Slovenian Economic Mirror

Slovenian Economic Mirror

Slovenian Economic Mirror No 7/2020

Euro area economic activity increased notably in the third quarter and even exceeded the expectations of international institutions. After a sharp decline in economic activity in the second quarter due to the COVID-19 epidemic and the related containment measures, GDP growth increased in the third quarter. This was to a great extent due to the comprehensive packages of measures adopted at the national, EU and ECB levels, which were, among other things, also oriented towards ensuring liquidity and helping the economy to recover. In July and August, the euro area thus recorded a recovery of most sectors. The indicators of economic activity in Slovenia have improved markedly since May and indicate a strong rebound in the third quarter, but in August and September the recovery already slowed considerably in most sectors. The outbreak of the epidemic had a significant impact on the performance of companies and their solvency in the first nine months. The consequences of the epidemic were felt in almost all activities, particularly in those that were hardest hit by the crisis and found it most difficult to adapt quickly to the current situation (service activities, accommodation and food service activities, transportation, construction, and arts, entertainment and recreation). The available indicators of labour market developments did not deteriorate further in the third quarter, which was to a great extent due to the recovery of economic activity in the summer months and the extension of job retention measures. The impact of the epidemic on this year’s public finance developments remains significant despite the improvement in the third quarter. In October, deflation continued but declined somewhat in comparison with previous months. With the tightening of the epidemiological situation in September and October, confidence indicators indicate uncertainty about further recovery. According to the most recent confidence indicators, the economic recovery in the euro area is losing momentum at the beginning of the last quarter. Similar is also true for Slovenia, where economic sentiment deteriorated in October after several months of improvement. The renewed declaration of the epidemic is expected to have greater consequences particularly for the service sector, but the economic consequences of the renewed spread of the epidemic and the related restrictions on business operations could be less intense than in the spring.

In the third quarter of the year, euro area economic activity strengthened beyond the expectations of international institutions, but it lost momentum at the transition to the last quarter, judging by confidence indicators. After a sharp decline in the first half of the year, GDP rose by 12.7% at the quarterly level (seasonally adjusted) in the third quarter and was 4.3% lower year on year. Economic growth has recovered more strongly than expected by international institutions in all our main trading partners, particularly France and Italy (18.2% and 16.1% respectively), which also recorded among the largest declines in activity in the second quarter. With a marked increase in the number of COVID-19 infections in Europe and a consequent tightening of containment measures, however, October’s confidence indicators (PMI, ESI, ifo) point to weaker confidence in service activities and among consumers at the beginning of the fourth quarter, though confidence in manufacturing improved further.


After a sharp decline in activity in the first half of the year, the recovery of the world economy continued at a somewhat slower pace at the beginning of the last quarter. This is suggested by some high-frequency indicators, which started to decline with the worsening of epidemiological conditions in September. The composite Purchasing Managers’ Index (PMI) improved somewhat in October, which can be attributed to the improvement in confidence in some major economies outside the EU (US, China), but confidence was recovering unevenly across countries and sectors. In manufacturing, confidence rose to a two-year high, especially in the automotive sector, while the somewhat lower confidence in service activities related to consumers was mainly due to tourism. Global trade in goods, which shrank by 12% in the second quarter due to a decline in global demand, disruptions in global production chains and increased trade costs due to containment measures, had been recovering at robust monthly growth rates until August. A continuation of the recovery is also indicated by a rebound in new export orders in October.


The indicators of economic activity in Slovenia have improved markedly since May and indicate a strong rebound in the third quarter, but in August and September the recovery was already slowing considerably in most sectors. After a sharp decline in March and April, in May the majority of export-oriented parts of the economy started to recover, but in September growth in external trade in goods slowed, while the recovery in manufacturing came to a halt. After the recovery in previous months, in August the movements in some activities oriented to the domestic market were already more unfavourable than in manufacturing, given the decline in activity in trade and most other market service activities. Activity strengthened further in accommodation and food service activities, which was a consequence of greater spending by domestic tourists (amid additional restrictions on travel abroad) and the continued use of tourism vouchers. In the absence of foreign tourists, turnover in accommodation and food service activities nevertheless remained far below the pre-epidemic level. In construction, where the decline in March and April was the least pronounced, activity strengthened in the summer months.


