Slovenian Economic Mirror
Slovenian Economic Mirror No 6/2021
Economic activity in the international environment strengthened in the second quarter. After contracting in the first quarter, economic activity in the euro area recovered significantly in the second quarter, according to available economic indicators. In Slovenia, most short-term indicators point to a relatively high year-on-year growth and the outlook for economic growth remains favourable. The export-oriented part of the economy was less affected by the epidemic, and the volume of trade in goods and manufacturing production in May were also well above comparable levels before the outbreak of the epidemic. Confidence in manufacturing and construction remained high compared to a year ago. Preliminary data on turnover in trade and service activities for May and data on sales according to data on the fiscal verification of invoices for June also point to growth. The situation on the labour market is much better than last year, with the number of unemployed and employed people almost the same as before the crisis. In addition to seasonal influences, which were not significantly different from those in the pre-epidemic period, the decline can also be attributed to the gradual relaxation of containment measures and the economic recovery. Consumer price growth slowed slightly to 1.4% in June and continues to be driven mainly by higher energy prices. In June, the prices of food and services remained lower year-on-year, although they gradually approached year-earlier levels. The growth in industrial producer prices intensifies with the growth of commodity prices. The overall deficit of the consolidated balance of public finances amounted to EUR 1,266 million in the first five months and was slightly lower than a year ago.
According to survey indicators, growth of global economic activity accelerated in the second quarter. In June, the composite Purchasing Managers’ Index (PMI) for the global economy remained well above its long-term average, pointing to increased activity in the manufacturing and services sectors. Despite disruptions in global supply chains, growth of global trade in goods continued in the second quarter, according to available indicators. The PMI for new export orders in the manufacturing sector recorded another high level in June, pointing to a further increase in global trade in goods in the coming months. According to the latest OECD forecast, global economic growth will be 5.8% this year and 4.4% next year, and global trade will recover with growth of 8.2% this year and 5.8% next year.
Economic activity in the euro area recovered in the second quarter. According to Eurostat’s estimate, economic activity in the first quarter contracted by 0.3% (by 1.3% year-on-year) compared to the last quarter of 2020 and was 5.1% lower than in the last quarter of 2019. The contraction was largely due to lower private consumption. According to the available economic indicators, economic activity recovered significantly in the second quarter. The composite PMI in May and June showed a significant rebound in services activity and a continued favourable trend in manufacturing. The euro area Economic Sentiment Indicator (ESI) also improved significantly in June, rising to its highest level in 21 years. Confidence was up in all activities, the most in services, and among consumers. International institutions expect growth to accelerate significantly in the second half of the year as a result of progress in vaccination. The ECB and the EC forecast growth of 4.6% and 4.8% respectively this year and similar growth next year (namely 4.7% and 4.5%).
The appreciation of the euro against a basket of currencies remained relatively stable in the second quarter. The initial global spread of the COVID-19 epidemic last year led to greater currency fluctuations; this year, movements are more stable. With heightened macroeconomic uncertainty, the only exception among the currencies of Slovenia’s main trading partners is the sharp depreciation of the Turkish lira in the second quarter. Contrarily, the currencies of the Visegrad Group countries and the British pound appreciated slightly against the euro. Slovenia's nominal effective exchange rate (NEER), which indicates the ratio of the euro to a basket of trading partners’ currencies, thus remained at a similar level for the third consecutive quarter. With inflation comparable to that of Slovenia’s trading partners, the price competitiveness indicator (REER-HICP) also remained at the previous quarter’s level.
