Slovenian Economic Mirror


Slovenian Economic Mirror

Slovenian Economic Mirror No 7/2021

The outlook for the euro area remains positive despite the increased uncertainty in the international environment in recent months related to supply chain disruptions. In Slovenia, some economic indicators point to a slowdown in growth in the summer months, although economic sentiment indicators remain higher than before the epidemic. The relatively favourable development of trade and tourism-related activities continued in the summer months, and household consumption increased. Activity in the export part of the economy remained at a similar level in July and August as in the second quarter, when it increased significantly. Growth in this segment has weakened in recent months, which is related to disruptions in the supply of raw materials in the automotive industry. In September, uncertainty about the future development of the COVID-19 epidemic and possible further containment measures contributed to a deterioration in the economic sentiment indicator and consumer confidence, which are nevertheless higher than a year ago and before the epidemic. Labour market conditions have continued to improve in recent months. Consumer price inflation edged up in September, as in previous months, mainly due to the sharp increase in petroleum product prices.

According to survey indicators, growth in global economic activity slowed in the third quarter. The average value of the composite Purchasing Managers’Index (PMI) points to a slowdown in global economic growth in the third quarter as activity in the manufacturingand service sectors slowed. Activity growth has slowed in most of the world’s major economies, and in China it even declined. According to PMI indicators, growth in global trade in goods also slowed in the third quarter due to supply chain disruptions. However, the OECD did not significantly change its earlier forecast for global economic growth in September and projects growth of 5.7% for this year and 4.5% for next year. On the other hand, the OECD raised its forecast significantly for the euro area economy, as did the ECB, as the economic recovery in the first half of the year was stronger than expected. The OECD and ECB forecast growth of 5.3% and 5% respectively, with real GDP expected to exceed pre-crisis 2019 levels by the end of 2021. Assuming a further easing of containment measures, mitigation of supply constraints from early 2022, an increase in global economic activity and continued strong economic policy support, euro area GDP growth is expected to reach 4.6% next year.

Economic activity in the euro area recovered significantly in the second quarter and remained at a high level in the third quarter, according to the PMI index. According to Eurostat’s estimate, it rose by 2.2% in the second quarter compared to the first quarter (by 14.3% year-on-year) and was 2.5% lower than in the last quarter of 2019. Private consumption was the main contributor to growth, which was much higher than expected by international institutions amid a gradual easing of containment measures. Based on the PMI, economic activity in the euro area remained similar in the third quarter, as the PMI remained high on average despite a slowdown in growth from August onwards. The somewhat lower index values are mainly caused by increasing supply constraints, mainly related to the semiconductor shortage and logistical problems affecting the automotive industry in particular.

Dollar prices of Brent crude oil rose again in September, while non-energy commodity prices have been falling steadily since June. After falling in August, the average dollar price of Brent crude oil rose 5.2% (82.1% year-on-year) to USD 74.5 per barrel in September. The increase was mainly due to higher global demand and only a moderate rise in production in OPEC+ members. Prices of other energy sources, especially natural gas, are also rising in global markets. Amid lower stocks and higher demand, natural gas prices rose 39% month-on-month (290% year-on-year) in September, with geostrategic reasons also playing a role. Rising natural gas prices also had an important impact on the significant increase in electricity prices in Europe in recent months. According to the World Bank, prices of non-energy commodities fell one percent in September from the previous month but remained 27.5% higher year-on-year. Base metals prices (excluding minerals and precious metals) in particular remain high. They rose slightly in September and were up 45.7% year-on-year. Particularly prices for aluminium, which accounts for more than half of Slovenia’s imports of all metals, increased.

The value of the euro against a basket of foreign currencies fell slightly in the summer months. The euro depreciated against most currencies, especially the Russian rouble, the US dollar and the Chinese yuan. With the exception of the latter, the value of the euro against foreign currencies remains generally higher than it was before the outbreak of the COVID-19 pandemic, when the euro appreciated significantly, especially in the early stages. Last year, the pressure on the price competitiveness of Slovenian exporters (measured by the REER_hicp indicator) was alleviated by weaker growth in final prices as measured by inflation. In recent months, domestic inflation has been comparable to that of trading partners, which, together with the depreciation of the euro, has led to a slight improvement in the price competitiveness indicator.

