Slovenian Economic Mirror
Slovenian Economic Mirror No 6/2020
The COVID-19 epidemic caused a significant contraction of economic activity in the second quarter in the entire euro area; amid a relatively robust recovery of activity in the summer months, international institutions have upgraded slightly their forecasts for this year but nevertheless predict considerable GDP declines. Slovenia has also witnessed a recovery since May, which, in the presence of the virus and due to the retention or reinstatement of containment measures, is and will be gradual and uneven across activities. Some indicators of economic activity had already been very close to pre-crisis levels in the summer, but according to more recent short-term indicators, the recovery eased in September. With the renewed rise in coronavirus cases across Europe, the high uncertainty has increased further, meaning that we can expect further fluctuations in economic activity and a slow recovery in 2021. With a rebound of economic activity in the summer and the extension of job-retention measures, labour market conditions did not deteriorate further. After a sharp decline during the retention measures, household consumption also picked up in most segments in the summer months. Slovenia recorded deflation at the annual level again in September, mainly on account of lower energy prices. The deficit of the consolidated general government budgetary accounts amounted to EUR 2.2 billion in the first eight months of the year, reflecting deteriorated economic conditions and the temporary measures to mitigate the impact of the crisis. Year-on-year revenue growth otherwise eased in the summer months.
As a result of the COVID-19 pandemic and measures to contain its spread, economic activity in the euro area contracted significantly in the first half of 2020, particularly in the second quarter. Euro area GDP was down 15.1% (seasonally adjusted) compared with the last quarter of 2019, reaching the lowest level since the first quarter of 2005. Economic activity fell sharply across the entire euro area, the most in France, Italy and Spain. The pronounced contraction was a consequence of a sharp decline in domestic demand, in particular private consumption. Net exports also made a negative, albeit significantly smaller, contribution to growth. Because of the nature of containment measures, the fall in value added was sharpest in certain private services, particularly tourism, transport, and arts, entertainment and recreation. Meanwhile, comprehensive measures to preserve jobs prevented a major deterioration in labour market conditions. Between February and August 2020, the unemployment rate in the euro area increased by 0.9 p.p. to 8.1%.
According to activity and confidence indicators, the euro area economy recovered strongly in the third quarter following the sharp fall in the second. In August, turnover in retail trade exceeded pre-epidemic levels, while from May onwards, manufacturing and construction were also recovering at high monthly growth rates. Activity in the manufacturing sector also improved significantly in August and September, judging by the business confidence indicator PMI, while activity in service activities slowed with a renewed increase in the number of COVID-19 infections. For the last quarter of this year, international institutions predict a continuation of economic recovery, assuming that a major outbreak of the pandemic is stemmed. Because of a somewhat smaller decline in economic activity in the second quarter than expected in the spring, coupled with robust recovery of some activities in the summer months, the ECB and the OECD upgraded slightly their June projections for the contraction of euro area economic activity in 2020 in their September forecasts. GDP is expected to decline by around 8% this year, before recovering by around 5% next year.
After a six-month appreciation against a basket of currencies, the value of the euro stabilised somewhat in September. Since the beginning of the COVID-19 pandemic (in March this year), the euro has appreciated against the currencies of the majority of more important trading partners, more notably (by around 30%) against the currencies of energy-exporting countries (e.g. Russia) and countries that already had unstable macroeconomic and financial environments before the pandemic (e.g. Turkey). In September, the euro also continued to appreciate against the currencies of non-euro countries in the region (Hungary, the Czech Republic and Poland) and the British pound, while depreciating against Asian currencies (the Chinese, Japanese and Korean) and the US dollar. In September, the nominal effective exchange rate, which indicates the ratio of the euro to a basket of currencies of trading partners, thus remained similar to that in August, having been strengthening for the previous six months. The pressure on the price-competitiveness position of Slovenian exporters (measured by the REER_hicp indicator) as a consequence of the strengthening of the euro was mitigated by weaker growth or an interim larger fall in prices in comparison with trading partners.
