Summary of macroeconomic developments, March 2019

Economic growth in the euro area slowed further at the end of last year, and the trajectory has remained similar this year. The slowdown in economic growth in Slovenia over this period has been much smaller. The slowdown in foreign demand brought lower export growth, but the relatively high economic growth was supported by domestic factors. Employment growth remained high last year, and firms are continuing to report labour shortages in in-demand roles. Wage pressures have nevertheless remained moderate, and wage growth is within the bounds of productivity growth. Inflation remains low, both in Slovenia and in the euro area overall. While growth in services prices has picked up, the main factor has been a fall in energy prices.

The main factor in the slowdown in economic growth in the euro area, where year-on-year growth stood at just 1.2% in the final quarter of last year, was the rising uncertainty in international trade. Growth was also weak in the early part of this year: the economic sentiment indicator and the manufacturing PMI declined further in February. In February the European Commission sharply reduced its forecast for this year’s economic growth in the euro area by 0.6 percentage points to just 1.3%. The exchange rate has remained just below USD 1.15 to the euro over the last four months, with only minor fluctuations.

Figure 1: PMI in the euro area

Source: IHS Markit

Economic growth in Slovenia slowed just slightly in the final quarter of last year. GDP was up by 0.8% in quarterly terms, and by 4.1% in year-on-year terms. Private-sector services continued to make a significant contribution to growth, partly as a result of ongoing rapid growth in exports of services, and partly as a result of the strengthening private consumption being driven by the buoyant labour market. The situation in the export sector is weaker, and industrial production in December was down in year-on-year terms. At the beginning of this year manufacturing firms significantly reduced their forecasts of growth in short-term demand. The weak international environment has been driving a slowdown in investment in machinery and equipment for several quarters now. Construction’s contribution to GDP growth declined slightly, as the pronounced growth in construction investment faded. Despite declining in February, the economic sentiment indicator remained relatively high, as domestic factors remained relatively encouraging.

Figure 2: Contributions to year-on-year GDP growth in Slovenia (percentage points)

Source: SORS

In the labour market, employment growth remained high until the end of last year. The workforce in employment in the final quarter of last year was up 28,000 or 2.8% in year-on-year terms. The surveyed unemployment rate fell to a low 4.4%. Wage pressures were mitigated by the structure of employment, which was increasingly based on the hiring of non-residents and in sectors with below-average wages. Wage rises did not weaken the cost-efficiency of the economy, at least last year, as they did not outpace productivity growth, which is also important from the perspective of maintaining the competitiveness of Slovenia’s economy.

Year-on-year inflation as measured by the HICP remained low in February (at 1.3%). The slowdown from the higher levels seen for most of last year was mainly attributable to a fall in prices of refined petroleum products in December and January, while services prices remain the fastest-growing category, driven by high growth in demand.

Last year the public finance position was affected by high growth in tax revenues, one-off factors and a further decline in interest payments on public debt. Despite the general government surplus and the decline in government debt as a ratio to GDP, the Fiscal Council and the European Commission are warning of the possibility of the government’s budget plans deviating significantly from the fiscal rules this year. 

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