In Slovenia, some economic indicators point to a slowdown in growth in the summer months; economic sentiment indicators remain higher than before the epidemic. The relatively favourable development of trade and tourism-related activities continued in the summer months, with household consumption increasing. According to data on fiscal verification of invoices, total turnover in September was higher than in the same period before the epidemic. Activity in the export-oriented part of the economy remained at a similar level in July and August as in the second quarter, when it had increased significantly. The slowdown in growth in recent months is related to material supply disruptions in the automotive industry. Some high-frequency indicators also point to a slowdown in growth. Freight traffic on Slovenian motorways remains comparable to the same period before the epidemic, while growth in electricity consumption has slowed in recent months. This is mainly due to industrial consumption lagging behind pre-epidemic 2019 levels due to disruptions in material supply and a slowdown in production growth. Construction activity further declined in July, with a particularly unfavourable trend in non-residential construction. Uncertainty about the future development of the COVID-19 epidemic and possible further containment measures (the recovered/vaccinated/tested rule was introduced on 15 September) contributed to the deterioration of the economic sentiment indicator and consumer confidence, which are nevertheless higher than a year ago and before the epidemic.
 

 

Electricity consumption in September was 2% lower year-on-year and 4% lower than in September 2019. We estimate that the decline in electricity consumption is related to lower industrial electricity consumption due to problems with the supply of input materials and consequently production disruptions. Among Slovenia’s main trading partners, consumption was significantly higher year-on-year in Croatia (5%), which is related to a better tourist season than last year, and it was also higher in Italy (1%) and Germany (2%). In Austria and France, it was lower year-on-year, by 4% and 1% respectively. Compared to September 2019, lower consumption was recorded in Austria and Italy (in both by 3%), while consumption in other countries remained about the same.

 

August was the second consecutive month in which industrial electricity consumption was lower than the same period in 2019, while small business electricity consumption has lagged behind 2019 levels since the epidemic began. Industrial consumption fell by 3.4% (by 4.9% in July), which we assess was related to material supply constraints and high material prices and consequently lower production. Small business electricity consumption was 5.3% lower (3.3% lower in July), while household consumption was 0.8% higher. Compared to August last year, industrial electricity consumption was 3.1% higher and small business electricity consumption was 1.4% higher. Household consumption was 2.1% lower, which may indicate that more households decided to go on holiday than last year.

Freight traffic on Slovenian motorways in September was up 11% year-on-year; after adjusting the data for working days, it was almost the same as in the September before the epidemic. With the number of working days being the same, the high year-on-year increase in traffic in September is still the result of a low base, i.e. lower traffic volumes during the two epidemic waves last year. Compared to September 2019, freight traffic has increased by almost 6%, mainly due to one more working day. After adjusting the data for the different number of working days, freight traffic this September was around 1% higher than before the epidemic. The ratio of domestic to foreign vehicles has also not changed significantly and remains at 40:60.

 

According to data on the fiscal verification of invoices, turnover in September was 9% higher year-on-year and 6% higher than in the same period of 2019. Year-on-year growth slowed in the second half of the month compared to August, most likely due to the introduction of the recovered/vaccinated/tested rule for users of most services and activities. Following high growth in the first half of September, which was also stimulated by the forecast tightening of measures, growth slowed significantly in the second half of the month in trade (especially retail), which accounts for about three-quarters of total turnover. The introduction of the recovered/vaccinated/tested rule also contributed to lower turnover in some other activities, such as accommodation, food and beverage service activities and sports activities. Nevertheless, year-on-year turnover growth in these services remained high in September (at around 25%), due to the increased number of foreign and domestic tourists and same-day visitors (also due to low turnover or base last year) and the continued redemption of vouchers. Growth in the creative, arts and entertainment activities slowed significantly in September, while the year-on-year decline in some personal services deepened.

 

Trade in goods increased again in August, significantly exceeding pre-epidemic levels. At the same time, there have been more marked monthly fluctuations in trade with other EU Member States in recent months, which we believe were mainly related to vehicle exports. Supply chain disruptions, and in particular shortages of electronic built-in components, have had a major impact on the automotive and related industries in Slovenia and its main partners in recent months. However, in most of the main product groups (chemical products, machinery and equipment excluding vehicles, metals) the favourable development continues and the pre-epidemic levels have been significantly exceeded. In recent months, exports of metals and metal products have increased in particular, which, in addition to higher exports, is also related to rising commodity prices on world markets. Export expectations fell slightly in September, mainly due to disruptions in material supplies and longer delivery times, while new orders remain well above normal levels. On the import side, imports of intermediate goods in particular remain high.

