Slovenian Economic Mirror
Slovenian economic mirror No 5/2020
The fight with the COVID-19 epidemic has had a major impact on economic activity since mid-March, notably in April. After falling further in April, the indicators of economic activity started to improve gradually in May and June, but were still significantly lower than in the same period of last year. With the loosening of containment measures and a gradual recovery of production in Slovenia and our main trading partners, in May activity increased in trade, manufacturing and goods trade. The improvement is also indicated by the available data for June and the beginning of July. After a marked deterioration in the first two months of the epidemic, labour market conditions had also improved slightly by the end of June. Similar movements in economic activity are also seen in the euro area. In the July forecast, the European Commission expects that the recovery will begin in the third quarter of this year. The forecasts are otherwise surrounded by high and mostly negative risks, as the scope and the duration of the pandemic and possible further containment measures remain unknown.
After a pronounced decline in April due to the measures taken to contain the epidemic, economic sentiment in the euro area improved significantly in May and June, but it remained low. Despite a strong increase for the second consecutive month, the value of the composite Purchasing Managers’ Index (PMI) for the euro area still indicates a contraction of economic activity in June, albeit a significantly smaller one than in previous months. The indicator increased strongly in all of our main trading partners. The PMI reading for France has already moved into expansionary territory (above the 50-threshold). The value of the Economic Sentiment Indicator (ESI) also increased more in June, suggesting the possibility of a broad-based stabilisation of economic conditions at the beginning of the second half of the year. Confidence was up in all activities, the most in trade. A possible recovery in Slovenia’s main trading partner, Germany, in the third quarter is also indicated by the Ifo Institute’s indicator.
International institutions project a deep recession in the euro area for this year. The economic impact of containment measures being larger than expected, they further downgraded their forecasts in June and July. The recession will affect all countries in the euro area, but the decline in GDP this year and then the pace of recovery in 2021 will differ markedly among individual countries. The OECD, IMF and EC project that, assuming a gradual lifting of containment measures and the prevention of a large-scale second wage of infections, the euro area economy will contract by 8.7%–10.2% this year, before recovering by 6.1%-6.5% in 2021. The forecasts of institutions are surrounded by exceptionally high uncertainty and mostly negative risks, as a longer lasting epidemic or a new outbreak of the epidemic could have a far greater negative impact on economic growth.
In April, economic activity in the euro area declined significantly again in some sectors, but data for May indicate improvement. With the reopening of shops in May, turnover in retail trade increased considerably relative to the previous month (18%), but it remained 5% lower year on year. Owing to the shutdown of some production plants and supply chain disruptions, manufacturing production fell more than 18% at the monthly level in the euro area as a whole. The production of durable goods fell in particular. In April, construction activity also decreased noticeably (by more than 14% relative to March). The EC estimates that the euro area economy operated at between 25% to 30% below its capacity during the period of the strictest confinement (March and April). In the first quarter, GDP contracted by 3.8% quarter on quarter (year on year, by 3.2%). In the second quarter, it dropped even significantly more (-13.6%) according to the EC estimate, but it is expected to recover in the second half of the year.
Oil prices rose in May and June but remained at four-year lows. After significant declines at the beginning of the year due to lower demand during the COVID-19 pandemic, the average dollar price of a barrel of Brent crude rose by 118% in June compared with April and totalled USD 40.3. Year on year, dollar prices of oil were 37% lower year on year. The rise in oil prices was attributable both to expectations of a gradual recovery of economies and consequently higher demand for oil and the extension of the agreement between OPEC and some allies to reduce extraction. Prices of non-energy commodities remained lower year on year in June according to World Bank data.
The appreciation of the euro against the basket of currencies continued in June. The spread of the COVID-19 pandemic across the world has caused major exchange rate fluctuations. Since including March, the euro has appreciated mainly against the currencies of energy exporting countries (e.g. Russia), countries with previously unstable macroeconomic and financial environments (e.g. Turkey) and the British pound. In June, it also appreciated against some safe haven currencies, the US dollar and the Japanese yen. The nominal effective exchange rate, which indicates the ratio of the euro to a basket of currencies of trading partners, was thus 2.2% higher in June relative to February (or 4.7% if trading with euro area countries is not taken into account in the basket). This puts pressure on the price-competitiveness position of Slovenian exporters outside the euro area, which is, however, mitigated by a significant decline in final prices (measured by inflation) in comparison with trading partners. In June, the value of the indicator of price competitiveness (REER_hicp), which takes into account exchange rate movements and relative inflation, was thus, with fluctuations, similar to that before the outbreak of the pandemic.
