Moderate economic growth continues in first quarter; fall in inflation comes to temporary halt

Current indicators point to stagnation in economic activity in the euro area in the first quarter of this year, while inflation is gradually slowing. The economic situation in Slovenia remained relatively favourable during this period, although the fall in inflation came to a temporary halt. The labour market remained robust, with a low unemployment rate and high wage growth.

Judging by the PMIs and the low level of consumer confidence, economic activity in the euro area stagnated once again in the first quarter of this year. The ECB’s latest projections for the first half of the year are similarly forecasting weak growth in euro area GDP. The expectation is that strengthening real household incomes will drive higher economic growth in the second half of the year amid the ongoing fall in inflation, which nevertheless remains above the monetary policy target rate. It slowed to 2.6% in February, primarily as a result of lower growth in food prices and prices of other goods, but service price inflation remains elevated.

The economic situation in Slovenia remained relatively favourable in the first quarter according to the available indicators. Consumers in particular were more optimistic, while confidence in sectors focusing primarily on the domestic market also remains in positive territory. By contrast, uncertainty among manufacturing firms remains relatively high in the face of weak demand. This is being reflected in the continuing year-on-year decline in industrial production, while construction activity is also slowing from its previous high levels. Based on a limited set of available indicators, the nowcasts for quarterly GDP growth in the first quarter are averaging 0.9%, down slightly on the final quarter of last year.

With the economy still growing, the labour market remains robust. The survey data suggests that hiring will continue in the future, particularly in services and construction. The persistent tightness of the labour market amid low unemployment is also being reflected in high wage growth, which held at 8.1% in the early part of this year.

Inflation remained at 3.4%, unchanged from January. This was primarily attributable to current rises in energy prices, fuels in particular, while headline inflation is continuing to be reduced by slowing growth in food prices and prices of non-energy industrial goods. The high service price inflation is continuing to reflect high wage growth, and signs of a renewed strengthening of demand. Core inflation continues to outpace headline inflation, and stood at 4.0% in March.

The 12-month current account surplus approached EUR 3 billion in January, with merchandise trade recording its largest surplus of the last two years, and services trade its largest surplus to date. Excluding transport services and miscellaneous business services, services trade in January was up around 10% year-on-year in nominal terms. It was a different story with regard to merchandise trade, where the year-on-year decline in exports slowed, primarily as a result of increased exports by the car industry.

The consolidated general government deficit recorded favourable results over the first two months of the year: there was an improvement in the position compared with the previous year, thanks to continuing growth in tax revenues. The fiscal developments remain subject to numerous risks, whether general risks affecting economic growth, or specific risks mainly in connection with current wage negotiations, the preparation of various reforms, and the ongoing post-flood reconstruction.

The Review of macroeconomic developments released today also highlights indicators of the external competitiveness of the Slovenian economy, while in the area of price developments it presents analysis of the pass-through of wage growth into final services prices.