Slovenian Economic Mirror


Slovenian Economic Mirror

Slovenian Economic Mirror No 4/2021

In the first quarter, economic activity in the euro area contacted somewhat relative to the previous quarter, but the outlook remains favourable. As containment measures are set to relax gradually, international institutions forecast a pick-up of activity in most euro area countries in the second quarter. After a long period, activity growth was also indicated by the indicators for the service sector. In Slovenia, growth in export-oriented activities continued. Services also started to rebound. The relatively favourable developments in the export-oriented part of the economy, which had reached pre-crisis levels at the end of last year, continued in the first quarter of this year. With a gradual relaxation of containment measures, household consumption picked up substantially in February and March. With the opening of most shops, the lifting of the ban on movement between municipalities and the compensation of foregone purchases, particularly household expenditure on non-food and food products and motor vehicles increased in February and March. Labour market conditions remain tight but they are gradually improving. The number of employed is lower than in the same period before the epidemic. The largest fall in employment was in accommodation and food service activities and administrative and support service activities. The number of registered unemployed fell further in April, amounting to 79,285 persons at the end of the month, but remained higher than before the epidemic. In April, inflation rose for the second consecutive month, again mainly due to higher prices of energy. Due to limited economic activity and measures to contain the epidemic, the deficit of the consolidated general government budgetary accounts increased significantly in the first quarter of this year, amounting to EUR 1.3 billion.

Economic activity in the euro area contracted slightly again in the first quarter this year. After a strong rebound in the third quarter last year, economic activity has declined in the next two due to the resurgence of the epidemic and the tightening of containment measures. According to Eurostat’s preliminary estimate, economic activity contracted by 0.6% quarter on quarter in the first quarter of this year (in the fourth quarter of last year by 0.7%). The year-on-year decline was 1.8% (in the fourth quarter, 4.9%). Among the largest euro area economies, which are also Slovenia’s most important trading partners, in the first quarter activity was affected the most in Germany (-1.7%), where stringent containment measures weakened particularly private consumption. As containment measures are set to relax gradually, international institutions forecast a recovery of activity in most euro area countries in the second quarter.

Euro area economic activity increased at the transition to the second quarter according to the available indicators. The economic sentiment indicator (ESI) for the euro area improved substantially in April for the second consecutive month and returned to the pre-crisis level. Confidence improved in all activities and among consumers, most notably in industry, where it exceeded slightly the highest value measured to date. In April, an improvement in economic conditions was also indicated by the composite Purchasing Managers’ Index (PMI). The indicator for manufacturing improved for the tenth month in a row, reaching the highest value in more than 20 years. For the first time since last summer, activity growth was also shown by the indicator for the service sector. 

 

Growth in export-oriented activities continued; a recovery also started in services. The relatively favourable developments in the export-oriented part of the economy, which had reached pre-crisis levels at the end of last year, continued in the first quarter of this year. Goods exports to EU countries increased further, as did manufacturing production. With the relaxation of some containment measures, service activities also started to recover in February, although some of them remain strongly affected. In February, turnover increased in all market services, including accommodation and services activities, where, however, it remains considerably lower than before the epidemic. With the opening of all non-food shops, turnover also rose notably in trade and, according to preliminary data, growth also continued in March. After strengthening in the second half of last year, activity in construction fell in February, particularly in the non-residential buildings sector. The lockdown at the beginning of April again affected particularly service activities, but data on fiscal verification of invoices for the second half of the month indicate that turnover rebounded and exceeded last year’s levels. Judging by weekly data on electricity consumption and freight traffic, containment measures again affected the export-oriented part of the economy less than service activities. 

 

In April, electricity consumption was 13% higher year on year but 4% lower than in April of the pre-crisis year 2019. The year-on-year increase in consumption was mainly due to the base effect, while the lag behind the pre-crisis level reflected the tightening of containment measures at the beginning of April. Year-on-year higher consumption was also recorded in our main trading partners, from 7% in France to 31% in Italy. Compared with April 2019, lower consumption was recorded in Austria (4%), France (8%) and Germany (1%), while consumption in Croatia and Italy was around 2% higher.

 

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 in February (to 12.1%) 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 April was up 59% year on year and up 2% compared with April 2019. Domestic vehicle traffic was 31% and foreign vehicle traffic 85% higher year on year. These strong growth rates are mainly due to the base effect, as in April last year traffic was greatly restricted due to the stringent containment measures during the first wave of the epidemic. As foreign vehicle traffic then fell more, it is now also recovering more strongly year on year. The share of foreign vehicle traffic, which had dropped by more than 8 p.p. in April 2020, returned to the pre-crisis level of around 60% in a few months. In April the volume of domestic and foreign vehicle traffic was slightly higher compared with the same period of 2019, which is relatively favourable considering that there was one working day less.