In May and June, the indicators of economic activity were still significantly lower than in the same period of last year, but they have been improving gradually since the deepening of their decline in April. Owing to the ban on business operations, most service activities were strongly affected by the pandemic in April, especially accommodation and food service activities. The decline in turnover in retail trade also deepened further. The volume of production in manufacturing and external trade in goods also contracted significantly as a result of weaker foreign demand and disrupted global supply chains. With the loosening of containment measures and a gradual revival of production in Slovenia and its main trading partners, the volume of production and trade in goods increased somewhat in May. The improvement in May is also indicated by preliminary data on retail trade. A further improvement is also suggested by the available data for June. Based on data on freight traffic and electricity consumption, we thus estimate that since April the decline has been decreasing year on year, but at the end of June economic activity nevertheless remained significantly lower than in the same period of last year.
The year-on-year decline in goods trade in May was smaller than in April; it remained the largest in trade with EU countries. The smaller decline in goods exports in May was mainly due to the relaxation of containment measures and a gradual revival in production in Slovenia and its main trading partners. Since the beginning of the epidemic, exports to EU countries dropped most markedly (by almost 30% year on year, the most in April), particularly to Italy, France and Germany. Lower exports were recorded for all main product groups, particularly road vehicles and vehicle parts and accessories and electrical machinery and equipment. Since the beginning of the epidemic, imports also dropped considerably, despite an increase in May. This was mainly due to significantly worse expectations about orders and a decline in production, investment in machinery and equipment and household consumption.
The decline in external trade in services deepened further in April.Exports of services were more than 40% lower year on year. The measures to contain the epidemic adopted in March had the largest impact on tourism, which had accounted for almost one third of trade in services before the crisis. Due to the closure of borders and hotels and restaurants, spending by foreign tourists had already dropped noticeably in March. In April, it was 96% lower year on year. Exports of transport services were also considerably lower (24.8%). With the closure of airports for passenger traffic, exports of air transport services decreased by almost three quarters. Exports of road transport services were one fifth lower. The fall in exports of other main groups of services (technical, trade-related services and construction services) was somewhat smaller but still pronounced (around 14%). Exports of ICT services, particularly computer services, remained higher year on year. The year-on-year decline in imports of services deepened (28.8%) but was smaller than in exports, particularly due to a smaller decline in imports of transport services.
Manufacturing production recovered in May with the loosening of containment measures but remained significantly lower than before the epidemic. With the restart of production in some main export-oriented companies, production in medium-high-technology industries increased the most. Compared with April, the year-on-year decline in production in these industries on average almost halved, while the decline in medium-low-technology industries was similar. The measures taken during the epidemic had a smaller negative effect on production in high-technology industries (the pharmaceutical industry and the manufacture of ICT equipment) and some low-technology industries (the food-processing and paper industries), which recorded similar production levels in the first five months to those one year earlier.
After strengthening at the beginning of the year, construction activity declined in all segments in March and April. Relative to February, the last month before the outbreak of the epidemic, activity declined by 16.8%, the most in the construction of non-residential buildings (-27.9%), followed by the construction of civil-engineering works (-17.2%) and residential buildings (-5.1%). Some other data (accrued VAT) indicate an even larger drop in activity, by around one third.
The stock of contracts remained high in April, higher than one year ago, but it should be noted that the data are provisional and may change (for March they changed by 9%). The number of construction permits was significantly lower year on year in May, as was confidence in construction, which is a sign of a considerable deterioration in construction activity.
In April, turnover in trade dropped further, but provisional data for May indicate improvement in some sectors. Year on year, turnover was 27.1% lower in real terms in April. As in March, the largest monthly decline was recorded for motor vehicle sales. Due to lower activity in related sectors, turnover also fell more notably in wholesale trade. In retail trade, automotive fuel sales declined sharply again due to the measures to contain the virus and lower freight traffic. The sale of non-food products declined further. The sale of food products also dropped after two months of growth. According to provisional data, turnover in trade strengthened again in May with the reopening of shops (at the end of April or the beginning of May) but remained lower year on year in most sectors for which data are available.
