Slovenian Economic Mirror 3/2017
Euro area economic growth has remained stable at the beginning of 2017; similar growth is also projected for the next two years. Favourable economic developments continued in Slovenia at the beginning of the year. Gains in the manufacturing sector’s competitiveness are reflected in further growth in Slovenia's merchandise market shares in the EU and on the global market. As a result of favourable economic conditions, the labour market situation continues to improve.
- International environment
- Economic developments
- Labour market
- Balance of payments
- Financial markets
- Public finance
In April the IMF projected a strengthening of global economic growth for this year and in 2018. GDP growth is expected to total 3.5% this year and 0.1 pps more next year. The main driver of growth will remain emerging-market and developing economies, where economic activity will strengthen particularly in commodity exporters; the economic growth in China is projected to remain stable (at around 6%). A significant contribution to global GDP growth is also expected from advanced countries, particularly the US. According to the IMF, GDP growth could be lower than forecast particularly owing to the uncertain trade policy of the US and a faster-than-expected increase in Fed interest rates. It could also be faster owing to the high level of confidence in the economy and fiscal stimulus in the US and China.
Economic growth in the euro area remained stable in the first quarter of this year. According to Eurostat’s preliminary flash estimate, it stood at 0.5% quarter on quarter and 1.7% year on year. According to the most recent forecasts by international institutions, GDP growth should hover between 1.5% and 1.7% this year and in 2018 and 2019. The main factors in these relatively favourable forecasts are high confidence in the economy and growth in private consumption. Among downside risks to growth, international institutions point to political uncertainty.
Favourable economic trends continued at the beginning of this year. Export growth continues to reflect foreign demand and the ability of manufacturing enterprises to maintain their favourable competitive position. Faster growth in manufacturing production is still impeded by the relatively slow recovery of sales on the domestic market. Private consumption is picking up under the impact of favourable labour market trends and high consumer confidence. Household borrowing is also on the rise. The strengthening of consumption has a positive impact on turnover growth in trade and, in particular, services related to leisure, which is also attributable to the higher number of foreign tourists. The pick-up in domestic and foreign demand has also contributed to further turnover growth in other market services. Construction output remains low, but its growth has strengthened. Economic sentiment is improving further and points to a continuation of positive trends.
Real merchandise exports and imports increased further at the beginning of 2017. The growth of exports continues to be underpinned by higher foreign demand and the ability of manufacturing enterprises to maintain their favourable competitive position. Expectations about future exports and orders in manufacturing also remain positive. Exports of all main groups of manufactured goods were up year on year at the beginning of 2017. The growth of imports is also rising, reflecting favourable export movements and growth in domestic private and investment consumption.
Nominal exports and imports of services remained high (seasonally adjusted). In the first two months of the year, exports were up 12.0% year on year, mainly as a consequence of higher exports of technical, trade-related business services and transport services. Imports were at almost the same level as one year before (0.5%).
Production volume in manufacturing increased further at the beginning of the year. Production is strengthening in all categories of technology intensity; in the first two months it was up year on year in all categories except for some low-technology industries. Growth in manufacturing production continues to be underpinned particularly by stronger foreign demand, while the recovery of sales on the domestic market still lags behind. While fewer and fewer companies report insufficient demand as a factor limiting production, amid higher capacity utilisation more and more companies are facing a shortage of skilled labour.
The value of construction output has remained unchanged since the second quarter of last year, though with considerable monthly fluctuations. Activity in 2016 and early this year was significantly lower than in 2015, particularly owing to low government investment. Amid a general improvement in economic conditions and a gradual rebound in the property market, the construction of flats and non-residential buildings started to pick up at the end of 2015 and mid-2016 respectively. Data on issued building permits and new contracts show a continuation of favourable trends.
At the beginning of the year, nominal turnover continued to grow in most market services. Higher demand for labour was reflected in stronger growth of turnover in employment services (part of N activities). Under the impact of exports of land transport services, turnover growth also increased further in the transport sector. After a long period of growth in information and communication services, activity in this sector is stagnating despite further growth in computer services exports. Stagnation also continues in professional and technical activities.
The growth of land freight transport strengthened in the second half of last year. In recent years, the volume of road transport of domestic hauliers has been increasing, particularly abroad. This trend has to do with the liberalisation of transport in the EU, as at the same time more and more foreign hauliers are performing their services on Slovenian roads. After a long period of stagnation, rail freight transport increased particularly strongly amid higher growth in export revenues in the last months of 2016.
Household consumption continued to increase at the beginning of the year, reflecting the improvement in labour market conditions and high consumer confidence. With further growth in employment and earnings, the net wage bill increased more strongly in the first quarter of the year. Household purchases of durable goods, particularly passenger cars and furniture increased further. The growth of spending on semi-durable goods (personal care products in particular) and on services of the accommodation and food service sector, i.e. tourism services, which had started last year, also continued.
