Economic and financial developments, January 2019
Governing Board of the Bank of Slovenia discusses the Economic and financial developments, January 2019.
- The international climate is slowing, and economic growth expectations in Slovenia’s trading partners are gradually declining along with it.
- According to the latest monthly confidence and activity indicators, Slovenia’s economy remained favourable in the final quarter of last year.
- Although the proportion of firms facing a shortage of suitable workers is increasing, employment growth remains high, while wage growth remains within the bounds that maintain cost competitiveness.
- The current account surplus over the 12 months to November exceeded 7% of estimated GDP, despite a decline in the merchandise trade surplus.
- Inflation fell to 1.4% in December, as price pressures from the rest of the world eased. The rise in core inflation to 1.3% was attributable to domestic inflation factors, which are most evident in growth in services prices.
- According to the estimate in December’s draft budget plan for 2019, the public finances are thought to have been in structural balance last year, which is not expected to be the case this year. According to these estimates, the structural position is forecast to deteriorate this year, while growth in expenditure is forecast to be higher than prescribed by the fiscal rules.
- Slovenia’s aging population and the imbalance between supply and demand on the labour market mean that migratory flows are becoming increasingly important.
The international environment is becoming less encouraging for Slovenia’s export sector. For several months now survey indicators have been pointing to a slowdown in global expansion, and economic growth in the euro area is continuing to slow. Consequently the weighted forecast of economic growth in Slovenia’s trading partners has been lowered slightly, but it nevertheless suggests that conditions will remain relatively solid for the export sector. In the wake of major divergence between the monetary policies of the ECB and the Fed, the euro has mostly fluctuated below the mark of USD 1.15 over the last three months, its low of the last year and a half. Inflationary pressures in the international environment have eased over the last three months, as oil prices and other commodity prices fell.
Year-on-year GDP growth in Slovenia again approached 5% in the third quarter of last year, without any major signs of new imbalances occurring. The high contribution made to GDP growth by construction investment was in line with the government investment cycle, while the weaker dynamic in merchandise exports was in line with the lower growth in the euro area, Germany in particular. The contribution made to GDP growth by net trade was nevertheless very large, as growth in imports declined by even more. This was partly attributable to surprisingly weak private consumption. The structure of investment growth continued to deteriorate in the third quarter from the perspective of increasing the output potential of the economy, and current growth in investment in machinery and equipment was again weak. Investment is most likely being held back mainly by the increased uncertainty in the international environment. Judging by the latest confidence and activity indicators, the economy remained relatively favourable in the final quarter of last year. Growth is likely to have remained high in construction and certain private-sector services in particular.
In the wake of the high economic growth, the proportion of firms facing a shortage of qualified labour is increasing, but employment growth nevertheless remains high. It was again close to 3% in the third quarter of last year, while employment forecasts also remain positive. The surveyed unemployment rate had fallen to just 5% by the third quarter of last year. Wage growth averaged 3.4% over the first ten months of last year, up 1 percentage point in year-on-year terms, although the dynamic in real unit labour costs remains better than in the EU overall, particularly compared with other newer Member States.
The current account surplus over the 12 months to November amounted to 7.3% of GDP, down 0.4 percentage points on its peak in August. The decline was attributable to a stagnation in merchandise exports in September, and a sharp increase in imports in October. The export developments did not remain weak in October and November, which was partly attributable to an increase in sales on euro area markets. Year-on-year growth in merchandise imports temporarily strengthened to almost 20% in October (its structure indicates increased imports of intermediate goods and consumer goods), before falling to below 9% in November. The surplus of trade in services continued to increase, largely as a result of high exports of travel services. The year-on-year reduction in the deficit in primary income slowed last year, as a result of an increase in the deficit in estimated reinvested earnings.
As price pressures from the rest of the world eased, inflation as measured by the HICP fell sharply in December. It stood at 1.4%, down 0.7 percentage points on November, and 0.2 percentage points less than in the euro area overall. The fall in oil prices and other commodity prices on global markets saw the previous large influence of external factors ease off towards the end of the year, while domestic factors came to greater expression. This is primarily being evidenced in growth in services prices, which accounted for the majority of headline inflation in December. Core inflation as measured by inflation excluding energy and food prices stood at 1.3% at the end of last year.
The fiscal position is continuing to improve, as a result of the favourable cyclical situation, and a decline in interest expenditure. The general government sector recorded a surplus in the amount of 0.7% of GDP over the 12 months to September of last year, while the government debt stood at 71.0% of GDP at the end of last September. Growth in general government revenues remained solid, primarily as a result of increased tax revenues, while growth in expenditure strengthened further, as a result of increased investment. According to the latest government estimates, the general government surplus is expected to have reached 0.8% of GDP by the end of the year, while the government debt is expected to have fallen to around 70% of GDP. According to the Ministry of Finance’s estimates, the public finances are thought to have been in structural balance last year, which is not expected to be the case this year; according to the government’s plans, the structural position is forecast to deteriorate, while growth in expenditure is forecast to be higher than prescribed by the fiscal rules.
Slovenia’s aging population and the imbalance between supply and demand on the labour market mean that migratory flows are becoming increasingly important. In the current economic structure there is a particular shortage of medium-skilled labour, for which reason the hiring of foreign nationals is increasing. Despite the net emigration of Slovenian citizens, the hiring of foreign nationals since 2015 has kept net immigration positive, whereby the average qualifications and professional skills of foreign workers are weaker than those of domestic workers. By contrast, those with tertiary qualifications are emigrating, which entails a loss of potential to the country after years of investing in their education. The assessment is that there are many factors in the background, including the structure of the Slovenian economy, with its large proportion of sectors with relatively low value-added per employee. Without a leap into the generation of higher value-added, and direct action to retain the best-qualified, future growth in productivity could be too low to allow for faster catch-up with more advanced countries, and the effects of the aging population would be worse.
Publication undergoing translation.