Economic and financial developments, April 2019

Favourable economic developments continue at the beginning of this year.

According to the available figures, economic activity in the euro area remained weak in the first quarter of this year. The economic situation in Slovenia remained good, although some indicators suggest a further gradual slowdown. The labour market remains buoyant, while as in previous months the hiring of foreign nationals has been a major factor in the rise in the workforce in employment. The Bank of Slovenia finds that in the final quarter of last year price and exchange rate developments had a favourable impact on the competitiveness of the Slovenian economy, which last year was again among the best performers in the euro area.

According to the available figures, economic activity in the euro area remained weak in the first quarter of this year. The economic sentiment declined again, while the manufacturing PMI reached its lowest level in almost six years. Industrial production and construction activity in January were both down in year-on-year terms.

The latest figures also suggest that the situation in the Slovenian economy remains better than in the euro area overall, although some indicators are pointing to a gradual slowdown in economic activity. While foreign demand has weakened, merchandise exports are continuing to record solid growth, but growth in imports has slowed. Growth in exports of services has remained high. After declining in December, industrial production in January was up 5.7% in year-on-year terms. Despite the deterioration in European industry, for the moment few manufacturing firms see the uncertain economic situation as cause for concern. Growth in turnover in services in January was also up on December. Year-on-year growth in construction activity slowed after the local elections, and remained relatively low in January at 4.3%.

Figure 1: Monthly economic activity indicators, Slovenia (Year-on-year change, 3-month moving average, %)

Sources: SORS, Bank of Slovenia calculations

The situation on the labour market remains favourable from the perspective of continuing growth in demand on the domestic market. Year-on-year growth in the workforce in employment remains high, despite the structural imbalances on the labour market. Excluding self-employed farmers, it stood at 3.1% in January, as the hiring of foreign nationals accounted for almost two-thirds of the growth. The number of vacancies remains high, although the survey indicators of employment expectations declined slightly. Year-on-year growth in the gross average wage rose to 4.2% in January, primarily as a result of the entry into force of an agreement on wage growth in the public sector and the resulting year-on-year rise of more than 10% in the average gross wage in public administration. Wage growth stood at 3.7% in the private sector. 

Inflation rose slightly in March, but remains moderate (at 1.6%). The influence of external factors, oil prices in particular, remains weaker than last year, while pressures from the domestic environment are strengthening, particularly growth in labour costs on one side, and higher purchasing power on the other.

The external competitiveness of the Slovenian economy is largely based on control of labour costs. Wages again moved reasonably in line with productivity in 2018, which meant that growth in real unit labour costs was low, and below the average in the euro area. At the same time the euro exchange rate did not bring any significant deterioration in price competitiveness, and domestic inflation did not deviate significantly from the euro area average. However, the Bank of Slovenia finds the increase in the technological complexity of merchandise exports to be too weak to contribute significantly to catching up with the more advanced euro area countries. According to a survey of financing conducted by the Bank of Slovenia at the end of last year, it is difficult to expect any major changes even in the medium term. The proportion of firms intending to invest in research and development remains at the same level as between 2016 and 2018.

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