Trade in goods increased noticeably in the third quarter after a decline in the second, but it remained lower year on year. With a rebound in activity in main trading partners, exports to EU countries picked up in particular, though they were still almost 6% lower year on year. Exports recovered in the majority of main activities,  the most in the group of motor vehicles (around one-quarter of total exports), where they had also decreased the most in the period of containment measures. Exports of motor vehicles increased in particular, more than exports of motor vehicle parts and accessories. Exports of electrical machinery and equipment also rose markedly, while the recovery of some other main manufacturing products (e.g. metals and metal products) was more modest. In the third quarter, imports also increased considerably, particularly of intermediate goods (excluding oil and oil products). Companies are more optimistic regarding future foreign demand than during the first wave of the epidemic in the spring. This indicates that the renewed containment measures could have a smaller impact on goods trade than those in the spring, as the measures in Slovenia and its main trading partners are for now somewhat less severe and companies better adapted to the situation.

In August, trade in services declined again and remained significantly lower year on year. After several months of recovery, the decline in exports of services increased in August and was around 30% smaller year on year. Exports of transport services were around 14% lower year on year. The year-on-year decline was mainly due to less air transport; a further decline was also recorded for exports of technical, trade-related, and administrative and support service activities. August’s movements were somewhat more favourable for exports of travel, as spending of foreign tourists in Slovenia increased slightly compared with previous months (seasonally adjusted), although it remained half lower year on year and thus made the greatest contribution to the total decline in exports of services. Similar movements, albeit less pronounced than in exports, were also seen for imports of services, which were 23% lower year on year in August. Spending of Slovenian guests abroad increased (seasonally adjusted), especially outside Croatia. The year-on-year lag in Slovenian tourist overnight stays otherwise increased due to additional restrictions for crossing the state border. 


Manufacturing production increased strongly in the third quarter, but in September growth came to a halt in most industries. Production in high-technology industries, which had been the least affected during the first wave of the epidemic, decreased somewhat in recent months but remained higher than last year. Last year’s levels were also exceeded by the manufacture of machinery and equipment and some low-technology industries, where production had contracted less during the first wave of the epidemic (the food- and wood-processing industries). The majority of other industries still lagged behind last year’s levels in the third quarter, despite a significant increase in production. The decline remained largest in the metal and leather industries, while decreasing notably in the manufacture of motor vehicles and electrical equipment. At the beginning of the last quarter, i.e. before the tightening of measures in most EU countries, the improvement in business expectations about future demand and production slowed amid uncertain economic conditions and insufficient demand. 


After the fall in the spring months, construction activity picked up in July and August. In August, however, activity was still 13.9% lower than in February, the last month before the outbreak of the epidemic. Compared with 2018 and 2019, in the last few months construction activity has been significantly lower in non-residential buildings, at more or less the same level in civil-engineering works and higher in residential buildings (where data for recent months are less reliable). Short-term prospects for civil-engineering works remain favourable, whereas they look worse for the construction of buildings, non-residential buildings in particular. The stock of contracts in the construction of civil-engineering works has increased by more than 50% in the last year, while in the construction of non-residential buildings it has remained almost unchanged. In the last few months, the total floor area of buildings planned by issued building permits remained lower than in the same period of last year. The total floor area of residential buildings was 12% and that of residential buildings 6% lower year on year.


Turnover in trade fell again in August and, according to preliminary data, also in September. In August, turnover dropped in all main segments, the most in sales of motor vehicles, where it had also fluctuated the most in previous months. Despite the decline, which also continued in September according to preliminary data, turnover in sales of motor vehicles remained roughly the same year on year. Turnover in retail trade remained significantly lower than in the same period of last year, mainly as a consequence of a quarter lower turnover in automotive fuels. This was probably also due to a decline in tourist transit in the summer, in addition to lower freight transport and lower sales of fuels to households. Turnover in retail trade in non-food products was still significantly higher year on year, partly as a consequence of higher sales over the internet, which remained one of the main shopping channels after the lifting of restrictions imposed during the first wave of the epidemic.


After three months of recovery, turnover in market services declined in August and was around 11% lower than before the outbreak of the epidemic. The decline was largest in professional and technical activities, mainly due to a fall in turnover in architectural and engineering services. This was followed by a fall in transport, where public passenger transport was still strongly limited. Turnover in information and communication activities remained at the previous month’s level. After plunging during the epidemic, turnover in accommodation and food service activities strengthened at the monthly level but remained considerably lower year on year in the first eight months (–31.6%). Amid additional restrictions on travel abroad, August’s increase was a consequence of a stronger focus on the domestic market and the continued use of tourism vouchers, which was reflected in an increase in overnight stays by domestic tourists; the number of foreign tourists remained low. Turnover growth also continued in administrative and support service activities, with rising turnover in both travel and employment agency activities.


