Productivity report 2022
Productivity Report 2022
Slovenia is gradually making progress in productivity and most of its key factors, but its structural development in terms of transition to innovation-driven growth and circular economy is too slow, and the modernisation and transformation processes are too shallow. This is reflected in the relatively slow narrowing of the development gap with the EU average, the still large development gap with the innovation leaders and the loss of the lead over the Visegrad Group (V4).
Productivity is a crucial basis for greater material prosperity of the population. To accelerate its growth, sound economic policy is needed, taking into account new challenges related to the energy crisis, high inflation and changing global economic relations. While keeping focus on maintaining economic potential and competitiveness, it should be more ambitious in addressing long-term challenges and especially Slovenia’s untapped opportunities.
The report concludes that the corporate sector has demonstrated a high degree of resilience, as reflected in its ability to cope with cost pressures and its strong financial position; export performance improved until 2021. However, a successful and, from the perspective of further development, urgent transition to an integrated, smart circular economy requires more decisive action. Urgent action is needed to significantly accelerate investments and structural changes in both the government and corporate sectors aimed at: a strategic transition to innovation-driven growth and a low-carbon circular economy, accelerated human resource development and strengthening of social capital, and a more agile business environment with a strengthened ecosystem approach.
Current situation and trends...
... in Slovenia’s productivity and competitiveness
Productivity (GDP per employee in purchasing power standards) reached 84% of the EU average in 2021. This only means that after more than a decade of slow productivity growth, Slovenia’s gap with the EU average has returned to the level it was at before the onset of the global financial crisis in 2008. In the long run, productivity was driven by the export-oriented parts of the economy. Recently, export competitiveness has been strengthened or at least maintained by the majority of energy- and emissions-intensive activities, which are currently most exposed to the challenges of the energy crisis and the urgent green transition. Knowledge-intensive services have long represented an untapped potential.
In 2022, as the economy cools, there are signs of a gradual cyclical slowdown in real productivity growth in the business sector, while the export market share in the goods market started to decline already in 2021. Labour cost growth increased slightly in the first half of 2022 against a backdrop of high inflation and labour shortages, and growth in prices of market services also accelerated. Should the situation worsen, domestic cost pressures could add to the global cost pressures that began to intensify in 2021 due to the surge in commodity prices.
Given the ageing population and the already high employment rate, raising productivity is a prerequisite for reducing the development gap (GDP per capita in purchasing power standards) and increasing prosperity. Therefore, investment and total factor productivity growth need to be strengthened, i.e. production factors should be used more efficiently. This requires a sound economic policy aimed at ambitious promotion of long-term productivity growth, which will enable, among others, a sustainable wage growth while maintaining a competitive position.
... in financial performance of companies
The overall financial situation of the corporate sector remained quite favourable in 2021. In 2020, the ability to repay debt temporarily deteriorated in some of the market services most affected by the COVID-19 epidemic (accommodation and food service activities, arts and recreation), while in 2021 it deteriorated in holding and leasing companies. The share of companies with a relatively high risk of insolvency was lower in 2021 than during the global financial crisis. The shares of these companies in employment, capital and value added of the entire business sector were even lower than in 2008.
The corporate sector has weathered the COVID-19 crisis quite successfully with the help of a number of intervention measures, as the solvency of the corporate sector had not deteriorated by mid-2022 and the number of bankruptcy proceedings initiated against legal entities and sole proprietors was lower in the first nine months of 2022 than in the same period of 2019. However, the corporate sector is facing new challenges due to the war in Ukraine and emergency situations, especially in the energy markets, amid high inflation and monetary policy tightening. The related economic policies must strive at supporting healthy cores of the economy that are not over-indebted and are viable in the long term, especially development-oriented niche parts of the economy that have great growth potential.
