Economic indicators paint a less favourable picture going into the third quarter
After domestic economic growth strengthened in the second quarter, the available indicators for the third quarter suggest a slowdown in economic activity even while certain figures remain favourable. The aftermath of the severe weather is also having an impact on the economy. Meanwhile the labour market remains tight, and wage growth remains high. Inflation remains high, primarily on account of strengthened service price inflation, supported by elevated wage growth.
The available figures for the third quarter in the euro area suggest a slowdown in economic activity. Following economic growth of 0.3% in the second quarter, driven primarily by services, the median composite PMI over the first two months of the third quarter slid into the zone of contraction. The situation in manufacturing remained difficult amid ever-weakening global trade, and demand for services also declined. Headline inflation and core inflation remained elevated in August at 5.3%, the former having remained unchanged from the previous month and the latter having fallen slightly.
Following the economic growth in the second quarter in Slovenia, the narrow set of available figures for the third quarter do not paint a uniform picture of macroeconomic developments. A fair few indicators suggest that developments have remained relatively favourable in the third quarter: car sales in July remained up significantly in year-on-year terms, there was a strong start to the main holiday season, and card payments continued to grow in real terms over the summer months. Contrasting indications of a slowdown come from invoices registered with tax authorities, freight vehicle mileage on motorways, and real turnover in retail, which was down in year-on-year terms.
The aftermath of the severe weather is also having an impact on economic developments. While certain sectors are working under constraints, the recovery and renovation work is conversely making a positive contribution to growth in investment and consumption.
The labour market remains tight, and wage growth remains high. Employment was continuing to rise and unemployment was continuing to fall as we entered the third quarter. The workforce in employment hit a new high in June, and the labour shortage remains at record levels. The average gross wage over the first half of the year was up 10.2% year-on-year in nominal terms, with the growth broadly based across sectors. The slowdown in inflation is strengthening the real rate of growth, which stood at 3.1% in June. As hiring continued in June, nominal growth in the gross wage bill also remained high at 10.8%.
Amid a decline in merchandise imports and an improvement in the terms of trade, the current account surplus has widened significantly this year. Merchandise exports in the second quarter remained at a similar level to the same period last year, but imports were down around a tenth amid declining domestic demand. The improvement in the terms of trade was responsible for approximately half of the change in the merchandise trade balance. It also accounted for almost all of the year-on-year increase in the services trade surplus. The narrowing deficit in income from direct investments also significantly reduced the aggregate deficit in primary income. All of this has been reflected in a large current account surplus, which amounted to EUR 1.9 billion in the first half of this year.
Banka Slovenije notes that almost all euro area countries saw a deterioration in their balance of payments position last year, primarily as a result of rising prices and the heavy dependency on energy imports.
Domestic inflation remains elevated: headline inflation as measured by the HICP rose slightly in August (to 6.1%), having fallen over most of this year. This was attributable to persistently high core inflation, alongside an increase in the contribution by energy prices. Core inflation remains at 7%, driven primarily by an uptick in service price inflation supported by higher wage growth.
The general government deficit over the first seven months of the year was wider in year-on-year terms, and significant funding will be required in the future to deal with the aftermath of the extensive floods. The consolidated general government deficit over the first seven months of the year widened to EUR 607 million. The low growth in revenues was attributable to a decline in corporate income tax settlements, the measures to mitigate the energy crisis, legislative changes, and reduced inflows from the EU budget. Alongside the energy measures, other major factors driving up expenditure were the significant rises in expenditure on wages and in investment as the European financial framework came to an end. The floods have necessitated the adoption of a revised state budget and numerous emergency measures, whose financial consequences will also be reflected in the government’s coffers.
Publication Review of macroeconomic developments, September 2023, is available here.