Economic developments seen in final quarter of last year continue in early part of this year, with moderate growth

Like much of the euro area, Slovenia saw the economic developments from the final quarter of last year, when moderate growth was recorded, continue in the early part of this year. This is also being reflected on the labour market, which is seeing record high employment and low unemployment. Inflation has slowed slightly in recent months, but remains high, as does core inflation.

Following the moderate GDP growth in the final quarter of last year (1.9% in year-on-year terms), developments in the euro area economy remain favourable in the early part of this year. The composite PMI moved into the zone of expansion, while the economic sentiment indicator remained above its average over the final quarter of last year. Because last year’s economic developments exceeded expectations, the European Commission has raised its GDP growth forecast for this year to 0.9%. Inflation in the euro area slowed to 8.5% in February according to initial estimates, driven largely by a fall in energy prices. By contrast, food price inflation and core inflation are continuing to strengthen. The European Commission lowered its average inflation forecast for this year from 6.1% to 5.6%.

Given the persistence of high core inflation, major central banks have continued to raise their key interest rates, and market expectations of further hikes in the euro area and the US have increased. This has driven a rise in government bond yields, while higher-risk asset classes have mostly continued to rise in value in the unexpectedly robust economy, thanks in part to the mild winter in Europe and the opening up of the Chinese economy.

In light of the persistently high inflationary pressures, at its latest monetary policy meeting the Governing Council of the ECB expressed the expectation that interest rates would again be raised by 50 basis points at the March meeting. “My expectations are that March’s hike will be followed by additional hikes, until we reach a level sufficient to bring us back on the path to meeting our target of 2% inflation,” said Banka Slovenije Governor Boštjan Vasle.

Year-on-year GDP growth in Slovenia remained positive in the final quarter of last year, at 0.2%. The confidence indicators in sectors primarily dependent on the domestic market also remained high in the early part of this year, while total card payments and ATM withdrawals also continued to rise in real year-on-year terms. Manufacturing is in a worse position, with firms again assessing current demand as weak following a significant fall in value-added in the final quarter of last year.

On the labour market, employment remains at a record high, while the year-on-year increase in the workforce in employment is above its long-term average. At the same time the available pool of labour on the domestic labour market is continuing to diminish, and firms are therefore increasing their hiring of foreign workers. Seasonally adjusted unemployment hit a new low in February, and the trend of decline could continue over the coming months according to our assessments. The rise in nominal year-on-year growth in the average gross wage came to an end in December of last year, but the rate of 4.6% nevertheless remains above its long-term average and last year’s average (2.8%). The risk of rising wage pressures remains high.

The current account was in deficit last year, in the wake of high growth in import prices and strong domestic demand. The deficit amounted to EUR 450 million, compared with the surplus of EUR 2.0 billion recorded in 2021. More than half of the change in the position came from the deterioration in the terms of trade, while the remainder was primarily attributable to the volumetric increase in merchandise imports outpacing that in exports. Conversely there was a large surplus of trade in services.

Inflation in Slovenia fell to 9.4% in February, driven primarily by a fall in energy prices, while core inflation remained above 7.0%. Both figures were above the euro area averages. Energy price inflation slowed to 7.7% as caps were applied to electricity and gas prices and fuel prices fell, but is still driving up prices of non-energy industrial goods via rising costs. The largest contribution to inflation of 3.8 percentage points came from food prices, where certain basic food products recorded notable price rises.

The general government deficit amounted to 2.7% of GDP over the 12 months to January of this year. The most notable development in the public finances over recent months has been a slowdown in year-on-year growth in revenues, in reflection of the more moderate growth in household consumption and a decline in certain taxes. Aggregate revenues were actually down in year-on-year terms, Slovenia having received funds from the recovery and resilience facility in January of last year, but nothing so far this year. Expenditure was also down in year-on-year terms in January, partly as a result of a decline in expenditure to mitigate the pandemic.

The publication Review of macroeconomic developments, March 2023 is available here.