... in a changed global economic context
The changes in global value chains (GVCs), in which Slovenia, as a small open economy, is relatively well integrated, are crucial for its competitiveness. The transformation of GVCs, which may be reflected in a partial or total reshoring of production to Europe, represents an untapped potential for Slovenia and for other Central and Eastern European countries. Survey data for Slovenian companies show that there have been no major changes in the production locations in the last two years, companies only report of a change in the geographical structure of input suppliers. Slovenia lags behind in terms of added value in exports, especially behind the innovation leaders, which points to the need to further strengthen the international integration of (especially knowledge-based) service activities and, above all, to upgrade the functions performed by Slovenian companies in non-service activities.
... and under the impact of the transition to a low carbon and circular economy
According to the targets adopted in the National Energy and Climate Plan, GHG emissions in Slovenia are to be reduced by about one third by 2030 and completely eliminated by 2050. However, national targets need to be revised upwards due to the more ambitious EU targets and we need to move from a linear to a circular management model. The long-term impact of climate change on overall economic activity and employment is estimated to be modest. The challenge, however, are the associated changes in the structure of the economy, especially in sectors that are under pressure from the green transition (energy, mining, energy-intensive industry, construction and agriculture). On the other hand, activities that have a positive impact on the environment open up new development opportunities and new jobs that require new knowledge and skills.
A decade ago, sustainability at the corporate level was seen more as a niche and a function of public relations, while in recent years, it has become a prerequisite for corporate success and a source of new competitive advantage. The green transformation of the corporate sector is not only accelerated by legislation, which will become even stricter in the future, but at the same time consumers, investors and employees increasingly expect a focus on sustainability. In the future, this trend will become even more pronounced, in part due to generational effects, also in Slovenia. Businesses must therefore optimise their activities in order to increase their returns, also in terms of creating wider economic, social and environmental benefits in accordance with a new paradigm of integrated smart circular economy.
Key factors of productivity with recommendations on how to move forward
With an agile business environment and ecosystem approach
Slovenia ranks in the second half of EU Member States in most institutional quality indicators. Addressing structural problems in the institutional environment, especially de-bureaucratisation, therefore remains a priority, and from a productivity perspective, government accountability and efficiency, especially in supporting the business activity, becomes an increasingly important challenge. The latter refers both to public services provided directly by the State and to the creation of a scientific research, innovation and digital ecosystem. Slovenia’s lagging behind is greatest in the indicators of participation and state responsibility, which are also increasingly important for productivity and competitiveness in an ever faster changing and more complex environment.
The tax system is often mentioned as one of the obstacles to doing business. Given the development challenges that require public financing and the tax changes adopted so far, which have resulted in the lowest ever tax revenues as a % of GDP, we expect that further reductions in the tax burden will be challenging. However, it is all the more important to address weaknesses related to the complexity of the tax system, in particular the number of tax procedures and the time needed to comply with tax obligations, as well as the frequency of changes in tax legislation, including tax rates.
With an inclusive attitude and strengthening of social capital
Social capital is an increasingly important productivity factor that has an impact on the quality of life in society in general. In terms of self-perceived employee performance and engagement, Slovenia ranks around the EU average, and especially in terms of self-perceived employee performance, Slovenia still lags far behind the innovation leaders. At the same time, Europe as a whole ranks third among the world’s ten major regions in terms of employee performance and last in terms of employee engagement. Employee engagement therefore remains an important challenge in strengthening social capital. In order to increase employment and job quality, more attention should be paid to working time flexibility, also to enable a better reconciliation of work and family life, and to compliance with health and safety at work regulations.
With human resources development
As the educational level of adults and persons in employment increases, so do the labour market mismatches. The proportion of people with tertiary education who are employed in occupations for which an upper secondary qualification is sufficient is increasing due to the following factors, among others: (a) mismatch between enrolments in upper secondary and tertiary education and the demand for labour, indicating a lack of strategic planning for human resource development, and (b) too slow and unambitious transformation of the business sector. The green and digital transformation dictate the adaptation and strengthening of young people’s knowledge, skills and competences and intensive retraining of the workforce, as well as other changes that require a stronger focus on cross-cutting skills. In view of the growing labour shortage, Slovenia should more actively attract professionals from abroad by simplifying procedures, providing information support and generally improving working conditions and opportunities for professional development. Inclusion of immigrants and migrants who are not in employment or do not have access to labour market requires more proactive migration and integration policies.