 

The growth of Slovenia’s market share in the EU came to a halt in the second quarter of this year. After a sharp decline in the early stages of the COVID-19 pandemic, Slovenia’s market share in the EU market strengthened last year and in the first quarter of this year. In the second quarter, however, it declined q-o-q and remained at the modest level of the last year’s second quarter. The stagnation was mainly due to the deterioration of previously favourable export trends in pharmaceutical products, which greatly mitigated the decline in exports of most other commodity groups last year. The development of the market share of road vehicles, one of the few major product groups where Slovenian exports to and imports from other EU Member States have not yet exceeded pre-epidemic (2019) levels, remains unfavourable. On the other hand, exports and/or market shares of machinery and equipment (industrial, specialised for particular industries, electrical and power-generating) are mostly increasing this year. This year’s growth in exports of metals (iron, steel, non-ferrous metals) and metal products is supported by a strong increase in the value of EU imports, largely due to the marked increase in metal prices on global markets.

 

The recovery in services trade continued in July. Given the easing of measures to limit the spread of the epidemic and the lifting of restrictions on crossing state borders, the recovery was mainly due to the increase in trade in tourism-related services. Trade in transportation services increased even more, as did trade in some other important services (construction, ICT). Year-on-year, trade in services was significantly higher in July, reflecting the very low level of activity last year, but remained below pre-epidemic levels, especially in the travel segment (by around a third). In the first seven months, trade was about one-tenth lower than in the same period before the epidemic, mainly due to about 60% lower trade volumes in tourism. Most other important groups of service activities are exceeding the comparable pre-crisis levels.

 

Manufacturing output has not changed significantly in recent months. Manufacturing output recorded significant growth compared to the same period last year and was also higher than in the pre-epidemic period. Year-on-year growth was the highest in medium-low-technology industries, mainly underpinned by the manufacture of fabricated metal products. Growth was also high in medium-high-technology industries, which had declined the most in the first half of last year due to the spread of the epidemic. Only the output of high-technology industries declined year-on-year, performing slightly worse than in the same period of 2019.

Construction activity declined in July. The value of construction output fell by 3.9% and was 8% lower than a year earlier. At the monthly level, activity in individual construction segments is highly volatile. Amid these fluctuations, activity in residential construction, civil engineering works and specialised construction remains at the level reached at the beginning of the year, while it declined sharply in non-residential construction. Data on the number of contracts suggest that activity in non-residential construction will remain relatively weak, while other segments, particularly civil engineering works and specialised construction activities, are expected to perform better.
Construction prices have risen significantly due to rising commodity prices (and shortage of labour). The implicit deflator of the value of completed construction works (used to measure prices in the construction sector) was 7% in July, its highest level since 2005.

 

Turnover in trade fell sharply in July in all three main segments; preliminary data show that it rose in August. Turnover in wholesale trade fell the most, falling for the fourth month in a row after rising sharply in the first quarter. Turnover was also down in the sales of motor vehicles. Nearly a third fewer new passenger cars were sold this July than in July 2020. Turnover in retail trade was also down due to lower sales of non-food products. Still, this is the only one of the three main segments that remains higher than a year ago and compared to July 2019. According to preliminary data, turnover in retail trade and in the sales of motor vehicles increased in August.

 

Real turnover in market services fell slightly in July, while growth continued especially in tourism-related services. With a sharp increase in overnight stays by foreign tourists and a high number of overnight stays by domestic tourists boosted by the redemption of last year’s and this year’s vouchers, the highest increase in turnover was recorded in accommodation and food service activities (by almost a quarter). In other business activities, turnover rose by just under a tenth, with strong growth in travel agencies, while moderate growth continued in transportation, with storage activity making the largest contribution. Professional and technical activities saw a decline in turnover, driven by a fall in architectural services and information and communication services, particularly computer services. Compared to the same period in 2019, turnover was significantly lower in only a few activities, such as travel agency activities, employment activities, and motion picture, video and television programme production, sound recording, and music publishing activities.

Household consumption increased in the summer months, especially in tourism-related services, while consumption of durable goods and food remained high. Last year, the number of domestic overnight stays in Slovenia increased significantly, which continued this summer season. This was also influenced by the possibility of redeeming last year’s and this year’s vouchers. In addition, the number of overnight stays in neighbouring Croatia increased by a quarter in July, approaching 2019 levels. Households also spent more money on travel to other countries in July, however, the total import of private travel services lagged behind the 2019 levels by a quarter. Expenditure on creative, arts and entertainment activities was also significantly higher in July and August than last year, also reflecting last year’s low base, as was expenditure on sports services, which was more than a tenth higher than in the same months in 2019. Expenditure on durable goods, which had still shown high current growth in the spring, declined slightly in the summer months, which we assess is also due to car delivery delays. According to data on fiscal certification of invoices, consumption growth continued in September, though slowing somewhat in the second half of the month due to the introduction of the recovered/vaccinated/tested rule.