In most market services the decline in turnover deepened in April. With the closure of all hotels and restaurants (except food delivery), it deepened the most in accommodation and food service activities. Travel agencies were also strongly affected by the epidemic. Together with employment agencies, they contributed to a similar turnover decline in administrative and support service activities as in March. With a further fall in turnover in architectural and engineering services, the decline also deepened in professional and technical activities. Similarly, turnover also fell in transportation, mainly due to the shutdown of public passenger transport. Turnover dropped the least in information and communication activities, which we assess is mainly related to sales on the domestic market.
Household consumption declined further in April, following the March decline due to the closure of all service companies and shops with non-essential goods and increased caution among consumers. Household disposable income was, as in the first quarter (4.3%), higher year on year in April. In addition to the higher amount of net wages paid in April, this was mainly due to government measures to mitigate income losses due to the epidemic. We estimate that, with further growth in disposable income and concurrent limitations in consumption and the postponement of non-essential purchases, the saving rate remained high in April (in the first quarter, it was 25%, which is 7.7 percentage points more than in the same period of last year).
In the first quarter, residential property prices rose again, while the number of transactions decreased amid limited supply and restrictions to business activity due to the outbreak of the epidemic. After 7.0% growth in 2019 as a whole, prices were up 5.5% year on year in the first quarter of 2020. The increase was largely due to higher prices of existing dwellings (up 5.7%), whose sales were otherwise the lowest in the last five years. Prices for newly built dwellings were also somewhat higher year on year, but the number of new dwelling transactions accounted for less than 3% of all transactions (76).
In June, economic sentiment improved for the second month in a row but remained considerably below the level from the beginning of the year. Because of the spread of the epidemic, confidence indicators deteriorated substantially in April in all sectors. Confidence dropped the most in service activities and retail trade. Consumer confidence also fell, to its lowest level since the first measurement in 2005. In May and June, confidence indicator values rose in all activities (particularly in retail trade) but remained markedly lower than at the beginning of the year.
With a gradual increase since the end of April, in June, electricity consumption was still significantly lower than in the same period of last year. At the weekly level, it was 11.8% lower on average year on year. This is close to the average decline in May, which was 13.5%. In most of our most important trading partners, the decline decreased in June with regard to May, especially in Croatia (from 12.3% to 6.8%). It increased only in Italy, from 12.3% to 14.3%.
At the beginning of July, freight traffic on Slovenian motorways was still a tenth lower than before the epidemic. A more than 40% decline in the first weeks after the declaring of the epidemic was followed by an improvement in April and stagnation in May. In the second half of June, traffic increased again and was thus only around 10% lower year on year in the first week of July. The distance travelled by domestic and foreign trucks declined by 7% and 12% respectively.
In April, employment declined; the number of unemployed persons fell in June, after rising up to mid-May. After still being higher year on year in the first three months, employment declined year on year in April (by 1%), the most in accommodation and food service activities and administrative and support service activities (by around 10%). At the end of June, the number of unemployed persons was 89,377 (26.3% more than one year earlier), which is 1.1% less than at the end of May. In our estimation, the average decline in June is related to the lifting of the stringent containment measures in Slovenia and neighbouring countries and the adoption of the third legislative package of measures to mitigate the economic impact of the crisis.
Year-on-year growth in the average gross wage increased markedly in April (11.9%), mainly as a consequence of the methodology for reporting wages for workers on temporary layoff. In the private sector, the pronounced year-on-year growth of wages (8.4%) was to a great extent a consequence of the methodology, according to which employers report only the number of persons who receive wages and the amount of wages that is funded from their own resources (and not the amount of wage compensation paid by the government). Many employed persons being temporarily laid off, the amount of wages paid from employers’ resources decreased significantly in April compared with the previous month. The number of employed persons who received wages funded by employers declined even more, which was reflected in the growth of the average gross wage. In the public sector, the methodological effect of temporary layoffs was significantly smaller. The stronger wage growth (16.3%) was attributable to the payment of allowances for hazardous working conditions and additional workloads and the payment of the bonus for work in crisis conditions (according to the collective agreement).
Consumer prices remained down year on year in June, but their decline was significantly less pronounced than in previous months. Electricity prices returned to the pre-epidemic level due to the expiry of the government measure on temporary non-payment of contributions related to electricity use. Lower energy prices otherwise still made the largest contribution to deflation (-1.2 pps), as prices of oil products were more than 20% lower year on year. We estimate that without the counter-cyclical adjustment of excise duties, the negative contribution of energy prices to year-on-year inflation would have been approximately 0.1 pps smaller. Prices of semi-durable and durable goods also remained down year on year. Growth in food prices moderated somewhat in June, while growth in prices of services remained around 2%, to a great extent on account of strong price rises in housing-related services.
