Domestic economy continues to see slow growth

The latest data for the third quarter shows a continuation of subdued economic growth in Slovenia, amid a moderate contraction in the euro area economy. Headline inflation is continuing to fall, with the rate in Slovenia remaining below that in the euro area overall, while the labour market is continuing to see wage growth close to its record high.

The available indicators for the euro area show a temporary moderate contraction in economic activity in the third quarter. According to the ECB’s September projections, euro area GDP is forecast to grow by 0.8% this year, and by 1.3% next year. Headline inflation slowed to 1.8% in September, its lowest level of the last three years, while core inflation stood at 2.7%. Like most of the major global central banks, the ECB is continuing to relax its restrictive monetary policy. We cut the interest rate on the deposit facility by 0.25 percentage points in September to 3.5%.

According to the available data and model estimates, the Slovenian economy enjoyed modest growth in the third quarter, thought to have been driven primarily by stronger performance in services. The situation in the service sector remains favourable, which is reflected in the positive assessments of demand, supported by the continuing real growth in the wage bill and strengthening tourism. Manufacturing output is undergoing considerable monthly fluctuations, while construction activity is continuing to decline, albeit from a high level. Given the available data, the nowcasting model is predicting quarterly GDP growth of 0.2% in the third quarter, similar to the previous quarter.

The labour market remains close to its record highs, despite a slight fall in the workforce in employment and a rise in registered unemployment. Firms are mostly expecting to continue hiring. Wage growth remains high, particularly in the private sector, which is further increasing the cost pressures on firms, especially in light of the low productivity growth. The challenges associated with labour shortages and high growth in labour costs remain more pronounced in Slovenia than in the euro area overall.

Slovenian firms are facing weak foreign demand. This is being reflected in broader pressures on competitiveness across the entire euro area. The breakdown of the growth in domestic exports reveals the structural challenges in trade and production chains related to the car industry. These developments have had limited impact on the external position of the economy for now, given that the market shares of Slovenia’s merchandise exporters have been rising since the beginning of last year, and the current account surplus remains large.

Inflation is continuing to fall, and slowed to 0.7% in September (as measured by the HICP), driven largely by energy prices. Food price inflation remains low, while prices of other goods were down in year-on-year terms, albeit slightly less than in the summer. Core inflation consequently strengthened to 2.4% (up from 2.2% in August). Service price inflation remains elevated, and the persistently high growth in labour costs, firms’ expectations of further rises in selling prices and the short-term trends do not point to any slowdown over the coming months.

The general government deficit over the preceding 12 months narrowed to 2.0% of GDP in June. The improvement was driven by a labour market situation that is beneficial to the public finances, the reduction in extraordinary measures, and weaker-than-planned government investment.

Publication Review of macroeconomic developments undergoing translation.