 

With sales at their highest level in the last four years, growth in the average dwelling prices accelerated in the second quarter. After 4.6% growth in 2020 as a whole, prices were up 7.3% year-on-year in the first quarter and 9.9% in the second quarter. The high growth was driven by higher prices of existing dwellings (by more than a tenth), with a record number of transactions taking place in the second quarter of this year. Prices of newly built dwellings were also higher (4.9%). However, their sales were the lowest since 2010, with the exception of the second quarter of last year (66 out of a total of 3,993 transactions).

 

In September, the value of the sentiment indicator deteriorated slightly. On a monthly basis, confidence in trade fell significantly, with indicators of expectations about selling prices, sales and expected employment declining the most. Confidence also fell slightly in manufacturing and among consumers, who are particularly concerned about future economic conditions. Confidence in services and construction improved slightly, with the latter reaching its highest level in three years. Year-on-year, the value of most confidence indicators is significantly higher, with the exception of retail trade, where confidence fluctuated sharply on a monthly basis due to the containment measures. Compared to the same period in 2019, the economic sentiment indicator remains at a similar level.

 

In July, employment remained at a similar level to the previous month, but year-on-year growth strengthened due to the base effect. The number of employed persons in July was 2.3% higher year-on-year, mainly due to the low base effect following a sharp decline in spring 2020. Year-on-year growth was similar for both employees (2.2%) and the self-employed (2.1%; the decline in the number of self-employed last year was much smaller than for employees). The highest year-on-year increases were observed in health and social work and in construction. For the first time since the outbreak of the epidemic, employment also rose year-on-year in accommodation and food service activities in July. Year-on-year, employment was lower only in arts, entertainment and recreation, sectors severely affected by the containment measures.

 

The number of unemployed persons continued to fall in September. At the end of September, 66,122 persons were unemployed, 4.6% fewer than at the end of August and 21.1% fewer than a year earlier. The number of unemployed people decreased by 5.3% compared to the end of September 2019. In the first nine months, the inflow into unemployment was lower than in 2019. The outflow from unemployment has fallen in recent months but remains higher than the inflow, so the number of unemployed continues to fall. Among the unemployed, the number of long-term unemployed increased in the first four months. In recent months, however, their number has fallen slightly again due to the high demand for labour. In the first nine months, an average of 41,206 people were long-term unemployed, which is 9.5% more than in the same period last year and 7.1% more than in 2019. Of the long-term unemployed, slightly more than half have been unemployed for more than two years.

Year-on-year wage growth remained high in July (7.1%). In the public sector, it was 9.3%, slightly higher than in June. In both months, year-on-year wage growth was lower than in previous months, when it was affected by the payments of epidemic-related allowances. In the first seven months, year-on-year growth was 12.3%. In the private sector, average wages rose 5.5% year-on-year in the first seven months, reflecting labour shortages, the increase in the minimum wage at the start of the year and a new wage calculation method related to the job-retention intervention measures.

 

Given the sharp rise in energy and other commodity prices and stronger price growth in tourism-related services, year-on-year consumer price inflation has gradually strengthened in recent months, reaching 2.4% in September. Half of the increase was due to higher prices of petroleum products, which rose by almost 30% year-on-year. Prices for other energy products, which are also experiencing high growth rates on international markets, rose to a much lesser extent. In the face of rising commodity prices and supply chain bottlenecks, year-on-year growth in durable goods prices has continued to strengthen gradually and at 2.9% was the highest in the past decade. Due to different seasonal developments in the clothing and footwear group, the prices of semi-durable goods fluctuated and were 0.6% lower year-on-year, having risen in the previous five months. Growth in services prices has also gradually strengthened (1.2% year-on-year), mainly due to higher year-on-year price growth in the restaurants and hotels group (5.2%), which we assess is also due to increased demand and high growth in the number of overnight stays by foreign tourists and to supply factors (lack of labour in the sector). Food prices are still lagging behind the previous year’s level, but the gap is narrowing from month to month.

