Economic and financial developments, July 2018
- Economic growth in the euro area slowed moderately, but the situation remained stable and favourable. Price pressures increased on international commodity markets.
- Economic growth in Slovenia also slowed, but continued to significantly outpace overall growth in the euro area. Domestic factors are prevalent: growth in private consumption remains robust, while the investment cycle is also continuing.
- Firms are facing increasing problems with labour shortages. At the same time wage growth strengthened, which did not have any adverse impact on the cost competitiveness of the economy, at least in the first quarter.
- The general government position moved into surplus in the 12 months to March, in the amount of 0.4% of GDP, which is not sufficient to meet the commitments under the Stability and Growth Pact. The key is to avoid measures that would cause a deterioration in the structural fiscal position, as general government debt remains high.
- Inflation is strengthening, and is embracing more and more price categories. The rate reached 2.3% in June, and continued to outpace the euro area average, which rose to 2%.
- Signs of potential imbalances on the residential real estate market are appearing. Price corrections as a result of new supply cannot be expected in the short term.
Economic growth slowed moderately in the euro area, but the situation remains stable and favourable for now: the economic sentiment indicator has remained high, and is signalling continuing solid economic growth. The monetary policies of the ECB and the Fed remain highly divergent. At its June meeting the Fed again raised its key interest rate, while the ECB announced the gradual scale-back of net bond purchases within the framework of the APP, but the simultaneous maintenance of interest rate levels at least through the summer of 2019. This was one of the reasons for the additional fall in the euro exchange rate against the US dollar, which approached USD 1.15 in June, its low of this year. At the same time inflation pressures again increased on international commodity markets.
Economic growth in Slovenia became more moderate in the first quarter. GDP growth declined from 6.0% in the final quarter of last year to a still-high 4.6%. Growth in foreign demand slowed, and with it growth in industrial production and certain services. At the same time the build-up of inventories brought increased growth in domestic demand. The latter was also attributable to sustained growth in private consumption, as the factors strengthening household purchasing power remained favourable. The increase in all types of investment continued. Growth in exports slowed more sharply than growth in imports, taking the contribution made by net trade into negative territory for the first time in a long time. The available figures for the second quarter suggest the continuation of more moderate economic growth, with the positive impulses prevailingly coming from the domestic environment.
In an environment of high economic growth, higher inflation and firms’ increasing problems with labour shortages, wage growth is strengthening, and the first signs of a slowdown in employment growth have appeared. Nominal year-on-year growth in the average gross wage increased to 4.6% in April. Although year-on-year growth in employment reached 3.0% in the first quarter, the decline in employers’ employment expectations is perhaps already indicating a slowdown. In this situation consumer purchasing power is increasing rapidly: real year-on-year growth in the wage bill averaged 6.1% over the first four months of the year.
The general government position moved into surplus in the 12 months to March, and according to the Ministry of Finance is forecast to stand at 0.4% of GDP this year, and to fluctuate around this figure over the next two years. Slovenia would nevertheless not be meeting the requirements of the Stability and Growth Pact, as the structural deficit would not be reduced quickly enough. The key is to avoid measures that would cause a deterioration in the structural fiscal position, as general government debt remains high.
Inflation is strengthening, and is embracing more and more price categories. The rate reached 2.3% in June, and continued to outpace the euro area average, which rose to 2.0%. The jump in inflation in Slovenia was primarily the result of higher energy prices, but the high price growth was also attributable to services prices. As a consequence, core inflation also strengthened, as the ongoing robust growth in private consumption is already allowing retailers to raise prices more significantly. The proportion of prices falling or recording growth of less than 1% has declined further this year, an indication of the spread of inflation across the basket of prices in the HICP.
Signs of potential imbalances on the residential real estate market are appearing. According to SURS figures, prices in the first quarter were up more than 13% in year-on-year terms. The model assessment, which has slightly less reporting value owing to the short nature of the time series, suggests that the current level of prices is still in line with supply and demand factors. However, the dynamics in certain indicators are perhaps already indicating potential imbalanced price growth, while price corrections as a result of the new supply of residential real estate cannot be expected in the short term.