A lengthy recovery for certain sectors, but opportunities beckon for some

05/27/2020 / Press release

The global economy is in shock, and this is being reflected in record falls in numerous economic indicators. Everything therefore points to a significant recession in the first half of 2020. The Slovenian economy too is facing a major crisis. Moving into the second quarter, some indicators hit their record lows. There was also a severe downturn in the labour market: the largest inflows into unemployment came from accommodation and food service activities, manufacturing, wholesale and retail trade, and employment agencies. Banka Slovenije’s Summary of macroeconomic developments publication also finds that it is already clear that for some sectors the recovery will be a lengthy process, while for other sectors the crisis presents an opportunity.

The record falls in numerous economic indicators, which are reaching lower levels than during the financial crisis of 2008 and 2009, point to a significant recession in the global economy in the first half of 2020. Economic activity in the euro area contracted by 3.8% in the first quarter of this year, and was down 3.2% in year-on-year terms. An even more pronounced fall in economic activity and a sharp downturn in the labour market can be expected in the second quarter.

The Slovenian economy too is facing a major crisis. Certain confidence indicators (economic sentiment, manufacturing confidence, demand forecasts, consumer confidence) hit record lows in April. They mostly rebounded in May, but remained well below their levels of last May. Imports and exports were down more than a tenth in year-on-year terms in March, with a particularly pronounced decline in tourism, as might be expected. Volume turnover in the retail sector was down 15.1%, while industrial production and construction activity also declined.

A number of alternative indicators suggest that the largest decline in domestic economic activity came immediately after the lockdown was tightened on 16 March. For example, the total value of card payments towards the end of March was down 41% on its multi-week average before the introduction of the aforementioned measure, while payments at POS terminals were down fully 47%. Freight tonnage on motorways was down 51% in year-on-year terms at the end of March.

The gradual lifting of the measures brought a partial revival in economic activity, particularly after the relaxation of sales of durables and certain services on 20 April. At the same time a number of large firms began restarting production, at least to a limited extent. In the third week of May the value of card payments actually exceeded – at least temporarily – its multi-week average from before measures were imposed, and freight tonnage also recovered slightly. Similar conclusions could be drawn from electricity consumption, which was down 20% in year-on-year terms in the second week of April, comparable to the largest decline in 2009, but was down only 12% in the third week of May.

The domestic labour market has undergone a severe downturn, although the rise in the number of unemployed is slowing. The number of people newly registering as unemployed over the first four months of the year was up 46.1% in year-on-year terms, the largest rises coming in accommodation and food service activities, manufacturing, wholesale and retail trade, and employment agencies. Unemployment continued to rise in May, albeit significantly less than in April.

The Ministry of Finance is forecasting a general government deficit of 8.1% of GDP this year, while the general government debt is expected to reach 82.4% of GDP. The official end of the epidemic in Slovenia will see certain fiscal measures that had placed a heavy burden on the public finances (including funding of wage compensation and social security contributions for furloughed employees) lifted at the end of May. However, a third package of measures is in the process of being adopted, and these will widen the deficit. Some measures will remain in place, for example those to alleviate liquidity difficulties for firms and households through government guarantees, which are available until the end of the year. Alongside these measures, the general government position is also under pressure from the decline in economic activity, which will reduce revenues.

A lengthy recovery for certain sectors, tourism in particular

Action by governments and central banks at the global level has increased the chances of a quick reignition of economic activity, but the response of consumers remains an unknown. Given the downturn on the labour market, and the general level of consumer caution, household consumption will decline, in particular demand for non-essential goods. If uncertainty on the part of firms makes the labour market slow to recover, the period of weak demand will also be longer, which will in turn weaken the labour market, and with it inflation. Social distancing might continue to make it hard for numerous services to operate, most obviously tourism.

The World Travel and Tourism Council estimates that tourism-related activities account for more than a tenth of Slovenia’s GDP. According to the Slovenian Tourist Board’s projections (a decline in global tourism revenue of 20% to 30%, and five to seven years needed for recovery), Slovenia could lose tourism revenues of between EUR 550 million and EUR 830 million from foreign visitors.

Other issues facing the Slovenian economy include the situation in neighbouring Italy, Slovenia’s second most important trading partner, and the very weak global demand for cars, at least at present, which is sharply reducing activity in manufacturing in Slovenia.

New opportunities for certain sectors

Meanwhile, in certain sectors a number of new opportunities are being opened up as a result of the current situation. Demand for pharmaceutical products and medical devices will remain extremely strong, at least temporarily. Although social distancing is a powerful limiting factor for a number of traditional services, it is also accelerating the digitalisation of the economy and strengthening the development of higher-tech services and their export potential. Firms’ experience of organising their production during the fight against coronavirus could also lead to technological improvements in the direction of greater automation. Another new opportunity for Slovenia could be the shortening of European firms’ production chains by switching production back to Europe from Asia, with the aim of ensuring more secure access to intermediate goods. This could increase inflows of FDI, and might improve the situation on the labour market. Another opportunity for promoting investment is the European Green Deal, which with the right support from the government could help to make the economy more environmentally sustainable.

Figure 1: Fall in arrivals at work

Note: The figures illustrated are calculated from a user sample, and therefore do not necessarily reflect the behaviour of the entire population. *Change relative to the median of the relevant day in the five-week period between 3 January and 6 February 2020.
Sources: Google, Banka Slovenije calculations

Figure 2: Fall in visits to shopping centres, catering establishments and cultural institutions**