In the second quarter, the year-on-year decline in real GDP deepened strongly, as expected (-13.1 %; in the first quarter, -2.4 %). As a result of the closure of all non-essential service activities and stores selling non-food products due to the measures to contain the COVID-19 epidemic, the largest contribution to the decline was made by service activities, especially the group of trade, transportation, and accommodation and food service activities. Because of a decline in orders and interrupted or hampered supply chains, a sharp fall was also recorded in manufacturing. Given the restrictions on the movement of people, household consumption also fell significantly. High uncertainty was also reflected in a significant fall in investment in machinery and equipment. Construction investment also dropped. As a result of a decline in global trade, international trade barriers and severe containment measures in EU countries, exports and imports also fell markedly. Among consumption aggregates, only final government consumption strengthened year on year.
After a marked fall in March and April, the indicators of economic activity have improved every month; in construction, the recovery has been somewhat slower. With the loosening of containment measures and a gradual recovery of production in Slovenia and its main trading partners, in May activity started to increase in trade, manufacturing and goods trade. In July, turnover also rose in all market services, this for the third consecutive month, the most in accommodation and food service activities, where it nevertheless remained far below pre-epidemic levels, as this sector was the most affected by the containment measures. In construction, where the decline in March and April was least pronounced, activity only strengthened in July, for the first time since February, meaning that it remained markedly lower than before the epidemic.
The recovery of goods trade continued in the summer months, but in August growth eased considerably. With a rebound in activity in main trading partners, exports to EU countries picked up in particular, though they were still almost 7% lower year on year in August. In the summer months, a recovery was seen in exports of most main product groups, especially exports of motor vehicles (around a quarter of total exports), which had also fallen the most during the containment measures. The strengthening of growth in recent months is mainly related to car exports to France and, to a lesser extent, to the overall recovery of the automotive industry in the EU. Since the lifting of containment measures, imports have also increased gradually, but, like exports, they remained lower year on year. This holds true particularly for imports of intermediate goods, which (excluding oil and oil products) were more than 8% lower than in the same period of last year. After a fall in March and April, export expectations improved further in the summer months and exceeded last year’s levels in September.
External trade in services remained significantly lower year on year in July. The measures to contain the epidemic had a strong impact on trade in services, particularly tourism, which had accounted for almost one third of trade before the crisis. The recovery started with the opening of the borders and accommodation and foods service establishments. This was reflected in renewed growth in spending by foreign tourists, which was nevertheless still half lower year on year in July. Exports of transport services had also recovered gradually but were still around 13% lower in July than in the same month last year. The year-on-year fall in transport was mainly due to a decline in air transport, where export revenues dropped by more than 90%. Exports of some other main groups of services (technical, -related services and construction services) recovered faster, already achieving more than last year’s levels in June and July, while in exports of ICT services, favourable movements were also recorded during the crisis. Similar movements, though less pronounced than in exports, were also seen for imports of services. Spending by Slovenian tourists abroad declined less (particularly due to holidays in Croatia) than spending by foreigners in Slovenia. Imports of transport services also fell less.
Slovenia’s export market share declined significantly in the second quarter of this year. With the spread of the COVID-19 epidemic across the world, world import demand, which had already started to decline gradually in 2019, shrank by 18.4% year on year in the second quarter of this year. The fall in Slovenian exports of goods was even more pronounced, so that Slovenia’s export market share declined by 6.7% year on year in the second quarter, according to our estimate. On the basis of more detailed data for export/import flows of EU countries, to which around three quarters of Slovenian goods exports are destined, we estimate that the decline in the total market share was to a great extent also due to the less favourable structure of Slovenia’s exports from the perspective of current foreign demand. More specifically, Slovenia has relatively strong export specialisation in the segment of passenger cars, i.e. in the part of goods trade that was especially affected by the outbreak of the epidemic. The unfavourable impact of the composition of exports was mitigated by stronger demand for pharmaceuticals, which also account for an above-average share of Slovenian exports.