In Slovenia, the outlook for economic growth remains favourable, with most short-term indicators pointing to a relatively high year-on-year growth. Data on the export-oriented part of the economy, which was less affected by the epidemic, show that Slovenia's export market share in the EU market continued to strengthen in the first quarter of this year. Despite a monthly decline, the volumes of trade in goods and manufacturing production in May were still well above the comparable pre-epidemic levels. Export expectations continued to improve in June, and the continued favourable trends in the export-oriented part of the economy can also be seen in the volume of freight traffic on Slovenian motorways and in electricity consumption. Both were higher year-on-year, with the former already surpassing the level of the same period in 2019 and the latter narrowing its gap as tourism recovered. Confidence in manufacturing and construction remained high compared to a year ago. According to the latest data, construction activity declined in April, but remained higher year-on-year. Preliminary data on turnover in trade and service activities for May and data on turnover according to data on fiscal verification of invoices for June also point to growth. This is due to the easing of measures in these sectors, which has also led to an improvement in confidence indicators in trade and service activities. Consumer confidence is still low, but has been improving in recent months. All this, together with better conditions on the labour market, also points to higher private consumption. Households held back on spending over the past year, partly because of uncertainty. With a relatively high level of disposable income, the volume of household deposits rose sharply (it amounted to almost EUR 24 billion in May, which is almost EUR 3 billion more than before the epidemic).
Electricity consumption in June was 6% higher year-on-year but 7% lower than in June of the pre-crisis year 2019. The reason for the year-on-year higher consumption was last year’s low base. However, consumption remained lower than in June 2019, mainly due to reduced tourism activities. Year-on-year higher consumption was also recorded in the majority of Slovenia’s main trading partners (around 5% in France, Germany and Croatia and 9% in Italy), except in Austria, where it was 1% lower. Compared to June 2019, consumption decreased in Austria (5%), Croatia (4%) and Italy (6%), while it remained about the same in Germany and increased by 1% in France.
In May, industrial electricity consumption and small business electricity consumption were higher year-on-year, with a smaller gap compared to the same period in the pre-crisis year 2019 than in the previous month. In May, industrial electricity consumption was up 19.1% and small business electricity consumption was up 10.6% year-on-year. This is mainly due to last year's low base, when electricity consumption was significantly lower during the first wave of the epidemic due to containment measures and the resulting lower foreign demand, supply chain disruptions and production shutdowns at certain companies. Household consumption was also higher year-on-year, by 4 %. Relative to May 2019, industrial consumption decreased by 2.1% (4.9% in April) and small business consumption decreased by 8.7% (10.9% in April), while household consumption increased by 3.1%.
Freight traffic on Slovenian motorways in June was up 20% year-on-year and up 7% compared to June 2019. Domestic vehicle traffic was 17% higher and foreign vehicle traffic 22% higher than in the same month last year. These strong year-on-year growth rates are a consequence of the base effect, as traffic volumes in the same period of the previous year were still significantly lower after the first wave of the epidemic. Compared to the same period in 2019, June saw a 13% increase in domestic vehicle traffic and a 3% increase in foreign vehicle traffic. The favourable traffic trend compared to the same month in the pre-crisis year could also be attributed to the fact that there were two more working days this year.
According to data on the fiscal verification of invoices, turnover in June was 8% higher year-on-year and 7% higher than in the same period of 2019. Positive trends in trade continued, with sales 5% higher year-on-year and 10% higher than June 2019. In most sectors, particularly those related to tourism (accommodation, gambling and betting, travel agencies), as well as arts, entertainment and recreation and personal services, turnover growth was even higher year-on-year, but about a fifth lower than in the same period of 2019, reflecting the ongoing constraints on certain business activities. Total turnover in June was 7% higher than 2019 levels, also due to two more working days this year.
Trade in goods fell again in May, but remained higher than last year. Real exports and imports of goods from and into EU Member States have reached levels comparable to those before the epidemic, with significant monthly fluctuations mainly due to changes in containment measures in Slovenia and its trading partners. The growth in exports of goods was interrupted in April and May, which we believe is related to lower vehicle exports and partly to a slowdown in industrial growth in Slovenia’s largest trading partners (Germany, Italy, France). This led to a halt in the growth of trade in intermediate goods. The less favourable development of imports is also related to a somewhat lower level of manufacturing activity in Slovenia. The growth of trade in the first five months of this year remains high year-on-year and is partly due to the very weak activity in April and May last year (the base effect). The outlook remains favourable and is linked to the expected recovery in activity among Slovenia's main trading partners. In June, export expectations continued to improve, with firms more optimistic about future foreign demand than before the beginning of the epidemic.
