Press release - Economic and Financial Developments report and Monthly information on bank performance in August 2016

Governing Board of the Bank of Slovenia discusses and approves the October 2016 Economic and Financial Developments report and Monthly information on bank performance in August 2016*

1. Economic and Financial Developments

Economic growth in the euro area slowed in the second quarter. The situation on the labour market is improving, although growth in the euro area is likely to remain merely moderate but relatively balanced this year. The latest weighted forecasts based on the Consensus forecasts also suggest that aggregate growth in Slovenia’s main trading partners will be moderate but stable, which provides a solid outlook for growth in Slovenian exports and industrial production. 
The economic situation in Slovenia is continuing to improve. Year-on-year economic growth stood at 2.7% in the second quarter, its out-performance of the euro area overall having been driven by industry this year. At the same time domestic final consumption is also strengthening more quickly than last year, households having increased purchases of durables, which was partly attributable to the slightly faster recovery in real disposable income. The government is continuing to contribute to domestic final consumption, via a less restrictive fiscal policy. There have been also favourable changes in aggregate investment from the perspective of the economy’s output potential, as investment in machinery and equipment in the second quarter was up in year-on-year terms for the fifth consecutive quarter. 

Growth in employment strengthened to 2% in the second quarter, while surveys of employment expectations suggest further growth over the remainder of the year. The fall in unemployment in the summer of this year was the sharpest in recent years. Nevertheless, structural unemployment is deepening, which is being reflected in particular in rising proportions of older unemployed people and those unemployed for more than three years. 

The current account surplus continued to widen in year-on-year terms over the first seven months of this year, primarily as a result of the further year-on-year widening of the trade surplus. Nominal growth in merchandise trade was relatively low as a result of a fall in trade prices, although the national accounts figures indicated real year-on-year growth of 9% in the second quarter. Growth in industrial production, exports and final consumption have brought a sharp increase in merchandise imports this year. 
With the exception of the general government sector, all the domestic institutional sectors have recorded financial surpluses for the fourth consecutive year. The 12-month surplus vis-à-vis the rest of the world stood at 5.3% of GDP in the first quarter of 2016. Firms have been generating high profits for three years now, and a slight pick-up in the investment cycle has been evident in the last year. The corporate sector’s financial surplus has primarily been directed towards debt reduction or invested in domestic banks in the form of sight deposits. Households are even more attracted to investments of this type: sight deposits have increased by EUR 2.9 billion over the last two years, while fixed-term deposits have declined by EUR 1.7 billion. The banks are continuing to reduce their total assets, on the investment side by reducing lending activity, and on the funding side primarily by repaying ordinary liabilities to the rest of the world.

The nominal general government deficit is forecast at 2.2% of GDP for this year, a small surplus in fact having been recorded in the second quarter. General government expenditure declined in the first half of the year as revenues increased moderately. The changeover to the disbursement of EU funds from the new 2014–2020 financial framework has brought slower growth in both aggregates. Growth in revenues from taxes and contributions remains solid, and reflects the ongoing strengthening of economic activity, and above all the favourable labour market indicators. 
Inflation in Slovenia moved more reliably into positive territory for the first time in two years, reaching 0.2% in September. This was primarily attributable to the gradual slowdown in the year-on-year fall in energy prices. There were rises in food prices and, more notably, in services prices. The latter rose by 2%, well above the comparable rate across the euro area. This acceleration has coincided with favourable developments on the labour market, with growth in employment and the wage bill, and with this year’s increased growth in household consumption.

2. The Monthly information on bank performance in August 2016

The banking system’s total assets declined to EUR 36.5 billion in August. Total deposits by the non-banking sector are comparable with the level recorded last year, but are gaining in importance in the structure of funding due to the simultaneous contraction in the banking system’s total assets. The banking system’s liabilities to the wholesale markets are being reduced, and are one fifth lower in year-on-year terms.

Despite sharply lower interest rates, the importance of household deposits in the structure of funding is strengthening. Growth in the aforementioned deposits rose to 6.3% over the first eight months of the year in the context of a minimal seasonal decline, with growth strengthening at all bank groups. However, only household sight deposits are on the rise, particularly over the last three years. Year-on-year growth in deposits by non-financial corporations also remains relatively high, with the proportion of those corporations’ financial assets accounted for by liquid assets rising.

Growth in lending to the non-banking sector overall remains negative. At -5.4%, the year-on-year contraction in loans to the non-banking sector has slowed slightly in 2016, while corporate lending continues to contract at a rate of more than 10%. Growth in household lending continues to rise gradually, both in terms of housing loans and consumer loans since April.

Bank surveys indicate that the decline in demand for corporate loans seen over the last several years continues. The structure of the aforementioned demand is shifting towards lower demand for loans for restructuring purposes as a result of the improving macroeconomic environment and corporate performance, and on account of the improving quality of the banks’ investments. Demand is higher than in previous years for loans for current operations, which is a reflection of the increased needs of corporates in conditions of economic growth. The high rate of surplus demand, particularly for loans for investments, indicates the still-low quality of such demand that does not meet the banks’ credit standards.

The quality of the banks’ credit portfolio continues to stabilise. The more active management of the banks’ non-performing portfolio through the sale of non-performing claims and an increase in write-offs led to a significant decline in July and August in the proportion of classified claims accounted for by claims more than 90 days in arrears, which stood at 6.7%, a decrease of 3.2 percentage points relative to the end of 2015.

Gross income was down slightly on the same period last year. Growth in net interest income remains negative due to falling interest rates and the contraction in loans. Year-on-year growth in net non-interest income remains positive. The banks recorded a pre-tax profit of EUR 351 million over the first eight months of the year, the release of impairments and provisions contributing decisively to the aforementioned profit.

The quality of the banks’ credit portfolio continues to stabilise. The more active management of the banks’ non-performing portfolio through the sale of non-performing claims and an increase in write-offs led to a significant decline in July and August in the proportion of classified claims accounted for by claims more than 90 days in arrears, which stood at 6.7%, a decrease of 3.2 percentage points relative to the end of 2015. The proportion of non-performing exposures stood at 10.3% in June (the last known quarterly figure) according to the broader European Banking Authority (EBA) definition. 
 

*publications only in Slov. language