In August, the strengthening of manufacturing production slowed. The slowdown was the most pronounced in low- and medium-low technology industries, while growth in medium-high technology manufacturing slowed less. Production in high-technology industries, the only industries to exceed last year’s levels (by a tenth in the first eight months), remained high. The lag behind last year’s levels remained the largest in the manufacture of motor vehicles and in industries integrated in the automotive supply chain (in particular the metal industry, but also the rubber industry and the manufacture of electrical equipment).
After five consecutive months of decline, construction activity increased in July. Relative to February, the last month before the outbreak of the epidemic, activity was 16.1% lower. The lag behind February’s level was the most pronounced in the construction of non-residential buildings (23.1%), somewhat smaller in the construction of civil-engineering works (19.4%), while activity in the construction of residential buildings increased (5.2%). In July activity otherwise strengthened at the monthly level in all three construction segments.
The indicators of the stock of contracts and the number of new contracts have strengthened this year and were higher year on year in July. A somewhat worse picture is indicated by data on issued construction permits, which have dropped significantly this year, and business trends in construction, which otherwise improved in the summer months but remained markedly lower than before the outbreak of the epidemic.
Turnover in trade strengthened further in July; preliminary data for August, however, indicate a decline in some segments. With further growth in all three main segments, the total turnover in July was already similar to that before the outbreak of the epidemic and only slightly lower than in July 2019. Following a sharp decline in March and April, turnover in sales of motor vehicles picked up the most in the next three months. In July, it was already a tenth higher year on year, before dropping somewhat in August, according to preliminary data. Turnover in retail trade in non-food products was also already a tenth higher year on year in June and July together and also, with further growth, in August. Although rising from May onwards, turnover in retail trade in automotive fuels remained lower year on year in July and the difference is set to increase to one quarter after a sharp fall in August. This was, in addition to lower sales of fuels to households and lower freight traffic, probably also a consequence of lower tourist transit in the summer.
In July, turnover growth continued for the third consecutive month in all market services, while total turnover was around 9% lower than before the outbreak of the epidemic. After a sharp decline during the epidemic, the highest monthly growth was again recorded in accommodation and food service activities, partly due to the introduction of tourism vouchers, which contributed to an increase in overnight stays by domestic tourists; the number of foreign tourists remained low. Turnover growth in professional and technical activities was supported particularly by a significant strengthening of turnover in architectural and engineering services. Turnover growth strengthened in information and communication activities, while being more moderate in transport and administrative and support service activities.
Household consumption strengthened in the summer months after a sharp fall during the epidemic, but the speed of recovery differed significantly among segments. Purchases that had been postponed during the epidemic increased in particular, i.e. purchases of non-food products (furniture, sports equipment, household appliances, and computer and telecommunications equipment) and passenger cars. Purchases of food and beverages returned to normal after rising before the declaration of the epidemic. With the introduction of tourism vouchers, the number of domestic residents’ overnight stays surged as well, but their spending abroad was significantly lower year on year, except in Croatia. Expenditure on cultural, sports, recreational and other leisure services also remained significantly lower than in the same period of last year, as certain containment measures remained in place after the end of the epidemic.
Dwelling prices increased again in the second quarter, while the number of dwelling transactions declined further, mainly due to the restrictions on business activity during the epidemic. Prices were up 5.2% year on year, indicating a moderation with regard to price growth in the last three years (almost 8% annual growth on average). This year’s increase was mainly due to higher prices of existing dwellings, the sales of which were otherwise the lowest since the first quarter of 2014 in the conditions of the epidemic. Prices of newly built dwellings were also higher year on year, but the transactions in these dwellings accounted for less than 3% of all transactions.
Economic sentiment improved somewhat again in September but remained lower than at the beginning of the year. The sentiment indicator improved for the fifth consecutive month but was still lower year on year (difference: -8.7 p.p.); since April, when the decline was largest (-46.1 p.p.), the year-on-year difference has narrowed considerably. Relative to the previous month, confidence improved the most in service activities and construction. Only the indicator of consumer confidence deteriorated.
