Economic and Financial Developments, July 2019

As economic growth slows slightly, the first signs are also being seen of a slowdown on the labour market

Economic growth in the euro area again slowed slightly in the first quarter, and the outlook remains similar. In contrast to the euro area, economic activity in Slovenia remains solid in the wake of a gradual slowdown, and it is mainly the situation in industry that is less favourable. This situation is also being reflected on the labour market, where the first signs are being seen of a slowdown in employment growth, although it remains solid, mainly on account of the hiring of foreign nationals. These are the key findings of the latest issue of the Bank of Slovenia’s Economic and Financial Developments publication. It also reveals that while inflation is still moderate, it is primarily being driven by domestic factors.

The outlook for the global economy is continuing to deteriorate, as a result of rising trade and political tensions, which are weakening trade, industry and investment. International institutions have thus cut their global economic growth forecasts for 2019 to around 3.1%, while growth in the euro area is forecast to barely exceed 1%. Economic growth in the euro area stood at just 1.2% in the first quarter, and is expected to have remained weak in the second quarter, given that the survey indicators remained rather low, particularly in industry.

Economic growth also slowed slightly in Slovenia, but remains very solid compared with the euro area. While activity is low, uncertainty is also rising in the European economy, although Slovenia’s export sector remains relatively robust for now. The Bank of Slovenia finds that some segments of manufacturing are already facing declining output, which was also the main reason for the run-down of inventories in the first quarter of this year. This was the main factor in the fall in year-on-year growth in domestic demand to 1.8% and in economic growth to 3.2%. Growth in other domestic demand aggregates has remained relatively high. Year-on-year growth in investment has strengthened slightly from the end of last year, while its structure is increasingly shifting towards construction. Private consumption has continued to strengthen, coinciding with increased growth in the real wage bill. According to the latest monthly activity and confidence indicators, economic growth is expected to have slowed again in the second quarter, and the situation is thought to have been less favourable in industry in particular.

Employment growth is showing the first signs of slowing. The first quarter saw the lowest rate for two years, albeit a reasonable 2.6%, mostly driven by the hiring of foreign nationals. The year-on-year fall in unemployment has slowed this year, partly on account of its structure, where the share of difficult-to-employ people is increasing. The surveyed and registered unemployment rates are both continuing to fall: the former to 4.8% in the first quarter and the latter to 7.6% in April.

Year-on-year nominal growth in the gross average wage stood at 4% in April. Because productivity growth is low, these wage developments are already raising growth in unit labour costs. For now this remains within the limits that maintain external competitiveness: it is not far removed from the euro area average, and is actually slightly lower than in Germany.

Figure: Contribution to year-on-year rise in the workforce in employment by foreign nationals (percentage points, unless stated)

Sources: SORS, Bank of Slovenia calculations

The current account surplus is gradually narrowing. It amounted to 5.4% of GDP in the 12 months to May, down 1 percentage point on a year earlier. The main factor in the narrowing surplus is the decline in the merchandise trade surplus, as domestic final consumption continues to strengthen. The surplus of trade in services is continuing to widen, as a result of continuing high growth in exports of a wide spectrum of services.

Inflation is primarily being determined by domestic factors this year. Headline inflation reached 1.9% in June, the highest rate since last November, as services remain its primary driver. The domestic inflationary pressures are primarily coming from wage growth, which is raising production costs, and is also allowing them to be passed through into final consumer prices via growth in demand. The higher labour costs are primarily being passed through into growth in services prices, as these are subject to considerably less international competition than industrial goods. Inflationary pressures from the rest of the world have been relatively weak this year, as oil prices linger at lower levels than a year earlier, which is holding down growth in domestic energy prices. It was a similar case with food commodity prices until May, but they rose in year-on-year terms in June, and played a part in reviving year-on-year growth in food prices, alongside the year-on-year rise in import prices.

Slovenia’s fiscal position remains favourable, thanks to the ongoing solidity of the cycle, and there was also a further improvement in its position on international financial markets. General government revenues are continuing to increase relatively rapidly, particularly those tied to the labour market. On the general government expenditure side, investment continues to strengthen, while wage expenditure is also up, in line with the agreement between the government and the trade unions. 

Publication is available here.