Provisional figures already showing a sharp fall in economic activity

The initial indicators confirm that the economic situation in the euro area took a sharp downturn going into the second quarter. It was a similar case in Slovenia, where there has been a huge decline in firms’ demand expectations and the beginnings of a downturn on the labour market. In its Economic and Financial Developments publication released today, Banka Slovenije emphasises that Slovenia is at least going in with good macroeconomic indicators, in contrast to the previous crisis.

The global economic situation is deteriorating sharply because of the coronavirus pandemic. For the euro area the initial indicators are pointing to a sharp fall in economic activity and a downturn on the labour market as early as the end of the first quarter. A further decline is expected in the second quarter. Compared with the economic shock in 2008 and 2009, on this occasion it is a number of service sectors that will be hit particularly hard, given the nature of the measures to curb the spread of the virus, and signs of this are already evident in survey assessments of firms’ future demand. Amid the rapid spread of the pandemic and the great uncertainty surrounding its duration, economic forecasts have been cut sharply over the last few weeks, and this year’s recession could therefore be even harsher than currently estimated.

The demand shock has brought a significant fall in oil prices, which by 9 April were down more than 60% in year-on-year terms, while other commodity prices have also fallen, which is strengthening deflationary pressures in the international environment.

A sharp global shock of this type requires unprecedented action by central banks and governments to prevent financial, economic and social collapse. Under the measures known to date, the direct and indirect aid through fiscal and monetary policy amounts to approximately EUR 5,000 billion in the EU, and fully USD 10,000 billion in the US, a significant share of which is being absorbed by the ECB and the Fed respectively.

Slovenia is also deep in crisis, although the available survey figures do not yet reflect its full magnitude. The economic sentiment deteriorated sharply in March, although the indicator remained significantly above its low of the previous crisis. Firms were still assessing current demand as relatively favourable in March, although the first more serious signs of the difficulties that they now face were revealed in their assessments of demand expectations. These declined sharply in March, as manufacturing and private-sector services (excluding trade) each recorded one of their largest monthly declines to date.

Figure: Demand expectations over the next three months

Source: SORS, Banka Slovenije calculations

The first signs of a sharper downturn on the labour market are also appearing. The number of people newly registering as unemployed in March was up more than 56% in year-on-year terms, while firms’ employment expectations indicators also declined sharply. The employment expectations indicator in services other than trade recorded its largest monthly decline since the outbreak of the previous crisis in November 2008.

Falling electricity prices saw inflation in Slovenia slow by more than the euro area average in March. Inflation was down 1.3 percentage points on February at 0.7%. Inflation in the euro area also stood at 0.7%, down 0.5 percentage points on February. The sharper slowdown in inflation in Slovenia was primarily attributable to falls in electricity prices, which were cut by almost 30% as part of the measures to alleviate the social and economic impact of the novel coronavirus epidemic. The drop in global oil prices saw further slight falls in fuel prices, although falling oil prices can be expected to have a greater impact on inflation in Slovenia in April.

How ready for the crisis is Slovenia?

Slovenia’s macroeconomic indicators were in good shape as it entered this year’s crisis, with both the corporate and financial sectors in a better position. Corporate and household indebtedness remain low, and well below the euro area average. Slovenia’s public debt amounted to 66.1% of GDP last year, well below the euro area average, but still significantly higher than at the outbreak of the previous crisis (22.5% of GDP). The net debt position of the government sector stood at 19.3% of GDP, significantly better than in the previous crisis. The surveyed unemployment rate is one of the lowest in the euro area. The financial sector is also in good shape. Banks have good capital adequacy and a sound liquidity position. The structure of bank funding is also significantly better than in the period before the previous crisis. The majority of these indicators will deteriorate significantly in the crisis, but their current levels provide a solid basis for combatting the crisis.

Banka Slovenije also drew up analysis a few days ago that shows that the Slovenian economy will pay a heavy price in doing battle with coronavirus, under the various scenarios examined.

Publication is available here.