With a strategic transition to innovation-driven growth
After a sharp deterioration in 2017–2019, Slovenia only managed to surpass the 2015 European Innovation Index score in 2022. During this period, the lead over the V4 countries has narrowed, while the gap with the innovation leaders has not narrowed significantly. The main reason for the slow transition to innovation-driven growth is insufficient investment, both from the public and corporate sectors.
In the field of digital transformation, Slovenia is making progress in the area of digital public services, but is losing its relative advantage in connectivity and integration of digital technologies, especially more sophisticated technologies. This shows that the modernisation processes are relatively shallow and less thorough than in other countries. This is also confirmed by the decline in the share of companies at the advanced Industry 4.0 readiness between 2018 and 2022 (from 26.3% to 24.4% of the companies surveyed). The COVID-19 crisis has also not significantly accelerated the profound digital transformation of businesses. The crisis mainly led to an accelerated use of basic digital tools and an increase in online sales, while its impact on the use of more sophisticated technologies or their integration was much smaller. In order to accelerate productivity growth, Slovenian companies must undertake a more comprehensive and ambitious (digital) transformation, both in terms of digitalisation and sustainability and in terms of strengthening organisational factors, with a stronger focus on penetration, creativity and innovation.
... and low-carbon circular economy
Greenhouse gas emissions and energy and material consumption have decreased in Slovenia in the long term, and emissions, energy and material productivity have improved. The gap with the EU average (with the exception of material productivity) has not narrowed significantly, so the transition to a low-carbon and circular economy requires even stronger action. The need to accelerate the green transition is further dictated by rising commodity prices, especially the sharp increase in energy prices, which has increased cost pressures, especially in 2022. In the corporate sector, the burden of material costs on revenues has largely declined over the period 2008–2021 and the surge in material and intermediate goods prices in 2021 has not yet been reflected in an increase in the ratio of material costs to operating revenues, which means that, on average, companies have either passed on higher material costs to higher prices or increased their resource use efficiency.
Particular attention should be paid to energy- and emissions-intensive manufacturing activities (manufacture of paper, non-metallic mineral products, metal products, chemical industry), which are at greater risk of carbon leakage as they are more exposed to international competition. In the period 2008–2021, companies that are the largest energy consumers were more successful than average in reducing the burden of energy costs on operating revenues, and most energy- and emissions-intensive products were able to maintain or even improve their competitive position on the global market. With comparatively lower tax burdens on individual energy sources, this was also a consequence of the slow progress in meeting climate and energy targets.
Slovenian companies are much less concerned about the impact of climate change on their business than companies in most other EU Member States. The main motivation for companies in Slovenia are savings and legal requirements, which is reflected in short-term-oriented measures. However, Slovenian companies lag far behind in promoting sustainable investments and in the overall sustainable transformation of companies in terms of product differentiation, the use of advanced sustainable technologies and the innovation of sustainable business models.
In order to achieve the energy and climate goals, the government will also have to significantly accelerate its activities, with between EUR 11.6 and 12.3 billion available for these purposes in the period 2021–2030. Since, according to the National Energy and Climate Plan, investments of EUR 28 billion would be required, this indicates a considerable gap, which, however, is not insurmountable with an appropriate, broad-based economic and sustainability policy. In addition to incorporating the investment potential of private sources, the upgraded policy must also include a broad package of measures, from price-based instruments, subsidies and standards, to the development of new technological solutions, the modernisation of infrastructure, the promotion of sustainable entrepreneurship, retraining and awareness-raising.