 

According to data on fiscal verification of invoices, in April turnover was 36% higher year on year but 9% lower than in the same period of 2019. Year-on-year growth, which was largely a consequence of the low base, strengthened further in the second half of the month after the reopening of non-essential stores and some services. Growth was also favourably affected by the further easing of other measures (the ban on movement between regions was lifted again, some accommodation establishments opened, and restaurants and bars were allowed to serve guests outdoors and also indoors in some regions). However, in some segments of services, which in 2020 had already reopened in the last third of April,  year-on-year growth eased. Total turnover in April lagged 9% below its 2019 level, which was a consequence not only of this year’s (partial) closure of some shops and services, but also of one working day less and a different distribution of Easter holidays.

 

Goods trade continued to recover in the first quarter of this year. Real goods exports to EU countries rose further in March and exceeded pre-crisis levels in the first quarter. We assess that exports rebounded in most main sectors. Meanwhile, the recovery of vehicle exports came to a halt. Particularly the movements of exports of intermediate goods remained favourable. Export expectations, which have been improving in recent months, did not change significantly in April, but companies were more optimistic regarding future foreign demand than before the beginning of the epidemic. Goods imports also recovered further, which is attributable particularly to the recovery of industrial activities and consequently higher imports of intermediate goods. 

 

External trade in services was significantly lower year on year in the first two months of 2021. Exports of services in the first two months were around a quarter and imports a fifth lower than a year earlier. The measures to contain the epidemic, particularly the closure of hotels and restaurants and restrictions on crossing the state borders, significantly affected tourism, where export and import revenues were more than 85% lower year on year in the first two months. Trade in ICT services was also noticeably lower year on year. The movements of some other more important service activities (transport, administrative and support service activities) were more favourable during the second wave of the epidemic, but trade in most of these services was nevertheless lower year on year due to the high base. On the other hand, trade in construction services was higher year on year. Growth in imports of transport services also stood out.

 

Production volume in manufacturing increased further in the first quarter of this year, despite somewhat weaker activity in March. After strengthening at the beginning of the year, in March activity declined, reflecting a fall in high-technology industries. Production in medium-high industries also decreased slightly. In high-technology industries, activity also contracted in quarterly terms, while activity in medium-high, medium-low and low-technology industries increased. In the first quarter, activity of high-technology industries was also lower year on year, according to our estimate mainly due to the worse performance of the pharmaceutical industry and last year’s high base. A minor year-on-year fall was also seen in low-technology industries, where it was more broadly based. Activity in medium-high and medium-low technology industries was up year on year in the first quarter, worse results being recorded only for the automotive industry and the manufacture of non-metallic mineral products.

 

Construction activity declined somewhat in February. The value of construction output fell by 1.8%, being down 7.0% year on year in the first two months of the year. Compared with the pre-crisis years 2018 and 2019, construction activity in the last few months was significantly higher in residential buildings, slightly higher in specialised construction activities and civil engineering, but, due to a fall in February, significantly lower in the construction of non-residential buildings. Data on the stock of contracts and new contracts in construction do not paint a uniform picture. The value of the stock of contracts declined after peaking in mid-2020 but remained markedly higher than in previous years. The value of new contracts has been highly volatile in recent months: after a relatively good last quarter, it was significantly lower year on year in February.

 

Turnover in trade strengthened significantly with the opening of all non-food stores in February; according to preliminary data, growth also continued in March. With the re-opening of shops and the lifting of the ban on movement between municipalities, turnover increased in all three main segments (the most, almost by a fifth, in retail trade, where non-food sales were up more than a third, partly also due to the making up for foregone purchases on the part of consumers). Turnover in the sale of motor vehicles was also much higher than in January, although new passenger car sales were still more than a tenth lower year on year. In March, turnover strengthened further in all segments according to preliminary data.

 

In February, turnover increased in all market services. After falling since October, real turnover strengthened the most in accommodation and food service activities, partly as a consequence of additional explanations regarding the possibility of offering services to legal persons. It also rose strongly in transportation and storage activities, particularly in land passenger and freight transport. In information and communication activities, growth accelerated mainly as a consequence of higher turnover in computer services on the domestic market. Turnover in professional and technical activities and in administrative and support service activities remained at the levels achieved in the previous month. The lags behind last year’s levels in accommodation and food service activities and travel agencies remained significant, in the first two months over 70% and 80% respectively. On the other hand, in professional and technical activities, information and communication activities and transport, last year’s turnover levels were already exceeded in this period.

