Press release - Summary of macroeconomic developments and Monthly information on bank performance
Ljubljana, 22. 11. 2016
Governing Board of the Bank of Slovenia discusses and approves the publications Summary of macroeconomic developments and Monthly information on bank performance*.
1.Summary of macroeconomic developments, November 2016
Economic growth in the euro area remains stable but relatively low. According to Eurostat’s estimate, growth in the third quarter was 0.3% in quarterly terms and 1.6% in year-on-year terms, the same as in the second quarter. In addition to the slowdown in growth in retail turnover, developments in industry have also been weaker this year, while construction is recovering, partly in connection with slightly stronger investment in residential construction. The outlook for the end of the year is better, as confidence in the economy, particularly in manufacturing and services, has strengthened in recent months.
Growth in the Slovenian economy in the third quarter remained at a similar level to the first half of the year. Growth in industrial production again sharply out-performed the average across the euro area. The growth in and structure of imports also suggest a further strengthening of domestic demand with increased private consumption, which is being supported by a dynamic labour market, and increased private-sector investment. The government sector is also increasing its final consumption. The conditions on the domestic market remain favourable to growth in turnover in services. The situation in the construction sector, which is strengthening its presence on foreign markets, is also improving gradually, while domestic demand for construction services is strengthening, most notably in the construction of residential buildings. Economic activity is also forecast to increase into 2017: according to the SORS survey, firms in all sectors remain optimistic with regard to future demand.
On the labour market, employment remained dynamic in the third quarter. The year-on-year increase in the workforce in employment reached 2.7% in September, after the elimination of the statistically unreliable category of farmers. The fall in the number of unemployed has accordingly strengthened this year. According to Eurostat’s monthly estimate, the seasonally adjusted unemployment rate fell to 7.7% in September, down 1 percentage point on a year earlier. Wage growth has also strengthened this year, partly on account of agreed government sector wage hikes and partly due to relatively strong bonus payments in the private sector.
Risks associated with wage growth are on the upside due to negotiations in the public sector, while private sector wages are expected to rise in line with increasing productivity.
The stronger domestic demand has stabilised the 12-month merchandise trade surplus in recent months. It amounted to 4.3% of GDP between July and September. The widening of the current account surplus was attributable to an increase in the surplus of trade in services and a narrower deficit in income. The overall 12-month current account surplus stood at a high 6.8% of GDP in September, which in addition to changes in the income position was also a reflection of the favourable terms of trade, the persistent relatively low level of domestic final consumption and investment, and the competitiveness of the export sector.
The general government deficit is continuing to diminish. General government revenues over the first eight months of the year were up 1.0% in year-on-year terms; the low growth was primarily attributable to a decline in revenue from the EU budget. Expenditure was down 1.4% over the same period as a result of a decline in public investment. The other major categories of expenditure are increasing, most notably wages and transfers to households, including pensions, which is contributing to growth in private consumption. In its autumn forecasts the European Commission is forecasting a general government deficit of 2.4% of GDP according to the ESA 2010 methodology, while the Ministry of Finance is forecasting a deficit of 2.2% of GDP. Both institutions are forecasting the deficit to narrow further over the next two years. In the opinion of the European Commission, the main risks to public finances are BAMC transactions and the costs of a potential renewed increase in inflows of migrants. General government expenditure could also increase more strongly than forecast in the government plans as a result of the outcome of the negotiations between the government and the trade unions on wage adjustments in the public sector, and the meeting of strike demands by physicians.
Deflationary pressures are easing, but inflation remains low. Year-on-year growth in prices as measured by the HICP rose to 0.7% in October, thus outpacing the average across the euro area, which stood at 0.5%, after a lengthy period of trailing. The negative contribution made by energy prices is continuing to diminish, but the ongoing decline could be slowed by the partial liberalisation of prices of refined petroleum products. The prices of unprocessed food, clothing and footwear recorded a sharp year-on-year increase. Growth in services prices remained at the level of the two previous months, and significantly above the average across the euro area.
2. Monthly information on bank performance, November 2016*
The banking system’s total assets declined by EUR 247 million in September (to EUR 36.297 million), and were down 2.7% on the same period last year. Contributing to the aforementioned decline were lower deposits by the non-banking sector and the continuing reduction in the banks’ liabilities to the rest of the world. In contrast to previous months, liabilities to the Eurosystem were up due to the participation of two banks in a TLTRO II operation. Loans to the non-banking sector were down among the banks’ assets.
The contraction in lending activity slowed further in September. Loans to the non-banking sector were down 4.3% relative to last September. The contraction in loans to non-financial corporations continues to slow, with those loans down 9.7% in year-on-year terms in September. Loans to households recorded the highest growth, of 2.6% in year-on-year terms in September. At 3.2%, following years of decline, year-on-year growth in consumer loans has nearly matched the pace of growth in housing loans. All bank groups, both the large and small banks under majority domestic ownership and the banks under majority foreign ownership, continue to record growth in loans to households.
Among sources of bank funding, growth in deposits by the non-banking sector is strengthening, and reached 1.9% in September. Growth in the most important source of funding, household deposits, fell slightly in September, but remains at a favourable 5.9%. The stock of the aforementioned deposits rose by EUR 703 million over the first nine months of the year. In the context of persistently low interest rates on deposits, the proportion of sight deposits continues to rise, and in September stood at 62% of all deposits by the non-banking sector. That figure is strengthening at all bank groups, and remains the highest at the large domestic banks (65%) and lowest at the small domestic banks (58%).
The quality of the banks’ credit portfolio is improving. The stock and proportion of claims more than 90 days in arrears continue to decline, that fall accelerating in the third quarter of 2016 when the aforementioned proportion fell to 6.4%. That translates to a reduction of 3.5 percentage points relative to the end of 2015. We can also expect the continued decline in the indicator of non-performing exposures according to the broader EBA definition, which alongside its broader capture of bank investments also includes forborne exposures under non-performing exposures. The majority of claims more than 90 days in arrears is still accounted for by claims against non-financial corporations, but both the stock and proportion of claims within the aforementioned sector have fallen to the 2009 level. A trend of decline in the stock and proportion of claims more than 90 days in arrears can also be seen at SMEs, which represent the more burdened segment of non-financial corporations.
The banking system recorded a pre-tax profit of EUR 334 million during the first nine months of this year. Impairment and provisioning costs had a positive impact on the banks’ operating results until the end of August as the result of net releases. In contrast to the preceding months, impairment and provisioning costs rose to EUR 39 million in September and thus reduced the banks’ profit.
There have been no major changes in recent months in terms of the banking system’s liquidity, which remains favourable and appropriate, which also currently applies to capital adequacy ratios.
*only in slov. lang. (Mesečna informacija o poslovanju bank)