. In addition to the rising barriers to international trade, the main risks include political and other factors within the EU, such as the link between Italy’s public finances and its banks and the forthcoming UK withdrawal from the EU. With January’s rejection of the withdrawal agreement in the UK Parliament, the risk of an unregulated, so-called hard Brexit, increased further. An additional risk in the recent period is social unrest in some countries. After December’s significant slides in stock exchange indices, uncertainty also increased on the world’s stock markets.
In October the price of oil reached its highest level since 2014, but this was followed by a sharp decline. The rise in the dollar price of Brent Crude, which in the first half of 2018 was marked particularly by expectations regarding the imposition of sanctions on Iranian oil exports, continued. In October the oil price exceeded USD 86 a barrel, before falling more than 20%, according to the IEA mainly owing to the current excess supply and the expected lower demand growth due to the easing of global economic growth. Despite the lower price in December than at the beginning of the year, in 2018 oil was more than 30% more expensive on average than in 2017.
The strong growth of activity in the service and construction sectors continued towards the end of 2018; the growth of activity in manufacturing remained lower than in 2017. Activity in sectors that are more dependent on domestic demand continued to rise rapidly in recent months. Amid increased investment by the government and municipalities, the strong growth in construction mainly arose from the segment of civil-engineering works. The continuation of turnover growth in trade continued to be supported by growth in household disposable income, rising consumer loans, higher spending by foreign tourists and vigorous construction investment. All of this also fostered turnover growth in other service activities. Owing to more subdued growth in foreign demand and one-off factors, exports and, in turn, manufacturing production increased at a more moderate pace than at the peak of the business cycle in 2017.
Real exports and imports of goods continued to expand towards the end of the year, though more slowly than in 2017 (seasonally adjusted). In the first 10 months of 2018, exports were up 7.4% year on year. Their growth was still mostly driven by exports of motor vehicles, though their contribution gradually declined. The more modest growth than in 2017 was a consequence not only of one-off factors, but also of lower import growth in main trading partners, in the last few months partly due to the temporary standstills of production growth in the automotive industry. Imports were up 8.9% year on year in the first ten months of 2018, under the impact of strengthening investment and further export growth. Amid moderating growth in world trade and uncertainties in the international environment, export expectations remained lower than in 2017 despite a minor improvement.
Nominal exports of services have increased further in recent months; imports have remained high (seasonally adjusted). Besides by exports of construction and ICT services, export growth has mainly been driven by higher spending of foreign tourists in Slovenia, while the growth of exports of transport services, which are strongly related to international trade, is easing. In the last few months, the growth of services imports, following a temporary slowdown, has picked up again due to increased imports of transport and technical, trade-related services.
The second half of 2018 recorded a continuation of more modest output growth in manufacturing activities than in the same period of 2017. In recent months production strengthened particularly in certain high-technology industries, the largest contribution, according to our assessment, coming from the pharmaceutical sector. In most other industries growth remained considerably more moderate than in 2017, largely reflecting weaker growth in foreign demand and, most recently, a standstill of production growth in the European car industry. In the last few months, besides in motor vehicle manufacturing, growth also slowed in several other sectors, especially those that mostly produce intermediate products for the automotive industry.
In the last months of 2018, the surge in construction activity continued, particularly in the segment of civil-engineering works. The two-year strengthening of construction activity thus continued. Growth was related to higher investment by the government, municipalities and infrastructure companies, which was reflected in strong growth in the segment of civil-engineering works. The construction of buildings, having strengthened significantly towards the end of 2017, stabilised at a somewhat lower level in the last months of 2018, though this still higher than in the same period of 2017. Amid signs of labour shortages, the high growth of activity also showed in upward pressures on prices: price growth in construction was last so high in 2008.
In the third quarter of 2018, growth in residential property prices continued at a more moderate pace and trading in them slowed further. After accelerating in the first half of the year, the growth in the average price of residential properties (15.1% year on year) eased in the third quarter, this as a consequence of a halt in the growth of prices of existing flats (which account for two-thirds of total transactions) and a decline in prices of new residential properties. The prices of both were around one tenth higher year on year. On the other hand, prices of existing family houses increased strongly (by around a quarter year on year) and numbers of sales again fell, similarly as for other property types. Amid a limited supply of suitable properties, the decline followed the significant price rises in the recent period, which have made houses and flats less affordable and less attractive as an investment.