 

Household consumption strengthened significantly in February and March, being higher year on year in some segments but lower in those where activity remained highly restricted. With the opening of most shops, the lifting of the ban on movement between municipalities and the making up for foregone purchases, particularly household expenditure in the retail sale of non-food and food products and motor vehicles increased in February and March. Owing to the year-on-year growth in February and even stronger growth in March due to the low base, in the first quarter retail sales of non-food products were more than a tenth and retail sales of food products 6.0% higher year on year. Almost a tenth higher turnover was also recorded for motor vehicles, where March sales strengthened in particular. On the other hand, in service activities that remained mostly closed (especially accommodation and food service activities and arts, entertainment and recreation), sales fell further year on year in the first quarter.  In March, the year-on-year decline otherwise decreased compared with January and February due to the low base and some additional relaxations and in some services even turned to growth.

 

The volume of road freight transport increased markedly again in the last quarter of 2020, reaching the level of the end of 2019. Slovenian hauliers carry out a large part of their journeys abroad. As a result of strict containment measures in most EU countries in the first half of last year, road freight transport abroad declined significantly. While it picked up again as the measures were eased, it ceased to recover in the last quarter and remained 12% lower than a year earlier. 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 and then recovered more slowly. In the fourth quarter, it increased more and was already 13% higher year on year. Freight transport by rail, which had already declined for several quarters before the epidemic, was less but in the longer term affected by containment measures (in the fourth quarter, it was down 9% year on year).

 

Economic sentiment improved somewhat further in April. With the announced relaxation of some containment measures and the re-opening of public life in the middle of the month, confidence improved particularly in trade and, partly, service activities. Confidence in construction has also been rising for several months, reaching the highest level in the last two years. Confidence in the export part of the economy did not change much in April and remained higher than before the epidemic. Consumer confidence deteriorated further and remained very low.

 

The number of registered unemployed persons fell further in April. Following the increases in the number of unemployed in December and January, which, due to the retention of intervention measures, did not differ much from seasonal increases in the same period of previous years, the number of unemployed dropped seasonally adjusted from February to the first half of April. Overall 79,285 persons were unemployed at the end of April, 4.1% fewer than at the end of March and 10.6% fewer than a year earlier. Compared with the end of April 2019, the number was, however, 7.2% higher. The number of employed persons was down 1.4% year on year in February, which is similar to previous months. It fell the most in accommodation and food service activities and administrative and support service activities, which were hit hardest by containment measures, while rising the most in health and social work.

 

In February, year-on-year wage growth continued; it remained 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 workload 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 the first two months of this year, the most in social work and health (in February, it was 35.5%; in the entire public sector, 14.8%). In the private sector, wage growth did not rise 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 February, wage growth was again somewhat lower (3.9%) despite the increase in the minimum wage at the beginning of the year.

 

Consumer price growth strengthened considerably in April. The main reason was year-on-year higher energy prices, mainly as a consequence of record low global prices of oil and oil products in April 2020, but also government measures, i.e. the ordinance on temporary exemption of households and certain small business consumers from paying contributions for electricity consumption. However, after a pronounced decline in the previous two months, prices of semi-durable goods were higher year on year in April (by 0.2%), largely owing to price rises in the clothing and footwear group due to the arrival of new collections, which took place somewhat later than in previous years due to longer-lasting containment measures. Prices of durable goods were also up year on year (by 1.2%) for the first time since August 2019. The year-on-year fall in services prices deepened slightly further in April (to 0.7%); an equal fall was also recorded in the food and non-alcoholic beverages group.

 

With stronger price rises on the domestic and foreign markets, year-on-year growth in Slovenian industrial producer prices strengthened again in March, reaching 2%. Price growth on the domestic market continues to be fuelled by price rises in the group of intermediate and capital goods. In March, energy price growth also strengthened notably, largely as a consequence of the lower base, as the government temporarily exempted households and certain small business consumers from paying electricity contributions in the first wave of the epidemic. Growth in consumer goods prices remains low amid more modest household consumption. Price growth on foreign markets continues to be driven particularly by higher prices of capital goods. In March, prices of intermediate goods were also up year on year after almost two years of decline.

 

The current account surplus remained high, amounting to EUR 3.2 billion in the last 12-months period (6.6% of GDP). Amid a further decline in the surplus in services trade, which was severely affected by the epidemic, the year-on-year higher surplus in current transactions mainly arose from a higher surplus in trade in goods. This was a consequence of a larger real fall in goods imports than exports and the improved terms of trade. The year-on-year widening of the current account surplus was also due to lower net outflows of primary income, in particular lower payments of profits of foreign-owned companies, which is related to last year’s decline in economic activity. Slovenia also received higher subsidies from the EU budget for the Common Agricultural and Fisheries Policy. The higher net outflows of secondary income were marked by higher payments to the EU budget (VAT-based and GNI-based contributions).

