Smaller decline in economic activity in second wave of epidemic than in first wave

During the second wave of the epidemic, economic growth in Slovenia slowed in the final quarter of last year, similarly to the euro area overall, but the slowdown was significantly less than in the first wave, despite the worse epidemiological data. The situation remains slightly better than in the euro area overall, and with it the starting position for the recovery after the epidemic eases. Banka Slovenije also finds the labour market not to have deteriorated significantly, amid the extension of the government measures. For now the anti-crisis measures have helped to preserve the majority of economic potential, which will provide the basis for the recovery after the epidemic eases, but this has had a profound impact on the fiscal position.

The euro area remains in economic crisis, but it is significantly less harsh in the second wave of the epidemic than in the first wave, despite an even worse health situation. Amid slightly less restrictive containment measures, extensive support from economic policy, and a more encouraging international environment, euro area GDP in the final quarter of last year was down only 0.6% on the previous quarter. This took the year-on-year decline to 5.0% according to seasonally adjusted figures, 9.7 percentage points less than in the second quarter, at the peak of the shock. High-frequency indicators (such as the composite PMI) suggest that the economy will remain weak in the first quarter of this year. The further evolution of the epidemic, which is heavily dependent on the availability and rollout of vaccines, will be the key to a broader recovery in the euro area economy, which is anticipated in the second half of this year.

The second wave of the epidemic is also having a smaller impact on the Slovenian economy. GDP in the final quarter of last year was down only 1.0% on the previous quarter. The year-on-year decline stood at 5.0% according to seasonally adjusted figures, 8.0 percentage points less than in the second quarter. GDP declined by 6.1% last year, slightly better than expectations, and also slightly better than overall performance in the euro area, where it declined by 6.8%.

In contrast to the first wave, only sectors that by nature are unable to adapt sufficiently to the containment measures were hit hard on this occasion. Turnover in accommodation and food service activities was down 62.4% in year-on-year terms in the final quarter, slightly more than in the first wave. Wholesale and retail trade also suffered a significant decline: a partial shutdown left turnover down 8.1%, despite the rise in online sales. Private-sector services have largely adapted to the restrictions by moving online and through home deliveries. The business conditions are significantly better in industry, which is recovering as foreign demand rises, and in construction, which is mainly being strengthened by infrastructure projects.

The situation on the labour market has not deteriorated significantly during the second wave. Amid an increase in export activity, renewed hiring in manufacturing, and the expansion of human health and social work activities, the year-on-year fall in the workforce in employment did not deepen in the final quarter (and stood at 1.2%). By contrast, employment in accommodation and food service activities was down 13.5% in year-on-year terms in December, owing to the shutdown. The bad situation in accommodation and food service activities was also one of the main drivers of the renewed rise in the number of furloughed workers.

The job preservation measures have greatly limited the rise in unemployment, and were extended again in the eighth package of anti-coronavirus measures. The rise in unemployment in December and January was merely in line with the usual seasonal movements: the figure peaked at 91.5 thousand during the second wave, almost 40 thousand less than the peak of the previous crisis. Growth in the average gross wage strengthened again, as a result of crisis bonus payments during the second wave, driven primarily by wage growth in human health and social work activities.

Price pressures are weak in the struggling economy. Energy prices remain a significant factor in inflation dynamics. Consumer prices as measured by the HICP were down 1.1% in year-on-year terms in February. The year-on-year fall in prices deepened primarily as a result of a fall in prices of non-energy industrial goods driven by extended winter sales, and stalling services prices.  Energy prices continued to be the main driver of deflation: they remained down more than 7% in year-on-year terms, despite a monthly rise in oil prices. Food price inflation has also been slowing since November. After five months of deflation, inflation in the euro area re-entered positive territory in January, at 0.9%. It should be noted that the rise was primarily driven by one-off factors, such as the expiry of the temporary cut in VAT and the new carbon emissions tax in Germany.

For now the anti-crisis measures have helped to preserve the majority of economic potential, which will provide the basis for the recovery after the epidemic eases, but this has been strongly reflected in the fiscal position. After two years of surpluses, the consolidated general government position moved into deficit last year, in the amount of EUR 3.5 billion (7.7% of GDP), and the position deteriorated further in January of this year.

Figure 1: Stringency of Covid-19 containment measures

Note: * weighted by individual countries’ share of EA19 GDP
Sources: Oxford Economics, Banka Slovenije calculations