The relatively strong growth in nominal turnover continued in most service activities. The continuation of rapid growth in accommodation and food service activities in the last months of 2018 was boosted by higher spending by both domestic and foreign tourists. Turnover growth in professional and technical activities accelerated again, supported by higher investment demand and favourable conditions in construction, which stimulated growth in architectural and engineering services. Further relatively strong turnover growth was also recorded in more export-oriented services, such as road transport and computer services. Turnover in administrative and support service activities maintained its high level from the summer months.
Household disposable income increased further towards the end of last year; at the same time, the proportion of disposable income saved continued to increase. The last quarter of 2018 saw further growth in the net wage bill, social transfers (including pensions) and new consumer loans. This encouraged households to increase spending in several segments (particularly on durable goods and accommodation and food services). According to SURS data, an increasing proportion of disposable income is being saved. The saving rate, up 0.9% to 13.9% in 2017, rose by a further 1 pp year on year in the first three quarters of 2018. The saving rate in Slovenia is indeed among the highest in the EU.
Economic sentiment improved slightly in the last months of 2018 but remained lower year on year due to the deterioration in the first half of the year. Particularly confidence in manufacturing and consumer confidence improved in the last few months, following earlier deterioration. Confidence in other activities reached similar levels year on year at the end of 2018.
The number of employed persons continued to rise relatively rapidly, despite ever greater shortages of appropriately skilled workers. Difficulties in finding workers on the domestic labour market are reflected in increasing hiring of foreign nationals. These already account for more than one-half (in October 57%) of growth in the total number of employed persons and around one-tenth of all employed persons. Growth in the number of employed persons is also attributable to the rapid increase in labour market participation, this also due to the inclusion of those who thus far had not been actively seeking employment. The number of registered unemployed persons continued to decline, though amid more moderate growth in employment from unemployment than in 2017. A total of 78,534 persons were registered as unemployed at the end of December and 78,474 in 2018 as a whole, 7.7% and 11.5% less respectively than one year before.
In the first ten months of 2018, year-on-year wage growth (3.4%) was higher than in the same period of 2017 (2.3%), particularly in the private sector. Wage growth in the private sector is driven by relatively low unemployment, steady productivity growth and good business results. Wages increased the most year on year in construction, accommodation and food service activities, and administrative support service activities. Reflecting the agreements reached with trade unions in 2016, wage growth in the general government sector was somewhat lower than in 2017, particularly in the last months, when the effects of these agreements were petering out. In public corporations, where wage formation is somewhat more autonomous and linked to business performance, wage growth was higher than 2017, which also contributed to higher total wage growth in the public sector.
In the first three quarters of 2018 as a whole, growth in labour costs was more-or-less aligned with productivity growth. Despite the quarterly fluctuations, unit labour costs remained almost unchanged on average with regard to the previous year (−0.1% year on year). Their fall in the third quarter (by 1.2% year on year) was attributable to the non-tradable sector, more specifically to the strongly accelerated activity in construction and financial services. In manufacturing, the sector that is the most exposed to international competition, upward cost pressures started to show gradually over the course of last year, but these do not yet deviate significantly from those in competitors from the euro area.
Consumer price growth fell markedly in December (to 1.4%); in 2018 as a whole it was somewhat higher than one year before (at 1.7%). For the most part of 2018, inflation, in addition to services, was to a great extent due to higher prices of oil products and food. At the end of the year the contribution of these fell significantly, because of which consumer price growth fell considerably year on year. Prices of semi-durable and durable goods continued to fall, the latter mostly owing to lower car prices. Influenced by favourable developments in the economy, year-on-year price growth in services continued to strengthen moderately, reaching 3% by the end of the year. This contributed to somewhat higher core inflation, which was at 1.2% in December. The harmonised index of consumer prices, which is used for international comparisons, also indicates 1.4% inflation in December 2018, 0.2 pps lower than inflation in the euro area.
