Summary of macroeconomic developments, August 2018
Highlights:
- There is significant uncertainty in the international environment owing to the introduction of tariffs and sanctions. Foreign demand is expected to provide less pronounced support for domestic economic growth.
- The slowdown in growth in foreign demand is already being reflected in a more moderate growth in industrial production, exports, and turnover in services related to merchandise trade.
- There is an indication of stronger growth in government investment and the maintenance of robust growth in private consumption, albeit not to the extent that would yet result in a deterioration in the external position of the economy. The current account surplus over the preceding 12 months reached a record level of 7.7% of GDP in June.
- Employment growth is gradually slowing in the wake of firms’ increasing difficulties with labour shortages and more moderate growth in demand.
- A slowdown in the previous wave of rises in food prices saw inflation fall to the level of euro area average in July, although it remained above 2%. In line with the dynamic in private consumption, growth in services prices continues to outpace the overall rate in the euro area, while prices of non-energy industrial goods are continuing to fall, despite strong domestic demand and higher commodity costs.
- The country’s fiscal position is continuing to improve. New government borrowing is no longer envisaged for this year, and the general government debt is expected to fall below 70% of GDP by the end of the year according to the forecasts of the Stability Programme.
The introduction of tariffs and sanctions have brought significant uncertainty to the global economy. Survey indicators of global activity and activity in the euro area suggest a further moderation in economic growth. Manufacturing segments that are most exposed to global trade are under particular pressure. The weighted average forecast for this year’s economic growth in Slovenia’s trading partners has declined slightly in recent months, which is expected to result in less-pronounced support for domestic economic growth from foreign demand. Turkey’s economic difficulties have raised the risks to the stability of certain European banks that are exposed to the country, which had a temporary negative impact on the euro’s value against the US dollar. The price of a barrel of Brent crude has been fluctuating around EUR 64 since May, up 44% on a year earlier.
Growth in the Slovenian economy is also becoming more moderate. The Bank of Slovenia forecasts currently suggest that year-on-year GDP growth has fluctuated between 4.0% and 4.5% in the second and third quarters of this year. Because growth in import demand on euro area markets has slowed, this year’s year-on-year growth in Slovenia’s industrial production, merchandise exports, and turnover in services related to merchandise trade is also down slightly on the second half of last year. According to available data, at the same time there has not been a significant rise in growth in domestic final consumption and investment, for which reason growth in imports and exports is relatively aligned. Together with the ongoing fall in net interest payments on long-term debt to the rest of the world, this has resulted in a record surplus in the current account. The economic sentiment indicator in July and August was down on the second quarter, but remained encouraging. Firms’ estimates of growth in demand were also down, but remained favourable.
Employment growth has been gradually slowing since the beginning of the year, while firms’ employment expectations have similarly been declining. The workforce in employment excluding self-employed farmers was up 3.0% in year-on-year terms in June, 0.7 percentage points less than in January. In July there were 76,051 people registered as unemployed at the Employment Service, down 10.2% in year-on-year terms. The registered unemployment rate stood at just 7.9% in June. The number of available workers is declining rapidly, which is being reflected in the extremely high values in various indicators of labour shortages. However, real wage growth is not increasing, as the recent increase in nominal wage growth has merely compensated for higher inflation. Real household purchasing power is thus continuing to be strengthened primarily by employment growth. Year-on-year growth in the nominal wage bill over the first six months of the year stood at 7.5%, of which the rise in employment accounted for 3.8 percentage points, inflation for 1.9 percentage points, and real growth in average wages for 1.8 percentage points.
Year-on-year inflation in July was down 0.2 percentage points on June at 2.1%, thereby drawing level with the overall rate in the euro area. The fall largely reflected a slowdown in the previous wave of rises in food prices. Inflation continues to be driven primarily by services prices and energy prices, which each contributed 1 percentage point to July’s rate. In line with the dynamic in private consumption, growth in services prices continues to outpace the overall rate in the euro area, while prices of non-energy industrial goods are continuing to fall, despite strong domestic demand and higher commodity costs.
The fiscal position is continuing to improve. The surplus in the consolidated general government position over the first half of the year increased by EUR 122 million in year-on-year terms to EUR 261 million. Growth in revenues remained relatively high, on account of tax revenues and revenues from the EU budget. Another factor in growth in expenditure, particularly in the second quarter, was growth in investment, which will further strengthen, as the utilisation of EU funds is improving, and local elections are approaching. The relaxation of austerity measures and the employment growth are the reasons for the rise in labour costs, while less money is being earmarked for interest payments. According to the Ministry of Finance’s July forecast, the state budget surplus is expected to amount to EUR 227 million this year, which would contribute to the attainment of the target general government surplus of 0.4% of GDP. New borrowing is no longer envisaged for this year, and the general government debt is expected to fall below 70% of GDP by the end of the year according to the forecasts of the Stability Programme.