Slovenian Economic Mirror 3/2023: Growth in economic activity in the first quarter supported by household consumption and growth in construction and most services; weak activity in the export-oriented part of the economy

Growth in economic activity in the first quarter was driven by household consumption, construction investment and growth in most services, where the post-COVID-19 recovery continues in some sectors. Activity in the export-oriented part of the economy was weak but trade in services, especially travel, has picked up. Employment of foreign workers was the largest contributor to overall growth in the number of persons in employment – contributing 83% to year-on-year growth in March. Year-on-year inflation slowed slightly in April, but was still high at 9.4%. As in previous months, food and non-alcoholic beverage prices were the main contributors to inflation, while core inflation remained high at around 8%. In the Selected topic of the new Slovenian Economic Mirror on business results of companies in 2022, we note that while business performance recovered quickly after the epidemic, the energy crisis led to a slowdown in indicator growth last year. Among the indicators, operating efficiency and return on revenue in particular have deteriorated, and are slightly below pre-epidemic levels. These are the key findings of today’s publication.

In the first quarter, economic growth in Slovenia was driven by household consumption, construction investment and growth in most service activities, while growth was weak in the export-oriented part of the economy. In the first quarter of this year, real gross domestic product (GDP) increased by 0.6% quarter-on-quarter and by 0.7% year-on-year. Household consumption contributed more than one percentage point to the year-on-year GDP growth in the first quarter. Compared to the same period last year, households spent more on tourist services abroad and vehicle purchases and less on food, non-food products and overnight stays in Slovenia. As the number of arrivals and overnight stays of foreign tourists increased, growth in tourism-related services was strong. Investment activity remained relatively strong in the first quarter, with a particular acceleration of activity in construction. However, the surprisingly high negative contribution of inventories (-6.5 p.p.) contributed to the sharp year-on-year decline in gross capital formation. Activity in the export-oriented part of the economy was weak in the first quarter, with goods exports and manufacturing activity remaining at similar levels to the same period last year. Trade in services, especially travel, increased, supported by a rapid post-COVID-19 recovery in tourism. Total exports increased while total imports declined, contributing to the high positive contribution of the external balance (5.1 p.p.). After a period of strong growth, government consumption declined year-on-year for the third consecutive quarter, mainly due to lower spending on COVID-19 containment measures.

Economic growth in the euro area was subdued in the first quarter, while, according to available indicators, it is accelerating in the second. After quarterly stagnation in the fourth quarter of last year, euro area GDP grew by 0.1% in the first quarter (1.3% year-on-year). Growth was slightly higher than had been expected by the EC. According to available confidence indicators (PMI, ESI), economic activity in the euro area has strengthened in the second quarter. The improvement in indicators was mainly driven by increased confidence in services, while confidence in manufacturing continues to decline. This is also reflected in Slovenia’s export-oriented activities, where sentiment deteriorated slightly at the beginning of the second quarter. Compared to the February forecast, the EC has revised its economic growth forecast for the euro area in 2023 and 2024 slightly upwards, and the inflation forecast has also been revised upwards. The EC continues to warn of downside risks, which are estimated to have intensified in recent months and are related in particular to persistent core inflation, tightening of financial market conditions and economic consequences of the war in Ukraine.

Employment of foreign workers contributed most to the overall growth in the number of persons in employment; the number of unemployed further declined in April; the average gross wage was higher in real terms in February than a year earlier. Year-on-year growth in the number of persons in employment was roughly at the same level as in the previous two months (1.8%). Due to the shortage of domestic labour, employment of foreigners contributed most to employment growth in most sectors, already 83% in March. Growth was highest in construction, which stands out in terms of the share of employed foreigners (48%) and is one of activities that face significant labour shortage. At the end of April, 48,904 people were unemployed, 3.4% fewer than at the end of March and 16.3% fewer than a year earlier. The number of long-term unemployed also declined, by almost one-third. The average gross wage was 1.2% higher year-on-year in real terms in February, mainly due to a significant increase in the minimum wage at the beginning of the year and a relatively low base from last year. Wages increased also in the public sector.

Year-on-year consumer price inflation slowed slightly in April, although it was still high at 9.4%. As in previous months, the main contributors to growth were food and non-alcoholic beverage prices, which were 15.8% higher year-on-year in April (19% in March). The contribution of non-energy industrial goods and services prices remained high, while the contribution of energy price growth was lower than in previous months, with year-on-year growth slowing significantly in April. Core inflation, i.e. price growth excluding energy, food and non-alcoholic beverages, remained around 8% in April and was higher than in the euro area. Slovenian industrial producer prices fell month-on-month in April, after about two and a half years of uninterrupted growth. Year-on-year growth also slowed further.

In the first quarter of this year, the consolidated general government budgetary accounts showed a deficit of EUR 273.7 million, which is slightly less than in the same period last year. Revenues increased by 2.6% year-on-year, mainly due to an increase in social security contributions, with continued employment growth and stronger wage growth. On the high base of last year, receipts from the EU budget and some non-tax revenues were significantly lower, while tax revenue growth also weakened (amid lower economic growth, temporary cuts in energy taxes and legislative changes in personal income tax). Expenditure was 1.7% higher year-on-year. The main reason for the increase was the rise in wages and other labour costs affected by the agreement on wage increases in the public sector. Various transfers have also increased due to last year’s low base and also measures to mitigate the impact of rising energy prices.