In the second quarter of 2020, the volume of road freight transport decreased significantly due to the measures to contain the epidemic in the EU; the volume of railway transport declined less. Slovenian hauliers carry out almost nine-tenths of their journeys abroad. The decline in road transport, which had started in the first quarter, continued in the second amid limited cross-border flows as a result of containment measures in individual countries. The largest year-on-year decline (by 22%) was recorded for road transport performed by Slovenian hauliers abroad. The volume of road transport at least partially connected to the territory of Slovenia (exports, imports and national transport together) decreased by 10%. The containment measures had a lesser impact on freight transport by rail, but this had already been falling for several quarters before the epidemic.


Household consumption strengthened in the summer months after a sharp fall during the first wave of the epidemic, but the speed of recovery differed significantly among spending segments. After the increase in June and July in purchases of durable goods that had been postponed particularly during the first wave of the epidemic (passenger cars, furniture and household appliances), these declined slightly again in August.  Meanwhile, sales of medicinal and cosmetic products, computer and telecommunication equipment, and sports equipment have been higher year on year since May. Sales of non-food products by mail order or internet, which had accounted for around a fifth of all non-food sales last year, strengthened further (up 77% year on year in August). The number of overnight stays of domestic tourists  surged as well, partly due to the use of tourism vouchers, but their spending abroad was significantly lower year on year, except in Croatia  until the restrictions on travel imposed in the second half of August. Expenditure on cultural, sports, recreational and other entertainment services also remained significantly lower than in the same period last year, as certain containment measures remained in place after the end of the first wave of the epidemic.


After several months of improvement, economic sentiment worsened in October. Due to a renewed spread of the epidemic and the adoption of new containment measures, the economic sentiment indicator fell in October. Confidence declined the most in retail trade, but it also fell in service activities and among consumers. In manufacturing, the confidence indicator remained close to the previous month’s level; business expectations regarding production volume and exports also remained unchanged. The confidence indicator in construction improved further (mainly due to increased orders in the construction of civil-engineering works), but, like other confidence indicators, it was significantly lower year on year. 


According to the final data for October, weekly electricity consumption exceeded last year’s level in the second half of the month. Electricity consumption was indeed up 1%–2% year on year in the period when the epidemic was declared again. Unlike in the spring, when electricity consumption had fallen significantly with the declaration of the epidemic, we assess that this time there were no major changes in industrial consumption, which accounts for the largest share of total electricity consumption. We also assess that household consumption increased due to remote work and schooling. Among Slovenia’s main trading partners, Austria recorded the sharpest year-on-year decline in weekly electricity consumption in the second half of October (by around 5%), followed by Italy (around 2%). In others, consumption exceeded last year’s level, in Germany by 7%, in France by around 6% and in Croatia by 2%.


Freight traffic on Slovenian motorways  increased slightly in October but remained lower than before the epidemic. After a sharp fall following the declaration of the epidemic in March, it increased more markedly from mid-June to mid-August. Then it fell again and remained around 10% below the level of the previous year until the beginning of October, when it increased again slightly. In the week between 26 October and 1 November, it lagged 5% behind last year, similarly for foreign and domestic hauliers.


Data on fiscally verified invoices indicate that the direct economic impact of the renewed increase in COVID-19 infections and the related restrictions, while considerable, could be significantly less intense than in the spring. According to data on fiscally verified invoices (fiscal cash registers), turnover in the last seven days of October was 27% lower year on year (at the end of March, the decline was more than 50%). It fell the most in gambling and betting activities, arts and entertainment activities, travel agencies, and accommodation. A sharp decline was also recorded in food and beverage service activities, but this was smaller than in the spring. The markedly smaller total decline than in the spring was mainly attributable to turnover in retail trade and in the sale and repair of motor vehicles.


In August, employment remained similar to that in the previous two months; following a fall in September, unemployment maintained its level in October. The number of employed persons was down 1.6% year on year in August, which is similar to the previous few months. Administrative and support service activities and accommodation and food service activities continue to stand out with the largest year-on-year declines (–11.6% and –6.2% respectively). An above-average fall is also recorded in manufacturing (–3.7%). A total of 83,654 persons were unemployed at the end of October, which is similar to the end of September and around 5% less than in August. The gradual decline in their number in the last two months was due both to the recovery of economic activity and to measures to preserve jobs. Year on year, unemployment was up 15.5% at the end of October.


In August, the average gross wage remained more-or-less the same as in the preceding two months; year on year, it was up 5%. The year-on-year wage growth since April is to a great extent 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, the number of wage recipients fell sharply, as did, albeit somewhat less, the amount of wages funded from employers’ resources, which 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 stronger year-on-year wage growth in April and May (14.5%, on average) mainly reflected the extraordinary payment of allowances for hazardous working conditions and additional workloads and the payment of the bonus for work in crisis conditions (in accordance with the collective agreement). Since June, extraordinary bonuses have no longer been paid, which is reflected in lower year-on-year wage growth in the public sector – in August, it was at 4.4%.


