Amid the bad epidemiological picture, the economic situation remained difficult at the end of the year

It is increasingly evident that economic activity in different countries is being shaped by their approaches to dealing with the epidemic and the success of these approaches. While some countries (China, India, Brazil, US) saw an improvement in the economic picture at the end of the year, the situation worsened again in most of the countries of continental Europe. In Slovenia too the bad epidemiological situation required the re-tightening of containment measures, which mostly affected services, in contrast to the first wave, when industry also suffered a major decline. Thanks to the government’s emergency measures, the situation on the domestic labour market remained better than the euro area average. In its Economic and Financial Developments publication released today, Banka Slovenije also finds that the extensive anti-crisis measures significantly worsened the fiscal position last year, although debt levels remained lower than in the euro area overall.

Although the global economic situation improved significantly at the end of last year, and the availability of a vaccine against Covid-19 lifted the mood in the real sector and, significantly more so, on the financial markets, there were pronounced differences between economies. Certain indicators for the final quarter of last year are pointing to a renewed improvement in the economic situation in China, India, Brazil and the US. It is a different case in the majority of continental Europe, where a profound recession has again taken hold in services as the epidemiological picture worsens.

The epidemiological situation in Slovenia in the final quarter was among the worst in the euro area, and required the long-lasting tightening of containment measures, which triggered another steep decline in economic activity. In contrast to the first wave, when industry also suffered a major decline, it was mainly services that were hit. Domestic private consumption declined sharply, and sectors reliant on foreign visitors suffered an even harsher decline. Given the better picture in construction and industry, the shock in economic activity was not as large as in the first wave.

The situation on the Slovenian labour market remained better than the euro area average, although it is deteriorating in response to the new wave of the epidemic. Registered unemployment has undergone a sustained increase since November, and in early January was just 725 less than its peak during the first wave. The number of unemployed in December was up 15.9% in year-on-year terms. An even worse situation is being prevented by the support measures: almost a tenth of all employees were on furlough in December. Despite the new crisis shock, vacancies remain significantly higher than in the spring, and firms are more optimistic than the euro area average in their assessments of future employment. Wage growth remained high in October, at almost 5%.

The beginning of the second wave of the epidemic did not have an adverse impact on Slovenia’s export sector, with the exception of tourism. According to balance of payments figures, merchandise exports in October were down only 2.6% in year-on-year terms, as sales on euro area markets recovered and exports to Asia actually increased strongly. The initial estimates for November are also encouraging. Imports too were yet to respond to the new wave of the epidemic by November: according to initial estimates, the year-on-year decline in imports actually diminished. The worsening epidemic in Europe additionally hit tourism. The new shock saw imports and exports of travel services decline by 16.0% and 18.6% in year-on-year terms respectively in October, despite growth in most other segments of services trade.

Figure: Selected alternative high-frequency indicators

Sources: Bankart, FARS, Banka Slovenije calculations; Note: *The source for card payments is Bankart, which covers more than 80% of all card payments in Slovenia.

Similarly to the first wave, deflation in Slovenia deepened at the end of the year as the containment measures were re-tightened, and domestic price pressures became weaker and weaker. December saw deflation of 1.2%, while core inflation stood at just 0.1%. The renewed rise in unemployment, the huge uncertainty among consumers, the low income levels and the renewed shock to private consumption profoundly weakened domestic inflation factors at the end of the year, and core inflation is therefore forecast to remain low for some time even after the containment measures are lifted.

The extensive anti-crisis measures have significantly worsened the fiscal position, although debt levels remained lower than in the euro area overall. The general government deficit over the first nine months of last year stood at 7.7% of GDP, primarily on account of the shock in the second quarter. The decline in revenues was largely driven by corporate income tax and taxes on consumption, as the epidemic had a profound impact on corporate performance and on private consumption. The impact of the epidemic was even more evident in the 12.9% rise in expenditure, where the main factor was the measures on the labour market. According to the government’s October estimates, the year-end deficit is forecast at 8.6% of GDP, and will remain high this year at 6.6% of GDP, as various support measures remain in place, albeit in slightly smaller scale than last year amid the anticipated waning of the epidemic.

The general government debt stood at 78.5% of GDP at the end of September. In the wake of additional borrowing, largely via the issuance of 30-year bonds in October, it is forecast to have exceeded 80% of GDP by the end of last year, and then to only gradually decline, although it will remain significantly lower than the euro area average. The terms of borrowing have further improved, thanks to extensive monetary policy support; 10-year government bonds were issued at negative yield for the first time in January of this year.