Economic developments in Slovenia: growing impact of the adverse situation in the international environment

The figures available thus far suggest that the low economic growth seen in the euro area in the first half of this year was followed by similar developments in the third quarter. The adverse international environment also began to discernibly spill over into the Slovenian economy, where domestic factors remain relatively favourable. On the labour market, the decline in economic growth is gradually being reflected in a slowdown in employment growth, although unemployment is continuing to fall. Meanwhile high wage growth, which is outpacing productivity growth, is weakening the cost competitiveness of the Slovenian economy, although it is driving growth in domestic demand. These are the key findings of the latest issue of the Bank of Slovenia’s Economic and Financial Developments publication, which was released today.

Global economic growth slowed in the first half of this year, while the medium-term outlook also deteriorated. Rising trade and political tensions have seen global trade and industry get progressively weaker, and growth in investment declined. Economic growth was also low in the euro area in the second quarter, and indicators suggest a continuation of these developments in the third quarter.

The worsening international environment has also begun to significantly affect the Slovenian economy. GDP in the second quarter was unchanged from the previous quarter, while the available monthly figures suggest that growth in the third quarter was also rather weak. Growth in industrial production was low over the summer months. It was mostly driven by high-tech sectors, most notably pharmaceuticals. Construction activity in July was also unchanged in year-on-year terms, as government investment stagnated over the summer months. By contrast, the latest figures for growth in turnover in a number of service sectors remain favourable, which is coinciding with a further rise in exports of services and the continuation of robust private consumption. The economic climate is gradually cooling; in September this was mainly attributable to a decline in consumer confidence, although, contrastingly, firms have slightly raised their demand expectations in recent months.

The situation on the labour market remains favourable for now. Year-on-year growth in employment is slowing, but remains high relative to economic growth. The survey indicators of employment expectations suggest that this trend will continue at least until the end of the year. The number of people registered as unemployed fell below the 70,000 mark in September, and was down 5.3% on September of last year. Nominal year-on-year growth in the average gross wage increased to 5.2% in July, among the highest rates of the last decade. Real wage growth was also relatively high, which is allowing for growth in domestic demand, although this is not being supported by productivity growth. Growth in unit labour costs is also outpacing the euro area average in consequence, as has been the case in the Baltic states, Cyprus, Slovakia and, in part, Germany. 

After rising in August, inflation slowed to 1.7% in September, but remained 0.8 percentage points above the euro area average. The slowdown was partly attributable to a negative contribution by energy prices, and smaller contributions from food price inflation and from non-energy industrial goods, the latter despite the spike seen in August. Year-on-year service price inflation rose to 3.7%, in line with expectations amid numerous price rises. Core inflation excluding energy, food, alcohol and tobacco stood at 2.3% in September, 1.3 percentage points higher than the euro area average. Slovenia’s relatively high core inflation is attributable to domestic inflation factors, most notably higher unit labour costs. By contrast, domestic inflationary pressures are being eased by the year-on-year fall in import prices, which has been most pronounced in the energy category.

The government sector is still running a surplus: it amounted to 0.6% of GDP over the 12 months to June, as year-on-year growth in general government expenditure in the first half of the year slightly outpaced growth in general government revenues and nominal economic growth. Of the major aggregates, the fastest increase was in investment expenditure, while the largest contributions to growth in expenditure came from employee compensation and social benefits. The tax break for annual leave allowance slowed the growth in general government revenues. The interest burden is declining for the fourth consecutive year. The general government debt stood at 67.7% of GDP at the end of June, having fallen in nominal terms and as a ratio to GDP since the end of last year. The Bank of Slovenia draws attention to the increase in macroeconomic risks, which demands caution in planning and administering fiscal policy.

Figure 1: Slowing economic activity indicators in Slovenia

Sources: SORS, Bank of Slovenia calculations Note: Real index of turnover in services and trade, real index of industrial production, and real index of amount of construction put in place, seasonally adjusted figures.

 

Figure 2: Wage growth outpacing productivity growth

Sources: SORS, Bank of Slovenia calculations Note: Productivity is estimated as nominal GDP per member of the workforce in employment, excluding self-employed farmers.

Publication undergoing translation.