Economic activity close to its pre-crisis level after strengthening in the second quarter

Despite the major barriers in international trade, and the spread of new variants of coronavirus, global economic activity is continuing to increase rapidly, while the euro area is recovering even more quickly. Economic activity in Slovenia also rose sharply in the second quarter of this year, approaching its pre-crisis level. This performance was matched by the buoyant labour market, where wage growth is also strengthening. Current economic indicators suggest that economic growth has remained high in the third quarter, albeit amid high risk driven by the deterioration in the epidemiological picture.

Despite the major barriers in international trade, and the spread of new Covid-19 variants, global economic activity is continuing to grow rapidly. The euro area stands out right now for the intensity of its economic recovery: after falling in the first quarter, GDP increased by 2.0% in the second quarter. This quarterly economic growth was driven first and foremost by household consumption. Judging by high-frequency indicators, quarterly GDP growth is expected to remain high in the third quarter.

While economic policy support measures remain in place, the situation on the financial markets remains very good. Together with the significant purchases by the Eurosystem amid the seasonal decline in the supply of bonds, the expectations of a long period of low interest rates brought a sharp fall in market yields on euro area government bonds. The borrowing costs of private issuers also remain favourable.

In these circumstances economic activity in Slovenia came close to its pre-crisis level in the second quarter. GDP was up 1.9% on the first quarter following the lifting of containment measures, and was up 16.3% in year-on-year terms amid a pronounced base effect. It remained down 0.2% on the pre-crisis peak in the final quarter of 2019.

Strengthening private consumption meant that quarterly growth in value-added was predictably strongest in the segments of private-sector services that had previously been hit hardest by the containment measures. The most notable growth was recorded by turnover in accommodation and food service activities. Households once again sharply increased their spending on durables. The situation in industry improved further (activity has now surpassed its pre-epidemic level), albeit with difficulties on the output side: firms are increasingly reporting disruptions in supply chains, labour shortages and rising input costs. Amid the strong demand, firms are also undertaking more and more investment. The government sector is also financing investment, which in June was reflected in a rise in activity in infrastructure construction.

Current economic indicators point to economic growth remaining high in the third quarter, but the deterioration in the epidemiological picture means that there are increasing chances of the containment measures being tightened, with an adverse impact on the openness of public life and activity, particularly in certain private-sector services.

As services recover, the situation on the labour market is continuing to improve, and is now better than before the crisis according to certain indicators. Despite the expiry of the furlough scheme, registered unemployment fell further to reach 70,655 by the end of July, down approximately 1,000 on the end of July 2019. Amid the high economic growth, firms notified a record number of vacancies in the second quarter, but a shortage of qualified labour means that they are having increasing difficulties in filling them. Year-on-year growth in the average gross wage increased to 7.7% in June. While wage growth in public services slowed to a still-high 9.1% as epidemic-related bonus payments fell, wage growth in the private sector picked up to 7.1% amid sharp wage rises in some of the worst-hit service segments.

Inflation rises as price pressures strengthen

With foreign and domestic price pressures strengthening, inflation stood at 2.1% in August. Amid rising global oil prices, energy prices remained the largest factor in inflation. They were up 13.8% on August of last year, when prices of motor fuels were held at one euro per litre by low oil prices and excise duty policy.

The problems in supply chains and rising cost pressures associated with rises in commodity prices, import prices and producer prices of industrial goods have driven a pronounced rise in prices of non-energy industrial goods in recent months. The broadly based inflation in this category reached 1.8% in August, one of the highest rates since the beginning of 2009.

Similarly, service prices have also been rising as the economy opens and private consumption revives, particularly in accommodation and food service activities. This is attributable to higher commodity prices, rising labour costs amid growing labour shortages, and the drive to make up for losses as demand strengthens following the long shutdown.

The strengthening external cost pressures are being reflected in import prices, which in July were up fully 12.8% in year-on-year terms. Domestic manufacturing firms are succeeding in passing through some of the rise in their production costs into final product prices. These were up 6.2% in year-on-year terms in July.

Figure: GDP of Slovenia and euro area


Note: *Seasonally and calendar adjusted data.
Source: SORS, Eurostat