 

The year-on-year growth of Slovenian industrial producer prices strengthened further to 7.7% in August. Producer prices in domestic and foreign markets are recording high growth rates. Further growth in prices of intermediate goods, which were 12% higher year-on-year, and capital goods, which were 7.5% higher, contributed the most to overall growth. Given the stronger growth in foreign markets (almost 65% year-on-year), year-on-year growth in energy prices also strengthened significantly in August (to 8.3%), but its contribution to overall growth was relatively modest due to its small share. Consumer goods price growth remained subdued year-on-year, hovering around 1% for the third month in a row. In the last two months, prices of non-durable consumer goods have risen somewhat more strongly (1.3%) than in the past, while growth in prices of durable consumer goods has actually slowed somewhat (to 0.2%).

 

The current account surplus remained high in July. It totalled EUR 3.1 billion (6.5% of estimated GDP) in the last 12 months. In comparison with the same period a year before, the higher surplus arose mainly from lower primary income deficit, lower net payments of interest on external debt and lower net payments of income on equity. The deficit in secondary income was also lower as the government received more funds from the European Social Fund. Despite the recovery in trade in services, the surplus in trade in services is still lower year-on-year, mainly due to a lower surplus in travel. The current account surplus narrowed, this due to  higher prices of energy and other primary commodities, which have the largest impact on import price growth. Export prices (in the last 12 months) rose by 0.9% year-on-year, import prices rose by 2% and the terms of merchandise trade deteriorated by 1.1%.

 

The growth of loans to the domestic non-banking sectors strengthened slightly year-on-year in August, but remains relatively modest (1%). Loans to households, mainly in the form of housing loans, are on the rise, rising by 7.7% year-on-year helped by low interest rates. Households continue to repay their consumer loans. The decline in these has gradually slowed since the beginning of this year, reflecting lower deleveraging, as new lending remains modest. Loans to enterprises and NFIs continued to decline year-on-year (-0.2%) but at a slower pace than in previous months. In our view, the introduction of deposit fees did not significantly affect household deposit growth. Household deposit growth has slowed somewhat since the introduction of fees (to 9.9%), which we believe is mainly due to the high base, as deposit growth was stronger in the same period last year due to stricter containment measures and lower household consumption. Thus the share of non-performing loans  was 1.3% in July.

 

The situation on euro area bond markets remained favourable in the third quarter. At the end of September, the ECB opted to slow the pace of its bond purchases under the PEPP programme. This, together with investors’ expectations of higher inflation, led to an increase in the yield to maturity, which by the end of September had reached roughly the same level as in the months before the outbreak of the epidemic. The yield to maturity of the Slovenian bond was thus -0.02% in the third quarter. The spread to the German bond was 35 basis points, roughly the same as in the previous quarter.

 

Given a significant increase in revenues and a slowdown in expenditure growth, the deficit in the consolidated balance of public finances was somewhat smaller than in the same period last year. The increase in revenues reflects several factors: the recovery in economic activity, the much smaller volume of the approved deferrals and instalment payments of tax liabilities than last year made possible by the intervention legislative measures taken during the epidemic, and some one-off revenues (sale of fees for the use of radio frequencies, treasury transactions related to borrowing). Growth in income tax and social security contributions is also high, as wages increased sharply as a result of the payment of allowances for work in hazardous conditions during the epidemic. Expenditure growth remains high this year as well, despite a slowdown. This is mainly due to growth in transfers to individuals and households, as well as in wages and other labour costs in the public sector, where it has continued to rise compared to the same period last year, which is related to the measures taken to contain COVID-19. The structure of these measures is different from last year, and the amount paid from the state budget in the first eight months (EUR 2.35 billion) already exceeds the amount paid in the whole of last year (EUR 2.02 billion). Investment expenditure has also risen sharply this year after falling in the same period last year.

 

Slovenia’s net budgetary position against the EU budget was positive in the first eight months of 2021 (at EUR 62.5 million). In this period, Slovenia received EUR 453.5 million from the EU budget (28% of revenue envisaged in the state budget for 2021) and paid EUR 391 million into it (69.2% of planned payments). The bulk of receipts were resources from structural funds (44.5% of all reimbursements to the state budget) and resources for the implementation of the Common Agricultural and Fisheries Policy (40.7%). Receipts from the Cohesion Fund accounted for 12.5%, and just over 20% of the planned funds have been drawn. According to SVRK data, by the end of June 2021 Slovenia had absorbed only 58% of funds available under the 2014–2020 financial perspective. According to SVRK estimate, 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 and difficulties in securing own resources faced by municipalities and other beneficiaries.