Economic growth continues in the first quarter

The data for the euro area points to a moderate contraction in economic activity in the early part of the year, and the continuing gradual slowdown in inflation. While the situation varies from sector to sector, the data in Slovenia points to solid quarterly economic growth, albeit down slightly on the end of last year. Inflation is also down. The labour market remains relatively robust, and growth in the average gross wage remains high.

After the euro area economy cooled in the final quarter of last year, the PMIs for the early part of this year remain in the zone of contraction, while inflation is gradually slowing. The fall in inflation is being driven by an easing of price pressures in production chains, but conversely pressures from wage growth are strengthening. With inflation persisting above the targets set by central banks, and amid favourable data from the US economy, the markets are lowering their expectations with regard to the pace of potential cuts in key interest rates.

The confidence indicators in Slovenia in the early part of this year present mixed signals, with the mood varying from sector to sector. The encouraging trend of gradual improvement in the economic sentiment from the second half of last year came to an end at the beginning of this year. The least optimistic mood among firms can be found in the manufacturing sector, where the adverse developments in foreign trade from the end of last year were joined in January by a further deterioration in short-term assessments of export expectations. By contrast, confidence in services, construction and retail remains in positive territory, while the mood among consumers during the first two months of this year was also slightly better than at the end of last year. The nowcasts for quarterly GDP growth in the first quarter are averaging 0.9%, based on a limited set of available indicators.

Inflation remained unchanged in February at 3.4%, on account of rises in the contributions by core inflation and energy price inflation, while the contribution by food price inflation declined. Amid record high employment and rising wage growth, service price inflation also remains high, and inflation is again being driven up by energy prices, mainly as a result of rises in fuel prices.

The labour market remains tight, the workforce in employment having hit a new high of 941,292 at the end of last year. Meanwhile the situation varies considerably from sector to sector. While growth in the workforce in employment in services remains robust, the workforce in employment in manufacturing is falling. Growth in the average gross wage remained high at 8.7% in December, albeit down on the beginning of last year (11.5%).

The improvement in the terms of trade and the larger decline in merchandise imports compared with merchandise exports were major factors in last year’s swing into surplus in the current account. The surplus amounted to EUR 2.8 billion, compared with the deficit of EUR 580 million recorded in 2022.

The general government deficit amounted to EUR 2.3 billion last year, having widened by EUR 0.7 billion in year-on-year terms. The main increases on the revenue side were in taxes and social security contributions, driven by the buoyant labour market. The largest nominal increases on the expenditure side were in wages, transfers to individuals and households, and investment. The developments in public finances remain exposed to various risks, including those relating to wage pressures, numerous reforms that are under preparation, and the post-flood reconstruction.

Publication Review of macroeconomic developments, March 2024 is available here.