Drop in economic activity sharpest in April; labour market heavily affected by emergency measures

The forecasts of international institutions continue to worsen slightly. According to the latest OECD and IMF forecasts, this year’s decline in global GDP is expected to be significantly larger than during the financial crisis of 2008 and 2009, and the forecasts for the euro area are particularly bad. On the other hand, certain figures in recent weeks have been better than expected and indicate the possibility of a relatively quick rebound. As expected, the drop in domestic activity in Slovenia was sharpest in April according to short-term indicators, while the outlook for the second half of the year is more favourable. In its recent Economic and Financial Developments, Banka Slovenije also finds that the labour market, which remains heavily affected by government emergency measures, has deteriorated significantly.

Euro area countries differ in terms of the length and severity of their pandemic containment measures, but all will be in recession this year. The majority of countries began lifting the containment measures in May, but the recession in the euro area deepened as expected in the second quarter of this year.  There are signs of a recovery in the second half of the year, but given the considerable uncertainty surrounding the further spread of the virus, it will most likely be weak and very gradual.

As expected, the drop in domestic economic activity in Slovenia was sharpest in April according to short-term indicators. In the context of the lifting of restrictions and the introduction of anti-crisis measures, the situation remained bad over the remainder of the second quarter. Somewhat more encouraging signs began to emerge in June. Firms and households were again less pessimistic, but their confidence remained below the average levels seen during the crisis in 2009. Certain alternative high-frequency indicators (e.g. electricity consumption and freight tonnage on motorways) improved, but remained down in year-on-year terms. The outlook for the third quarter is more favourable for now: according to an SORS survey, firms are expecting a significant increase in demand, while household consumption is likely to be less constrained.

The situation on the labour market has deteriorated significantly. Having recorded positive growth in March, the workforce in employment excluding self-employed farmers was already down 1% in year-on-year terms in April. Given the nature of measures to contain the spread of the epidemic, the largest shock was seen, as expected, in services where direct contact between the consumer and the provider is essential. The workforce in employment in accommodation and food service activities was down more than 10% in April. An even larger downturn was prevented by the emergency measures, and the number of registered unemployed in June actually declined slightly from May. It nevertheless stood at more than 89,000 and was up 26.3% in year-on-year terms. Growth in average wages exceeded 10% in April, which can primarily be attributed to the Slovenian government’s comprehensive anti-crisis measures on the labour market.

Figure: Employment expectation in the private sector

Source: European Commission. Note: The indicator illustrates the weighted average of the employment expectations of employers for the next three months in all four surveyed sectors (industry, services, retail and construction).

Banka Slovenije emphasises that emergency measures are having a considerable impact on statistics regarding employment and wages. Those statistics could change significantly when the measures are lifted. According to the results of surveys of firms, the downturn on the labour market is expected to continue.

The financial situation at firms remains solid relative to the deteriorating economic situation. Firms did not highlight financial difficulties as a limiting factor in June. This can be attributed to high liquidity reserves in the form of sight deposits, favourable terms of bank financing, the co-financing of labour costs, the possibility of deferred tax payments, and a government guarantee scheme to prevent liquidity problems. Firms otherwise entered the crisis in a sound financial position after achieving record profits again last year.

The contraction in the economy and the extensive anti-crisis measures have brought a significant deterioration in the fiscal situation. Cashflow figures thus indicate, for example, that the consolidated general government deficit over the first five months of the year amounted to EUR 1.4 billion. The position was already less favourable in the first quarter of this year, but an even larger deterioration came in April and May as the crisis hit home. Consolidated general government revenues during the first five months of the year were down EUR 720 million or 9.2% in year-on-year terms, driven largely by reduced inflows of taxes and social security contributions. At the same time, the measures to alleviate the economic and social impact of the crisis increased expenditure by EUR 874 million or 11.4%. According to the ESA 2010 methodology, the general government deficit could amount to around 8% of GDP this year, while the general government debt could reach a similar level to 2015, when it stood at 82% of GDP, its highest figure to date. The ratio of debt to GDP will nevertheless remain significantly below the euro area average this year, which the European Commission is forecasting will exceed 100%.     

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