In the first quarter of this year, Slovenia's export market share on the EU market strengthened again (by 1.8% year-on-year). However, the growth more than halved compared to the last quarter 2020, mainly due to deteriorating trends in medicinal and pharmaceutical products (year-on-year decline in EU imports and an even sharper decline in Slovenian exports and related decline in market share), which have otherwise experienced strong growth since the beginning of the COVID-19 epidemic. Demand for road vehicles, which was hit hard by the crisis, is gradually recovering, but Slovenian exports are not quite keeping pace with the faster growth in foreign demand (decline in the market share). The unfavourable impact of these two main groups on the growth of Slovenian market share was almost entirely cushioned by the further significant strengthening in the electrical machinery and equipment group, where foreign demand is also growing significantly. Slovenian exporters also increased their market shares in the iron and steel, metal products and metal ores groups, where nominal imports also increased strongly (partly due to rising metal prices on global markets). Geographical decomposition of the export market share in the EU market shows that the increase was mainly due to the increased market share in Slovenia’s largest trading partner – Germany; among other main export markets, Slovenia's market share also increased in Italy and France, while it decreased in Austria and Croatia.
After noticeable growth at the beginning of the year, the recovery in trade in services came to a temporary halt in April. This was mainly due to the more restrictive measures taken to limit the spread of the epidemic, since lockdown was introduced in several countries in the weeks around Easter, which, with border crossing restrictions in place, mainly affected tourism. Trade in other business services was also lower than in previous months, while trade in transportation services increased. On a year-on-year basis, trade in services was noticeably higher in April, reflecting the very low level of activity last year, but remained well below pre-epidemic levels. In the first four months, trade was about one-fifth lower than in the same period before the epidemic, mainly due to about four-fifths lower volume of trade in tourism. Other important groups of service activities are already significantly exceeding the comparable pre-crisis levels.
After several months of growth, manufacturing production fell slightly in May. This was mainly due to the current decline in production in high-technology industries, although production in medium-technology industries also declined slightly. On the other hand, production in low-technology industries increased for the sixth consecutive month. Year-on-year, manufacturing production again recorded relatively high growth, although the increase was much smaller compared to the same period in 2019. A high year-on-year growth was recorded in medium- and low-technology industries, and although a decline was recorded in high-technology industries, the manufacture of computers, electronic and optical products still performed well year-on-year. Most major sectors saw a high year-on-year growth, including the automotive industry, although it still fell far short of production volumes in the same period of 2019.
Construction activity slowed somewhat in April. The value of construction output fell by 3.4% but was 6.5% higher than a year earlier. Compared to the previous month, construction activity fell in all segments and strengthened only in non-residential construction, where it had fallen sharply in previous months. Activity in this construction sector is also significantly lower this year than last year's average. Year-on-year, the outlook is best for residential construction (nearly 30% higher activity). Activity in civil-engineering and specialised construction is also higher than last year. Data on the number of contracts suggest that activity in non-residential construction will remain relatively low, while other segments, particularly civil-engineering and specialised construction activities, are likely to perform better.
Turnover in trade declined in April and strengthened in May according to preliminary data. After high growth in March, sales declined in April, due in part to the partial closure of certain stores and services at the beginning of the month and the limited movement between regions in the first three weeks of the month. Turnover fell in all three main sectors, most markedly in the retail sector, where non-food sales declined particularly sharply. According to preliminary data, turnover in retail trade picked up again in May.
In April, turnover declined in most market services. Compared to the previous month, real turnover fell by 2.4% but was still higher than a year earlier (by 27.2%), mainly due to the low base. With severe restrictions on business and movement between regions, the decline in revenue in the accommodation and food service activities and tourism-related activities (travel agencies) has deepened. Turnover again declined in information and communications activities, although computer services increased sales in foreign markets. Turnover in transportation also fell in most activities. It increased slightly only in professional and technical activities. In April, the year-on-year turnover growth was positive in all market services due to last year's low base.