The year-on-year decline in consumer prices decreased in October. The lower prices were still mainly due to around one fifth lower prices of oil products. Prices of durable and semi-durable industrial goods also remained down year on year. The decline in prices of semi-durables otherwise slowed significantly in October due to the arrival of new collections of clothing and footwear, which contributed to a fall in the year-on-year deflation seen in the last three months. Growth in food prices maintained its relatively high level (3.6%), while growth in prices of services remained moderate (at around 1%). Owing to higher excise duties, prices of tobacco products rose by 5.3% in October, contributing around 0.2 p.p. to inflation.  


Slovenian industrial producer prices remained lower year on year in September. Prices in countries outside the euro area are declining faster year on year. In the euro area, the decline in prices has slowed in recent months. Price growth on the domestic market remains modest. Year on year, prices of energy (electricity) are rising at the fastest pace, but their growth is gradually easing. Consumer goods prices also continue to increase year on year (1.6%), currently particularly in the segment of non-durable goods, which is also related to uncertainty about the course of the epidemic. Industrial producer prices in the group of intermediate goods remain lower year on year amid moderate economic activity.


In the current account, measures to contain the epidemic were mainly reflected in the segment of goods and services trade and in primary income. In August, the current account surplus declined but remained high, amounting to EUR 3 billion in the 12 months to August (6.5% of estimated GDP). Despite a further widening of the surplus in goods trade, the year-on-year decline in the surplus in current transactions mainly arose from a lower surplus in services due to a decline in services trade as a consequence of the coronavirus crisis (exports fell more than imports), particularly in the segment of travel and transport services. In goods trade, the surplus increased as a consequence of a larger real fall in goods imports than exports and of improved terms of trade. The deficit in primary income was up year on year, mostly due to higher net inflows of income from equity capital of direct investment. The lower deficit in secondary income was again marked by lower VAT- and GNI-based contributions to the EU budget.


Bank lending activity in Slovenia remains modest. The volume of corporate, NFI and government loans continues to decline, while the year-on-year growth of household loans has stabilised at around 1.5% in recent months. A great extent of household borrowing is in the form of housing loans, but in the third quarter the volume of other loans (overdrafts) increased as well. We estimate that, in addition to seasonal factors (holidays and the beginning of the school year), this may also be due to increased demand for liquidity on the part of financially weaker households. The volume of foreign sources of finance for the banking system increased in the third quarter but remained modest. Growth in domestic non-banking sector deposits, which were almost 9% higher year on year in September, continues. Corporate and household deposits are also rising rapidly, overnight deposits already accounting for more than three quarters of all non-banking sector deposits. The quality of banks’ assets remains good, partly as a consequence of measures adopted to mitigate the consequences of the pandemic. The share of arrears of more than 90 days was 1% in August. 


The deficit of the consolidated general government budgetary accounts in the third quarter of this year was significantly smaller than in the second quarter. The improved balance in the third quarter reflected year-on-year growth in revenue (4.8%), which had fallen sharply year on year in the second quarter, and significantly slower expenditure growth (11.6%). On the revenue side, revenues from social contributions and the EU budget increased year on year. Revenues from some main tax revenue categories were also higher year on year in this period (VAT, corporate income tax and personal income tax), mainly due to the improvement in economic conditions and to a lesser extent to the payments of matured instalments, i.e. deferred payments, of these taxes, which was made possible by the intervention legislation. Year-on-year expenditure growth, which had been strongest in May and June, when the most expenditures to mitigate the consequences of the epidemic were paid (particularly subsidies and transfers to individuals and households), slowed considerably in the third quarter.


The impact of the epidemic on public finances remains significant despite the improvement in the third quarter, and the deficit is expected to widen somewhat by the end of the year. In spite of the improvement, revenues of the consolidated general government budgetary accounts remained lower year on year in the nine months as a whole (–3.5%), while expenditure growth remained strong (15%). The deficit, at EUR 2.3 billion in the first nine months, will increase further in the last quarter of the year due to the tightening of epidemiological conditions and the adoption of additional measures to mitigate the impact of the epidemic on health care and economic activities (the recently adopted fifth anti-corona package and the sixth package in preparation). In the revised state budget, a substantial reserve has been set aside to finance these measures. Until the middle of September 2020, almost EUR 1.6 billion was paid from the budget for financing expenditure-side measures.