Encouraging economic growth in first quarter of this year

The economic indicators for the first quarter of this year show encouraging economic growth in the euro area, and similar developments are being seen in Slovenia. Inflation remains high and broadly based, and core inflation is continuing to strengthen amid high domestic consumption. The labour market remains very tight, and the rise in the minimum wage has significantly strengthened growth in the wage bill, according to Review of macroeconomic developments released today.

After the situation had worsened in the final quarter of last year, the euro area saw an easing of uncertainty in connection with energy supply and the risk of recession. The favourable survey indicators, particularly in services, also point to strengthening quarterly economic growth in the early part of this year. According to the IMF’s latest forecasts, economic growth in the euro area is expected to be less than 1% this year, before rising to 1.4% next year.

Headline inflation in the euro area fell to 6.9%, as a result of a decline in energy price inflation on account of the high base caused by the rise in prices in March 2022, but food price inflation and core inflation are continuing to strengthen. There remains great variation in the price developments in different euro area countries, which is increasingly linked to differences in core inflation. Core inflation in the euro area overall rose to 5.7% in March. The ECB is responding to high inflation with decisive rises in interest rates, and by withdrawing the final non-standard monetary policy measures. 

The persistently high core inflation means that central banks have continued to raise their key interest rates. After concerns were raised in early March with regard to the stability of the banking systems in the US and Switzerland, there was a sharp decline in market expectations of further rises in key interest rates in the Eurosystem and the US, which drove down yields on German and US government bonds, and caused a fall in the values of higher-risk asset classes. The situation eased towards the end of March, and market participants returned their attention to the high core inflation, which drove a renewed rise in market expectations of further interest rate hikes, and consequently a rise in yields on German and US government bonds.

Economic growth in Slovenia in the first quarter continued to be driven primarily by activity on the domestic market, where construction is increasingly prominent, and is expected to see further growth amid the investment planned by the government. According to the confidence indicators, demand in services other than retail remained strong, and car sales strengthened as the situation in supply chains normalised. By contrast, turnover in other segments of retail declined; soaring food price inflation saw a notable decline in turnover in food products, which was down 5.1% in year-on-year terms in February. Domestic consumption slowed in March: growth in the value of card payments and ATM withdrawals stood at just 0.1% in real terms.

The economic sentiment also declined gradually in the first quarter, most notably the order books indicator in manufacturing, amid weak real growth in merchandise exports. Output in manufacturing in the first two months of the year was up a fraction in year-on-year terms, which was largely attributable to pharmaceutical firms, while output in energy-intensive sectors continued to decline amid the high electricity and gas prices.

Given the positivity currently prevailing in the monthly impulses, the nowcast is for quarterly GDP growth of 1.0% in the first quarter.     

The labour market remains very tight, and the rise in the minimum wage has significantly strengthened growth in the wage bill. Year-on-year growth in the workforce in employment is gradually slowing, but remains above its long-term average, and employment expectations are also easing. In the wake of a further fall in registered unemployment, which reached a new seasonally adjusted low of 50,327 in March, there remains a large shortage of workers on the domestic labour market, which is driving a further increase in the hiring of foreign nationals, who now account for more than 80% of the year-on-year increase in employment. According to the qualifications profile of the positions being sought, new hires are primarily going into work with low value-added.

The large rise in the minimum wage drove pronounced year-on-year growth in the average gross wage in January, which in parallel with the continuing rise in employment was reflected in growth in the gross wage bill increasing to 13.4%, the highest figure since May 2021. At the same time surveys reveal that employees have high expectations for this year’s wage growth.

With import price pressures easing and domestic demand slowing, the current account was in surplus in February. Merchandise exports were up 10.2% in nominal terms over the 12 months to February, but were down 2.2% in real terms after allowing for export prices. Merchandise imports were up 5.9% year-on-year in nominal terms, but were down 1.7% in real terms after allowing for import prices. Given the signalled improvement in the terms of trade, the real decline in merchandise imports, the continuing rapid growth in services exports and the stable deficit in income, the current account position over the last 12 months moved into a small surplus in the early part of this year. 

Domestic inflation rose sharply to 10.4% in March, which was primarily attributable to a base effect from the reductions in electricity prices between March and May of last year. Without these price reductions inflation would have stood at 8.7% in March according to our estimates, and they will continue having an impact on measured inflation for the next two months, which corresponds to the period that the exemption from network charges was in place last year. Food price inflation and core inflation are continuing to strengthen. Food prices excluding alcohol and tobacco were up 19.4% in year-on-year terms, the highest rate since 2000, while core inflation rose to 7.2%.

Publication Review of macroeconomic developments, April 2023, is available here.