After accelerating in March, household consumption declined slightly in April, and increased again in May. With the lockdown at the beginning of the month, household consumption fell in April compared to March, especially for services and durable goods and certain semi-durable goods. In May, however, with the easing of restrictions on activity, consumption picked up again. Also due to the low base, consumption was significantly higher year-on-year, but remained well below the level of the same period of 2019 in services, which were still severely restricted despite the easing of measures (arts and entertainment, accommodation, travel agencies, gambling and betting). We estimate that due to increased consumption, the household saving rate in the second quarter will be lower than in the first quarter, when it fell compared to the last quarter of last year, but was still very high at 27.2%.
Average residential real estate prices increased again in early 2021, while the number of transactions declined in the face of limited supply and restrictions on business activity due to the epidemic. After growing by 4.6% in 2020 as a whole, prices rose by 7.3% year-on-year in the first quarter of 2021. New dwelling prices increased the most (by 13.1%), accounting for less than 5% of all transactions, despite an increase in the number of sales compared to the first quarter of last year. Prices of existing dwellings rose by 7% though the number of sales was the lowest in six years, with the exception of the second quarter of last year.
Economic sentiment improved in June, mainly due to improvements in retail trade and services. The latter is a consequence of the gradual lifting of containment measures in May and June and, in particular, the opening of hotels and restaurants. On a monthly basis, confidence in manufacturing and construction deteriorated slightly, but remains high compared to a year ago. Consumer confidence remains low, although it has improved in recent months. However, the proportion of those who believe that prices will rise in the future has increased significantly over the last three months.
The number of registered unemployed continued to fall in June. The number of unemployed continued to fall significantly in June. In addition to seasonal influences that were not significantly different from those in the pre-epidemic period, the decline can also be attributed to the gradual relaxation of containment measures and the economic recovery. At the end of June, 71,094 people were unemployed, 5.4% fewer than at the end of May and 20.5% fewer than a year earlier. However, compared to the end of June 2019, the number was only 0.5 % higher. According to the Statistical Register of Employment (SRE), the number of employed people was 1% higher in April than in the same month last year, mainly due to the base effect (a sharp fall in April 2020 due to the outbreak of the epidemic). The year-on-year decline in employment continued to be the strongest in accommodation and food service activities and administrative and support service activities, i.e. the sectors most severely affected by the containment measures, while the largest increase was recorded in human health and social work activities. According to survey data, the number of employed persons in the first quarter fell year-on-year (by 5.5%), largely due to the change in methodology. The biggest drop was still among students (-30.4%), while the number of self-employed was slightly higher than a year ago (3.7%).
After a strong year-on-year increase in average wages in recent months, growth remained moderate in April (3%). In the private sector, it was lower (2%), partly due to the high growth in the same month of the previous year (base effect) caused by the introduction of crisis bonuses and the wage calculation methodology. In the public sector, on the other hand, growth remained relatively high (5.6%) despite the already high base last year (introduction of bonuses for hazardous working conditions and additional workload, as well as a bonus for work in crisis conditions in accordance with the collective agreement), due in part to the performance bonus introduced in the middle of last year.
Consumer price growth slowed slightly in June to 1.4%. The contribution from energy prices, which, with a high year-on-year increase in the prices of petroleum products (by almost a quarter), contribute the most to current inflation (1 p.p.), decreased significantly in June. This is due to the increase in electricity prices last June (base effect), when the measure of temporary exemption from the payment of contributions for households, introduced during the first wave of the epidemic, expired. The year-on-year increase in prices for semi-durable goods remained broadly unchanged in June (1.7%), while the growth in durable consumer goods prices almost halved (0.9% year-on-year), comparing to previous month. The prices of food and services remain lower year-on-year, but are gradually approaching last year's levels.
