Press release: Moderate growth in investment in machinery and equipment

Governing Board of the Bank of Slovenia at today's meeting discussed a new financial andeconomic developments.

Economic growth in Slovenia slowed slightly more towards the end of the year, at least on the basis of the available monthly figures. Although the situation on the main markets going into the final quarter of 2015 was stable, at least on aggregate, Slovenia’s merchandise exports over the first ten months of the year slowed more than had been expected. The slowdown was most likely temporary: by November exports were already increasing. At the same time the major exporters remained relatively optimistic in their assessments of expected orders, while the export sector’s cost competitiveness relative to firms elsewhere in the euro area strengthened further. In the wake of the temporary deterioration in exports, the figures suggest that the recovery in domestic demand has remained moderate at best; monthly growth in turnover remained low in the retail sector, and actually came to a halt in other services. The current account surplus over the preceding 12 months remained high at 7.6% of GDP in October. 

Quarterly economic growth slowed in the third quarter of 2015, albeit only as a result of a decline in construction activity. This was the result of the end of a strong government investment cycle prompted by the uneven disbursement of EU funds. The decline in construction investment was also the sole factor in the decline in year-on-year growth in domestic demand to just 0.3%. The slowdown in aggregate growth conceals some positive changes in the economy. 
The robustness of economic growth from the perspective of value-added increased in the third quarter, and the structure of investment improved again. The contribution made to GDP growth by industry remained at the level of previous quarters despite the slowdown in export growth, while there was a sharp increase in growth in services, which accounted for just over a half of aggregate growth. At the same time there were signs of a reversal towards moderate growth in investment in machinery and equipment, which is being facilitated by the high corporate financial surplus. Year-on-year growth in household consumption and government consumption remained positive, although both rates remain among the lowest in the euro area. This was reflected, via weak imports, in the high contribution made by net trade, which accounted for 2.3 percentage points of the GDP growth of 2.5% in the third quarter.

The Bank of Slovenia assesses that the risk to growth in foreign demand is continuing to increase in 2016. Signals from the international environment are mixed. The geopolitical turmoil in the Middle East is worsening, albeit without significant economic consequences for the moment. There was no significant decline in the weighted growth forecasts for the main trading partners towards the end of 2015, while the economic sentiment in the euro area remained stable. Estimates of global economic growth were continuing to decline at the same time. Growth in the major economies remains uneven, which has also begun to be reflected in a divergence between the monetary policies of the ECB and the Fed. Via the impact on the euro exchange rate this will continue to contribute positively to the price competitiveness of the euro area export sector, while the current maintenance of low commodity prices will prevent an increase in its input costs, although deflationary pressures will therefore be maintained.

Aggregate developments on the labour market remained positive in the second half of 2015. Flexible forms of employment remained prevalent: self-employment accounted for almost a third of the rise in employment. The labour market reforms of 2013 are no longer having the desired effects, as the proportion of permanent new hires is again declining and the proportion of those registering as unemployed because their temporary employment has ended is increasing. Wage growth remained very low, partly as a result of increased employment of low-income workers. The structure of employment is being reflected in low growth in labour productivity, which is nevertheless outpacing wage growth, which is further improving cost competitiveness.

Slovenia recorded deflation overall in 2015, for the first time since price growth begun to be measured by the HICP. This was the result of diminishing pressures from the international environment and the domestic environment. Prices fell more sharply than those in the euro area overall, as a result of the larger impact of oil prices on inflation in Slovenia, and as a result of weaker growth in final consumption. 

Slovenia’s main objective in the fiscal realm in 2015 was to reduce its general government deficit to below 3% of GDP. The objective was realised according to the latest estimates; the official annual figures will be known at the end of March 2016. General government revenues over the first three quarters of 2015 were up 3.8% in year-on-year terms, as a result of the improved macroeconomic situation and a rise in levels of certain taxes and contributions. General government expenditure was approximately unchanged in year-on-year terms after the exclusion of one-off developments. 
With the exception of the general government sector, all the domestic institutional sectors have recorded financial surpluses for the third consecutive year. The overall surplus against the rest of the world over the 12 months to the second quarter amounted to 6.2% of GDP, an indication that national saving is significantly larger than investment. Corporate saving has now surpassed the level seen before the crisis. At the same time investment is merely half of its pre-crisis level, although the level of investment was unsustainably high at that time. The non-financial corporations sector also directed its surplus into paying down debt, while households directed their surplus into currency and bank deposits. The restoration of confidence in the banks has improved their funding structure, thereby reducing systemic risks, although the shortening of average funding maturities is simultaneously increasing the instability of funding structure. Despite favourable financing conditions and increasing demand for loans, the banks have remained cautious with regard to investments.

New publication: Summary of macroeconomic developments, January 2016