 

The year-on-year fall in the volume of loans to domestic non-banking sectors remained at 2.5% in March. Despite the monthly growth of loans to enterprises and NFIs, their decline strengthened further year on year (to -4.5%). After being lower year on year in the first two months of this year, the volume of household loans was again somewhat higher in March. We assess that this is largely a consequence of higher household consumption due to the partial relaxation of measures to contain the epidemic. At the monthly level, the volume of loans for other purposes (mostly overdrafts) thus rose by almost 3%. After almost a year and a half of continuous decline, the volume of consumer loans strengthened slightly in March but was still 7.5% lower than in the same month last year. Increased spending was also reflected in lower household deposits in banks, but their year-on-year growth still exceeded 11%. The share of non-performing claims, as measured by arrears of more than 90 days, remained at around 1% in the first two months of the year. 

 

Amid strong expenditure growth, which exceeded revenue growth, the deficit of the consolidated general government budgetary accounts amounted to EUR 1.3 billion in the first quarter of this year.Revenue in this period exceeded last year’s level by 3.3%. Revenues from social contributions and personal income tax were higher year on year amid wage growth, which was boosted particularly by the payment of allowances during the epidemic. Receipts from the EU budget and other non-tax revenues were also higher than last year. On the other hand, owing to limited economic activity and due to deferrals of tax payments and lower advance payments enabled by the intervention legislation, some tax revenues were below last year’s level, especially revenue from value added tax (-9.6%). Expenditure increased significantly in this period under the impact of measures for mitigating the consequences of the epidemic (by 21.5% year on year). On the basis of anti-coronavirus packages (PKPs), EUR 830.7 million was paid from the state budget in the first quarter, the most for allowances for public sector employees (EUR 209.6 million), partial reimbursement of uncovered fixed costs (EUR 196.0 million), monthly basic income (EUR 103.5 million), reimbursement of wage compensation to workers on temporary layoff (EUR 86.7 million) and the crisis bonus (EUR 60.0 million). This was reflected in stronger growth in funds for public sector wages, transfers to individuals and households, and subsidies. Investment also strengthened slightly. According to the preliminary state budget data for April 2021, the increase in the deficit has slowed significantly. 

 

The current data of the consolidated general government accounts and the projections of the Stability Programme 2021 indicate that the general government deficit will remain high in 2021. The general government  deficit is estimated at 8.6% of GDP in 2021. Amid the expected improvement in economic conditions, a decline in the volume of measures to mitigate the consequences of the epidemic but expansionary fiscal policy of other expenditures, it will be higher than last year (8.4% of GDP). Its gradual decline is envisaged in the following years, by 2024 to 2.8%. The first medium-term fiscal projections since the beginning of the epidemic are associated with uncertainties about the further course of the epidemic and possible new measures (tax changes, the long-term care act, etc.). In the whole period of the projections, the MF projects lower growth in revenue than nominal GDP as a consequence of tax cuts (excise duties on energy, motor vehicle tax)  and the impact of tax deferrals and payment by instalments. With regard to the termination of the Multi-Annual Financial Framework 2014–2020 and the adopted Recovery and Resilience Plan, the Stability Programme envisages a high level of revenue from the EU budget. This also has an impact on the high expenditure level planned in the entire period (particularly subsidies and investment), in addition to the high level of investment from national sources and some other measures that will increase expenditure in this period (for example changes in pension legislation and a temporary increase in expenditure related to the EU presidency). The value of direct measures related to the mitigation of the consequences of COVID-19 declines in the projections. According to MF estimate, last year the total value of measures on the revenue and expenditure side amounted to EUR 2.8 billion or 6.1% of GDP (of which measures on the expenditure side 5.3% of GDP); in 2021 it is expected to amount to EUR 1.3 billion or 2.6% of GDP (of which only EUR 22 million on the revenue side) and in 2022 to EUR 55 billion.

 

Slovenia’s net budgetary position against the EU budget was positive in the first three months (at EUR 34.3 million). Receipts from the EU budget amounted to EUR 231.8 million, while payments to the EU budget totalled EUR 197.5 million. The bulk of receipts were funds for the implementation of the Common Agricultural and Fisheries Policy (EUR 102.6 million – 33.9% of the revenue planned in the budget), which are very high each March due to direct payments to farmers. From the structural funds, the state budget received EUR 94.3 million (13.4% of the revenue planned) and from the Cohesion Fund EUR 30.6 (12.4% of the revenue planned).