Year-on-year growth in Slovenian industrial producer prices continued to strengthen in May, reaching 3.5%, the highest level since 2011. Price growth in the domestic market continued to increase (4.6%), as did price growth in foreign markets which was, however, only half as strong as in the domestic market. The difference in growth is largely due to price trends over the past year. However, year-on-year price growth in the five months of this year was comparable in the domestic and foreign markets (about 3%). Higher commodity prices, up 5% in May from a year earlier, were the biggest contributor to growth. Prices in the manufacture of metals were 15% higher year-on-year. Growth of energy and capital goods prices has also been strengthening. The combined year-on-year increase in consumer goods prices in the domestic and foreign markets remains modest (0.2%). On a year-on-year basis, only domestic prices for durable goods increased (2.1%)
In April, the current account surplus was again higher year-on-year. This is mainly due to the surplus of secondary income (a deficit was recorded last April), mainly due to more government funds received (social benefits from the EU budget). Due to the easing of containment measures, trade in services recovered after a year. The surplus in trade in services was again higher year-on-year, mainly due to a larger surplus in transportation and travel services. The primary income deficit was lower in April than a year earlier, mainly due to lower net payments of interest on external debt. The surplus in trade in goods remained at a similar level as in April last year (EUR 168 million). The high year-on-year nominal growth in trade in goods in April was also the result of higher energy prices and the prices of other primary commodities, which have the largest impact on the import price growth. In April, export prices of goods rose by 1.8% year-on-year, while import prices rose by as much as 7% and the terms of merchandise trade deteriorated by 4.8%. The 12-month current account surplus remains high (EUR 3.4 billion; 7% of GDP).
The year-on-year decline in the volume of loans to domestic non-banking sectors slowed in May. Corporate and NFI loans continued to fall year-on-year, with the drop of 2.7% the weakest this year. After a decline at the beginning of the year, the volume of loans to households gradually increased year-on-year. Due to the favourable interest rate level, the growth of housing loans picked up, the volume of which was already 5.6% higher in May year-on-year. The decline in consumer loans, on the other hand, has slowed down, and new lending remains modest. We estimate that the increased household spending is covered mainly by current income, which was higher year-on-year in the first quarter due to government measures to mitigate the impact of the epidemic, and to a lesser extent by savings accumulated during the epidemic. With the introduction of fees for large deposits, some savings were transferred to other alternative investments (e.g. mutual funds). Growth in household bank deposits has thus slowed somewhat in recent months, but is still relatively high (10.3%, with total household deposits of EUR 23.8 billion in May). The share of non-performing claims fell below 1.5% in April.
The situation on euro area bond markets remained favourable in the second quarter. The ECB had a significant impact on this, as it significantly increased its purchases of securities under the PEPP programme at the end of the first quarter in light of the rise in required government bond yields in the euro area. The yield to maturity of the Slovenian bond was thus 0.14%, while the spread to the German bond declined slightly, to 36 basis points.
After a surplus in April, the consolidated balance of public finances returned to a deficit in May, but smaller than the average for the first three months. This development can be attributed to the evolution of economic activity and renewed closures in early April. Expenditure on measures to alleviate the effects of the epidemic was also significantly higher than in April. The overall deficit of the consolidated balance of public finances amounted to EUR 1.27 billion in the first five months, slightly lower than in the same period of the previous year (EUR 1.39 billion). Turnover in the first five months was a fifth higher than a year ago, with tax revenues rising in particular as containment measures gradually eased. Expenditure in the consolidated accounts increased by 15.7%, with the largest increase in expenditure on wages and current transfers, mainly due to payments for the implementation of measures to contain the second wave of the epidemic.
Slovenia’s net budgetary position against the EU budget was positive in the first five months (at EUR 85.7 million). During this period, Slovenia received EUR 370.8 million from the EU budget (22.9% of the budgeted revenues for the current year) and paid EUR 285.1 million into it (50.5% of its annual obligations towards the EU budget) of which just under a quarter came from gross national income. Almost half of the receipts (45.4%) came from the Common Agricultural and Fisheries policy, 39.9% from the structural funds and the smallest part from the Cohesion Fund (13.3%). According to SVRK data, from the beginning of the financial period in 2014 until the end of May 2021, project funding decisions taken accounted for 113% of the available funds, operations confirmed accounted for 92% and disbursements to beneficiaries for 57% of the available funds. Under the REACT-EU programme , the project funding decisions taken account for 30% of available funding and projects that are in the process of being approved account for 30%, while no payments have yet been.