Economic recovery in the early part of the year; economic activity expected to pick up sharply in the second quarter

In contrast to the euro area overall, Slovenia saw the economic recovery begin in the first quarter of this year. This was largely driven by the lifting of containment measures, and the resulting growth in sizeable areas of private consumption that had previously been curtailed. The situation is also gradually improving on the labour market, where wage growth strengthened again amid the government measures. Banka Slovenije’s assessment is that the current figures for May indicate a sharp rise in economic activity in the second quarter of this year.

Economic growth in the euro area is recovering as the epidemiological picture improves. Strengthening demand also drove a recovery in services, alongside continuing growth in manufacturing output. After two quarterly declines, GDP is expected to increase in the second quarter of this year. Economic growth is forecast to reach 4.3% this year (European Commission, OECD). Major uncertainties nevertheless remain in connection with the spread of the virus.

In contrast to the euro area, the Slovenian economy actually began its recovery in the first quarter of this year. GDP was up 1.4% on the final quarter of last year. Amid the lifting of the containment measures, the rise was driven most notably by growth in sizeable areas of private consumption that had previously been curtailed. The exceptions were certain leisure services, which have not yet begun to recover to a sufficient extent, given the measures still in place to prevent people from travelling and gathering.

Growth in aggregate industrial production slowed slightly in the first quarter, primarily as a result of a decline in the pharmaceutical sector, but the majority of other sectors saw the recovery continue. Despite construction firms’ optimism, value-added in construction declined relative to the final quarter of last year, but in our assessment this is merely a temporary blip given the scale of residential construction and public investment planned.

The situation is also improving on the labour market as the containment measures are gradually lifted. The number of registered unemployed at the end of May was down 16.8% in year-on-year terms, while the number of vacancies is rising. Given the rising optimism of firms, which in May was already being reflected in a sharp increase in employment expectations in all sectors, even the worst-hit service sectors can be expected to see a gradual improvement in the situation over the coming months.

Thanks to bonus payments in connection with the epidemic, the average gross wage in public services over the first two months of the year was up almost a tenth. Wage growth exceeded 14% in March (in part because of the fall in wages in the private sector during the same period last year).

The general government deficit amounted to EUR 1.2 billion over the first four months of this year, and was mainly attributable to the need to fund Covid-19 measures. After deteriorating in year-on-year terms for more than a year, the balance improved in April, driven by an increase in revenues. The growth in revenues was attributable to last year’s low basis caused by the anti-coronavirus legislation, but economic activity is also strengthening. Growth in expenditure outpaced growth in revenues over the first four months of the year, and continues to be driven primarily by measures in connection with Covid-19.

The economic growth outlook for the remainder of the year is highly positive, and accordingly Banka Slovenije is expecting the economy to pick up sharply in the second quarter. The weekly activity indicators for May show continuing growth in private consumption and exports, while optimism is rising among firms, and the mood of consumers is improving. Amid the restrictions still being imposed by the epidemic, in the short term economic growth might be held back more by limitations on the supply side than on the demand side, as a number of commodities have risen significantly in price, while supply terms have lengthened.

Figure: High-frequency indicators of economic activity

Note: *Includes data from the Bankart system only, which covers more than 80% of all payments. The last data points are not calculated as moving averages.
Sources: FARS, DARS, Bankart, Banka Slovenije calculations

Inflation: recent months have seen certain domestic inflationary pressures strengthen alongside foreign inflationary pressures.

Consumer prices in May were up 2.2% in year-on-year terms. Capacity utilisation in manufacturing has already reached its pre-crisis level, while the numerous crisis bonuses in the public sector have brought a rise in labour costs, and firms have seen a sharp rise in price expectations. Similarly to the euro area overall, inflation has been driven since March by year-on-year rises in energy prices. Despite a rise in food commodity prices, food prices fell in year-on-year terms for the first time in five years, by 0.8%. In addition to food prices, headline inflation was also slowed by service prices, which in May were down in year-on-year terms for the second consecutive month. This year’s weak service price inflation is largely attributable to year-on-year falls in prices of package holidays and accommodation. Core inflation (excluding energy, food, alcohol and tobacco) remained very low, at 0.5%.