After the strong growth in 2016, the number of employed persons continued to increase at the beginning of this year. Under the impact of a further improvement in economic conditions, most private sector activities also recorded higher year-on-year growth in February. Short-term expectations of enterprises about future employment remain the highest since the onset of the crisis. Owing to the relaxation of hiring restrictions in 2016, public service activities recorded higher growth than in the same period of last year in education (particularly at the primary level), the health sector and public administration.
The decline in registered unemployment continues to be due particularly to the outflow into employment. This outflow remained almost unchanged year on year in the first four months of 2017. The inflow into unemployment, related primarily to the termination of fixed-term contracts, was smaller. There were also fewer first-time jobseekers, in our view as a result of better economic conditions and smaller generations of young people finishing school. At the end of April, 91,087 persons were registered as unemployed (13.6% fewer than in April 2016), which is close to the level recorded in the years of stable economic conditions before the crisis.
Average gross earnings per employee continue to increase at a moderate rate. After the typical seasonal upswing at the turn of the year related to the dynamics of extraordinary payments, earnings in the private and public sectors rose slightly again in February. In the first two months they were up 1.5% year on year in both sectors, remaining higher in industry than in service activities.
Consumer price growth continues to be influenced particularly by higher prices of services and energy. The prices of energy otherwise remain affected by further commodity price rises on global markets. The continuation of year-on-year price growth in services is underpinned primarily by the strengthening of private consumption (affecting the prices of leisure-related services); in some segments, price growth is also attributable to suppliers’ efforts to adjust prices in favourable economic conditions (resulting, for example, in price rises in telecommunication services). The prices of public utility services also continue to be higher year on year. Food and semi-durable goods prices remain up while those of durable goods remain down year on year.
Industrial producer prices and import prices remain higher year on year. The main reason for this is further commodity price rises on world markets, which, amid strengthening demand, are gradually passed on to import prices and the prices of domestic industrial producers.
Price and cost competitiveness improved at the turn of the year. In the last quarter of 2016, this was a consequence of a decline in relative prices and unit labour costs, while the improvement in the first quarter of 2017 mainly reflected the nominal depreciation of the euro, particularly against the currencies of Slovenia’s main trading partners outside the EU. The real effective exchange rate deflated by the relative HICP and ULC consequently declined to the level from one year before, which is close to the lowest figure since Slovenia’s entry into the ERM2 in 2004. In the first quarter of 2017, Slovenia was in the middle of euro area countries in terms of year-on-year movements of price competitiveness. Cost competitiveness movements in the last quarter of 2016 were among the more favourable, though this following a relatively greater deterioration in the first three quarters of the year.
The current account surplus increased further despite the worsening of terms of trade. It totalled EUR 2.8 billion (6.7% of estimated GDP) in the 12 months to February. The larger surplus in current transactions in comparison with the previous 12-month period was mainly due to the smaller deficit in primary income (lower estimates of reinvested earnings, smaller net payments of interest on external debt and higher receipts from the EU budget). The surplus in trade in services was also up, primarily owing to higher net revenues from construction works abroad and a larger surplus in trade in transport services. With further growth in domestic spending, imports of goods are also rising, which, amid deteriorated terms of trade, is reducing the surplus in trade in goods.
The net outflow of external financial transactions continues. External financial transactions recorded a net outflow of EUR 1.4 billion. The main reason for this was net outflows in portfolio investment, particularly financial investments of the BoS, commercial banks and insurance companies in foreign debt securities. Other investment recorded a net inflow, as the government was withdrawing deposits from foreign accounts. FDI flows mainly involved inflows of equity capital of foreign investors.
The volume of loans to domestic non-banking sectors increased further in March. The main factor continued to be increased household borrowing in the form of consumer and housing loans and, to a lesser extent, loans for other purposes. In our estimation, this is also a consequence of favourable labour market trends and higher consumer confidence, which is reflected in higher consumption and a rising number of transactions on the housing market. The decline in corporate loans continues to slow gradually year on year. This is estimated to be due to lower corporate deleveraging, given that new lending has already been low since the end of 2015. Enterprises continue to take advantage of more favourable borrowing conditions abroad, having borrowed more than EUR 150 million net abroad in the 12 months to February. It is the volume of long-term loans that is on the rise. The quality of banks’ assets continues to improve steadily.
The structure of bank liabilities continues to change in favour of non-banking sector deposits. It is mainly overnight deposits of enterprises and households that are rising, while the volume of government deposits in the banking system continues to decline. The share and volume of loans taken from foreign banks (i.e. dependency on foreign sources of funding) continue to decrease gradually.
Fiscal developments were favourable at the beginning of the year. In the first two months, the general government deficit on a cash basis was a good third lower than in the same period of 2016, while the primary balance turned from negative to positive in the same period. The favourable trends are based on the relatively rapid year-on-year growth in most revenue categories, receipts from the EU budget remaining an exception. The strong revenue growth is attributable, in addition to certain one-off factors, primarily to favourable economic conditions, including the labour market situation. These allow a moderate increase in other expenditures without jeopardising the fiscal consolidation. The year-on-year growth in expenditure in the first two months of this year was mainly underpinned by current transfers, particularly subsidies in agriculture, and compensation of employees.