The slowdown of the year-on-year growth of Slovenian industrial producer prices continued in November; the growth of import prices also declined. Slovenian industrial producer prices were up 1.6% in November year on year, recording the lowest growth since January 2017. The slower growth on both the domestic and foreign markets was mainly attributable to lower growth in non-energy commodity prices. The growth of energy prices strengthened somewhat further in November on the back of price rises in electricity and in the manufacture of coke and petroleum products, while the year-on-year growth of prices in other product groups remained similar to that in October. The lower growth of import prices was to a large extent due to the easing of energy price growth, owing mainly to lower oil prices on world markets and, partly, to weaker growth in non-energy commodity prices; price growth in other product groups did not change significantly.
In 2018 price factors had no significant impact on the competitive position of Slovenian exporters on most foreign markets. The real effective exchange rate against the group of main trading partners in and outside the euro area was fairly stable last year. Major shifts towards a deterioration in price competitiveness were recorded only in comparison with Turkish competitors, this owing to the marked depreciation of the Turkish lira, but this moderated somewhat towards the end of the year.
The surplus of the current account of the balance of payments has declined slightly in the last few months, but remains high. The slight decline is largely a consequence of the lower surplus in trade in goods owing to faster real growth in goods imports than exports and deterioration in the terms of trade. The surplus in trade in services, contributing the most to the high total surplus, continued to rise in both main segments, i.e. transport and travel services. The total deficit in the income balances has been relatively stable in the last few months and remains lower year on year. This is a consequence of lower costs of servicing external debt amid (i) lower yields on government bonds and (ii) deleveraging of the private sector (particularly commercial banks), which, investing in foreign securities, receives higher and higher net interest income from abroad. The current account surplus in the 12 months to October 2018 totalled EUR 3.2 billion (7.0% of GDP).
The net outflow of financial assets abroad, almost entirely in the form of portfolio investment, continues. Financial transactions recorded a net outflow of EUR 1.8 billion in the last 12-month period, with the net outflow of the private sector and the government together exceeding the net inflow of the BoS. The outflows of financial assets of the private sector, which continue to exceed inflows, mainly involve investment in foreign securities and short-term commercial crediting of exports of goods and services. The government placed long-term deposits in accounts abroad and repaid a portion of its liabilities to foreign portfolio investors. The BoS, meanwhile, reduced its purchases of foreign securities within the framework of non-standard monetary policy measures, while increasing its liabilities within the Eurosystem.
Among loans, particularly household loans are rising further; the quality of banks’ assets is improving. Households are borrowing primarily in the form of housing and consumer loans. The year-on-year growth of the latter has exceeded 10% since May 2017 and their maturity is lengthening. The volume of corporate and NFI loans, on the other hand, continues to fall gradually, which is related to somewhat higher loan repayments, as the volume of new loans in this segment has increased slightly in recent months. Bank deleveraging abroad, where banks have significantly reduced exposure in recent years, came to a halt in the last few months. Bank deposits of domestic non-banking sectors, particularly households, continue to expand. With only overnight deposits on the rise, the maturity structure of bank deposits is deteriorating further. With a further decline in the share of arrears of over 90 days (to 2.6% of the banking system’s total exposure), the quality of banks’ assets continues to improve gradually.
Towards the end of 2018, the general government surplus increased further (to EUR 785.1 million) under the impact of one-off inflows. The inflows from dividends significantly strengthened the growth of non-tax revenues, which until September still lagged behind those in the same period of 2017. The growth of revenue from taxes and social contributions up to November 2018 was also higher year on year, reflecting favourable economic conditions, particularly on the labour market. Higher growth was also recorded for inflows from the EU budget, partly as a consequence of a one-off payment of the retained EU funds from the previous financial perspective. The growth of expenditure in the first 11 months of 2018 was half lower than the growth of revenue. With a faster implementation of EU projects, it was strongest in investment. Favourable public finance developments are also witnessed in the general government sector, which recorded a surplus of EUR 259 million (0.8% of GDP) in the first nine months of 2018. This is also consistent with the latest estimates of the balance for 2018. Such realisation would mean that the general government structural balance remained in equilibrium, which was achieved in 2017 according to our assessment.