In mid-September, weekly electricity consumption almost reached the level recorded in the same period of last year, this for the first time since the declaration of the epidemic, but in the middle of the month, the year-on-year lag increased somewhat again. The relatively rapid decline in the year-on-year fall in weekly electricity consumption recorded since the beginning of June came to a halt in August, before continuing in the first half of September, when weekly consumption came very close to last year’s level (-1% and 2% respectively). In Slovenia’s main trading partners, weekly electricity consumption also came very close to last year’s levels in the middle of September. Moving on to the second half of the month, the year-on-year lag in consumption widened somewhat again. In the fourth week of September, it amounted to -4% in Slovenia and between -1% (Italy) and -7% (Austria) in our main trading partners.
Freight traffic on Slovenian motorways from the second half of August to the end of September was around a tenth lower than before the epidemic. After falling sharply with the declaration of the epidemic, it had increased more strongly since mid-June and by mid-August was already higher year on year (adjusted for the holiday effect). Then it fell again and was around 9% lower year on year until the end of September. The number of kilometres travelled by foreign hauliers fell more year on year than that travelled by domestic hauliers (by 12% and 6% respectively).
In July, employment remained almost unchanged relative to the previous month; unemployment declined slightly in September. The number of employed persons was down 1.6% year on year in July, which is similar to the previous few months. Administrative and support service activities and accommodation and food service activities still stood out with the largest year-on-year declines (12.6% and 6.9% respectively). A total of 83,766 persons were unemployed at the end of September, 5% fewer than at the end of August. The gradual decline in the number since the end of May was due not only to the recovery of economic activity, but also to measures for preserving jobs. Year on year, unemployment was up 20%.
In July, year-on-year growth in the average gross wage strengthened further (4.3%), albeit less than in the previous few months. The strengthening of the year-on-year wage growth since April is related to the methodology for the collection of earnings statistics, which were significantly affected by the placement of a relatively high number of workers on temporary layoff. As a result of the layoffs, the number of wage recipients fell sharply, as did, albeit somewhat less, the amount of wages funded from employers’ resources. This pushed the average wage upwards. The effect of the temporary layoff measure on wage growth was larger in the private than in the public sector. In the public sector, the strengthening of the year-on-year wage growth in April and May (by 14.5% on average) mainly reflected the extraordinary payment of allowances for dangerous working conditions and additional workloads and the payment of the bonus for work in crisis conditions (in accordance with the collective agreement). Since July, extraordinary bonuses have no longer been paid, which has been reflected in lower year-on-year wage growth in the public sector – in July, it was at 4.8%.
According to Labour Force Survey data, labour market conditions deteriorated in the second quarter, as expected. The number of employed persons was 1.2% lower year on year. The number of self-employed persons fell even more (by 8.8%). Among the employed, the volume of student work fell sharply year on year (by more than half), while the number of persons in paid employment remained more or less unchanged. The number of unemployed persons was around a quarter higher year on year, the increase being more pronounced among younger age groups. The ILO unemployment rate was 5.2%, one percentage point higher than in the same period last year.
Consumer prices remained lower year on year in September. The decline was still mainly attributable to lower oil product prices, although prices of semi-durable and durable goods also dropped again year on year. September also recorded significantly lower year-on-year price growth in services. At 0.8%, it was the lowest since 2016 and half that of the previous month. We estimate that this was to a great extent due to a higher base as a result of last year’s increase in health insurance premiums. At the same time, prices of services in the recreation and culture group also dropped somewhat year on year. After slowing in the middle of the year, food price growth strengthened again in the last two months, exceeding 4% in September.
Slovenian industrial producer prices on foreign markets remained lower year on year in August. Prices on foreign markets remained down year on year in all industrial groups. The decline in countries outside the euro area was larger than that in the euro area, where it slowed in the last two months. Year-on-year price growth on the domestic market remained modest. Energy (electricity) prices and prices of consumer goods rose the most, the latter somewhat more in the non-durable goods segment. Industrial producer prices in the group of intermediate goods were lower year on year amid moderate economic activity.