The year-on-year decline in Slovenian industrial producer prices increased slightly in May (to 0.7%). This was due particularly to lower producer prices on the domestic market, which were down year on year for the first time since 2016. Year-on-year growth in prices of consumer goods in May was lower than in previous months. Prices of durable goods fell slightly year on year due to lower demand at the outbreak of the epidemic, while growth in non-durable goods prices eased somewhat, though remaining relatively high (at 2.9%). Commodity and energy prices remained down year on year. The decline in producer prices on foreign markets remained just above 1%.
The current account surplus remained high in the last 12 months to April (EUR 3.3 billion, which is more than 7% of estimated GDP). The higher surplus compared with the same period of last year was mainly due to the surplus in trade in goods. As a result of the adopted containment measures, goods trade otherwise dropped significantly in April, but net exports increased. The 12-month surplus in services trade was, despite a pronounced fall in April, also higher year on year (mainly due to a higher surplus in trade in telecommunication, computer and information services). Trade in travel services almost came to a halt in April, while trade in transport services was a fifth lower year on year. Net outflows of primary income dropped further, mostly owing to lower net payments of income on equity. Net outflows of secondary income declined mainly due to lower payments into the EU budget.
The volume of loans to non-banking sectors declined markedly in Slovenia after the outbreak of the epidemic. In April and May together, it fell by almost EUR 350 million or 1.5% (in the euro area, it declined more only in Lithuania and Cyprus), mainly on account of corporate deleveraging. Following a pronounced decline in April, the volume of household loans increased slightly again in May due to growth in loans for other purposes and housing loans, while consumer loans declined further. Methodologically, new lending to enterprises and households increased significantly in April and May particularly due to the deferral of the payments of borrowers’ obligations according to the ZIUOPOK, as each change in essential conditions is taken into account as a new credit transaction.
The situation on euro area bond markets deteriorated following the outbreak of the COVID-19 epidemic. In view of high uncertainty, part of demand was shifted to safer investments. Only yields to maturity of peripheral countries thus rose more significantly, despite increased borrowing requirements of all countries. Although the EC and ECB measures to some extent stemmed the further deterioration in bond markets, the yield to maturity of the Slovenian 10-year bond increased by almost 50 basis points (to 0.65%) in the second quarter. The spread to the German bond also widened, to almost 110 basis points, and was the highest in the last three years.
The deficit of the consolidated general government budgetary accounts increased to EUR 1.4 billion by May this year due to a significant fall in revenue and an increase in expenditure. The year-on-year decline in revenue in the first five months (-9.2%) reflected several factors: lower economic activity, the approved deferrals or instalment payments of tax liabilities and the exemption from paying tax liabilities enabled by the legislative intervention measures during the epidemic, and the tax reform adopted last year, which lowered revenue from personal income tax. The increase in expenditure (11.4%) mainly reflected the measures for mitigating the consequences of the epidemic for vulnerable groups, which strengthened in particular the growth of transfers to individuals and households, subsidies and other current transfers (for the purchase of protective equipment). The measures – the payment of bonuses for work in hazardous working conditions and for increased workload during the epidemic – also influenced the growth of the wage bill. This rose mainly owing to increased payments on the basis of the adopted agreements and higher funds for wages paid by the ZZZS to public health institutes at the beginning of this year due to last year’s expenditure restrictions. As a result of the increased ZZZS transfers to public institutes, the growth of expenditure on goods and services also strengthened considerably.
Slovenia’s net budgetary position against the EU budget was positive in the first five months (at EUR 50.4 million). In this period, Slovenia received EUR 306.4 million from the EU budget (28.7% of revenue envisaged in the state budget for the current year) and paid EUR 256.0 million into it (51.1% of its annual commitments to the EU budget). Almost half of the planned revenue (49.5%) was received under the Common Agricultural and Fisheries policy, a good third (34.9%) from structural funds and the least from the Cohesion Fund (14.4%).
According to SVRK data, 89% of the total available funding was approved in the current financial period (from January 2014 to the end of March 2020), while the confirmed operations accounted for 71% and payments to beneficiaries for 37%.