Renewed economic downturn in the final quarter, albeit slightly smaller than in the spring

The economic situation in the euro area took a renewed downturn going into the final quarter of this year. Banka Slovenije expects a significant decline in activity in the final quarter amid the reimposition of lockdowns in numerous euro area countries, albeit not as pronounced as in the second quarter of this year. The growth forecasts for 2021 are also being cut. The economic situation is similarly deteriorating again in Slovenia, and the labour market recovery has come to an end. Government job retention subsidies for firms and assistance for vulnerable population groups are widening the state budget deficit, which is nevertheless forecast to remain at the euro area average level.

After improving in the third quarter, the situation in the euro area is deteriorating again in the final quarter of this year, owing to the tightening of containment measures; the economy is expected to contract again. This is suggested by the current economic indicators: the PMI declined sharply in November, and the gradual improvement in the economic sentiment indicator came to an end in October, while firms in retail and other private-sector services have become more pessimistic about future demand. Electricity consumption in the second week of November was down 11.1% in year-on-year terms. In contrast to the first wave of the epidemic, firms have not seen disruption to their supply chains, and thus the contraction in activity in the euro area in the final quarter of this year is expected to be smaller than in the second quarter, albeit still substantial. The growth forecasts for 2021 are also being lowered: the European Commission’s latest forecast is for growth of 4.2%.

In Slovenia the third quarter ended encouragingly in construction, but slightly less so in industry and trade. The domestic economy re-entered a sharp downturn in November, although the figures available to date suggest the situation is not as bad as in the spring. The economic sentiment declined sharply in November, although the indicators remain above their levels from May of this year. Consumers are the most pessimistic, and expect to see a significant rise in unemployment and very restrained spending.

Banka Slovenije’s assessment is that there is a high likelihood of a long-lived crisis in services in particular, as the hardest-hit part of the economy. Before the crisis, services accounted for approximately 22% of jobs and 20% of value-added in Slovenia, and 25% and 19% respectively in the euro area overall. However, the rapid progress in the development of vaccines against Covid-19 and their mass deployment over a relatively short timescale offer the prospect of a speedy normalisation of the situation.

Figure 1: Google data for commuter arrivals

Note: Calculated for a sample of users, and therefore does not necessarily reflect the population as a whole. *Change relative to the median day in five-week period between 3 January and 6 February 2020. Sources: Google, Banka Slovenije calculations  

The renewed tightening of containment measures also halted the recovery in the labour market, but there has not yet been a rise in unemployment. After falling sharply in September, registered unemployment remained virtually unchanged in October. It stood at 83,654, still up approximately 11,000 in year-on-year terms. The situation also remained reasonable in November, despite additional restrictions on businesses; this is thought to be attributable to a rise in the number of furloughed workers. Wage growth continues to show no signs of cooling: year-on-year growth in the average gross wage remained similarly high in September as it had been in August, at 5.1%.

Deflation continued over the autumn. Deflation stood at 0.5% in October, again driven primarily by falling energy prices, which lowered headline inflation by 1.7 percentage points. Year-on-year food price inflation increased to 3.1%, as a result of a rise in excise duties on tobacco products. Service price inflation has slowed sharply since the outbreak of the epidemic. Given the poor epidemiological picture and the stringent containment measures, deflationary pressures are expected to strengthen again as a result of the huge uncertainty, the unutilised production capacity and the downturn on the labour market.

In the current situation domestic and foreign fiscal policy measures are the key to preventing an even larger decline in economic activity, but they are also widening budget deficits. Slovenia’s consolidated general government deficit amounted to EUR 2.3 billion over the first nine months of the year, compared with a surplus of EUR 233 million over the same period last year. The government measures to support households and businesses have been the largest factor in this year’s deficit. Their impact on expenditure over the first nine months of the year was estimated at EUR 1.6 billion, where the main factors were job retention subsidies for firms and assistance for vulnerable population groups. The resurgence of the epidemic means that the deficit will have widened further by the end of the year. According to the Ministry of Finance, this year’s general government deficit is forecast to reach 8.6% of GDP, comparable to the European Commission’s forecast for the euro area overall, despite the slightly more extensive anti-crisis measures in Slovenia. The general government debt will exceed 82% of GDP, but will remain approximately 20 percentage points less than the euro area average.

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