The current account surplus widened further in July. The year-on-year increase in the surplus in current transactions arose mainly from a higher surplus in trade in goods, as imports fell more than exports in real terms. In addition, the terms of trade improved. The surplus in services was down again year on year in July. The pronounced fall in trade and in the surplus in travel and transport services continued. The deficit in primary income was lower year on year in July, mostly due to lower net outflows of income from equity capital of direct investment. The lower deficit in secondary income was marked by lower VAT- and GNI-based contributions to the EU budget. In the 12 months to July, the current account surplus totalled EUR 3 billion (6.7% of estimated GDP).
After the outbreak of the epidemic, banks’ lending activity declined in Slovenia. From April to the end of August, the volume of loans to domestic non-banking sectors declined by almost EUR 560 million (2.4%) in Slovenia, in contrast to the euro area, where it recorded 1% growth. The decline in lending activity in Slovenia is largely attributable to a lower volume of loans at non-financial corporations, which we estimate is a result of lower demand due to uncertainties related to the epidemic, but also to limited supply given the above-average tightening of lending conditions for corporate borrowing in Slovenia in the last two quarters. Because of the adopted binding macroprudential measure, lending to households has also been declining in Slovenia since the end of last year, especially in the segment of consumer loans, while year-on-year growth in housing loans has stabilised at around 4%. The share of arrears of more than 90 days has risen slightly in recent months, mainly due to the increase in corporate arrears, but it is still low, at 1.2%.
After deteriorating following the outbreak of the epidemic, the situation on euro area bond markets moderated in the third quarter. The yield to maturity of the Slovenian bond declined by almost 60 basis points, to 0.09%, and was lower than before the epidemic. The spread to the German bond also declined to a similar extent, to 56 basis points.
The deficit of the consolidated general government budgetary accounts totalled EUR 2.2 billion at the end of August. Revenue was 3.8% lower and expenditure 15.1% higher than in the same period of last year. Since May, when it was at its lowest, revenue has been recovering with the improvement in economic conditions. Moreover, year-on-year expenditure growth – which had been strongest in May and June, when the most temporary expenditures to mitigate the consequences of the epidemic had been paid (particularly subsidies and transfers to individuals and households) – slowed considerably in July and August. The monthly deficit thus already narrowed significantly in these two months. The deficit of the state budget (after revision), which accounts for the largest part of the deficit of the consolidated general government budgetary accounts, is expected to reach EUR 4.2 billion in 2020, in the general government sector, EUR 3.9 billion (according to ESA methodology). In addition to the already realised costs of measures (1.6 billion in expenditure and 0.5 billion in tax revenue loss until 23 September), the projections also take into account a significant budgetary reserve for financing further measures to mitigate the consequences of COVID-19 (the 5th and possible further packages of measures).
Slovenia’s net budgetary position against the EU budget was positive in the first eight months of 2020 (at EUR 61 million). In this period, Slovenia received EUR 399.2 million from the EU budget (37.4% of revenue envisaged in the state budget for 2020) and paid EUR 338.2 million into it (67.5% of planned payments). The bulk of revenue was accounted for by resources for the implementation of the Common Agricultural and Fisheries Policy (41.0% of all reimbursements to the state budget) and resources from the structural funds (40.3%). Reimbursements from the EU Cohesion Fund (15.7%) were significantly lower. According to SVRK data, by the end of June 2020 Slovenia absorbed only 39% of funds available under the 2014–2020 financial perspective. The reasons for the fairly slow absorption of EU funds include (in addition to the COVID-19 epidemic, which affected particularly the implementation of projects financed from the ERDF and ESF) difficulties in the preparation of infrastructure projects (unsuccessful public procurement procedures, poorly prepared investment documentation, lengthy administrative procedures for obtaining environmental consents, etc.), and difficulties in securing own resources faced by municipalities and other beneficiaries.