Rapid increase in economic activity as the epidemic eases; labour market close to pre-crisis levels

Record highs in certain indicators point to a fast recovery in the euro area economy. Economic activity is also rising fast in Slovenia: the business conditions have largely normalised, while the economy succeeded in preserving the vast majority of production capacity during last year’s crisis, thanks to extensive financial support. The opening of the economy is also improving the situation on the labour market, which is already comparable to that before the crisis in terms of certain indicators. The reappearance of structural imbalances on the labour market, the high capacity utilisation in manufacturing, the growth in wages and private consumption, and the rising optimism are creating further conditions for rises in prices on the domestic market. The latest issue of Economic and Financial Developments also finds the public finances continuing to mainly reflect the consequences of the battle against the epidemic.

Global economic activity is strengthening rapidly, but very unevenly, as the epidemiological situation improves and amid intensive support from economic policy. The US is notable among the advanced economies: by the first quarter of this year it had already exceeded its pre-crisis level of GDP. There are also signs of a strong economic recovery in the euro area, with a number of short-term indicators at record high levels. By contrast, the recovery in numerous developing economies remains sluggish, owing to the lack of sufficient control over the epidemic.

Domestic economic activity is rising fast. Domestic and foreign demand are both strengthening, while the economic sentiment has already returned to its pre-crisis level. Merchandise exports are rising, and certain indicators for the end of the second quarter are suggesting that domestic final consumption has surpassed its pre-crisis level. Investment, including construction investment, is expected to strengthen further, as the decline in construction activity in the early months of this year was thought to be merely temporary.

At the same time our analysis confirms the good financial situation in the private sector, while the saving-investment gap is indicative of large financial surpluses. The recovery will be a more lengthy process in the sectors of accommodation and food service activities, administrative and support service activities, and tourism, where certain containment measures remain in place, owing to the risk of the spread of new Covid-19 variants. Amid strong demand, issues are intensifying on the supply side: firms are already reporting a shortage of skilled workers, and commodities are becoming more expensive and harder to obtain.

Given the positive results from the early part of the year, the current situation confirms our latest forecasts, which are predicting the Slovenian economy to enjoy faster growth than the euro area average over the projection horizon.

On the labour market, registered unemployment stood at just over 71,000 at the end of June, comparable to June 2019, while rising demand for labour saw the job vacancy rate approach its pre-crisis level in the first quarter. Structural imbalances mean that indicators of labour shortages are rising, which could lead in turn to wage pressures. Despite the current very positive signals, future developments on the labour market remain uncertain, and will again be heavily dependent on support measures in the event of any resurgence of the epidemic.

Figure: High-frequency indicators of consumption

Note: *Includes data from the Bankart system only, which covers more than 80% of all payments. The dots denote the four-week moving averages. Sources: FARS, Bankart, Banka Slovenije calculations

The epidemic has opened up large gaps between the labour market situation in the public sector and the private sector. While the gross wage bill in mostly public services in the first quarter was up 20.9% in year-on-year terms according to national accounts figures amid rising employment and bonus payments in connection with the epidemic, it was down 0.9% in the private sector, driven by falling employment and reduced bonuses for employees included in job preservation measures. Our expectation is that these gaps will largely even out when the epidemic ends.

With foreign price pressures strengthening, and domestic price pressures beginning to appear, domestic inflation stood at 1.7% in June. The reappearance of structural imbalances on the labour market, the high capacity utilisation in manufacturing, the growth in wages and private consumption, and the rising optimism of firms and consumers are creating further conditions for rises in prices on the domestic market. External inflation factors nevertheless continue to prevail. The largest contribution to headline inflation continues to come from energy prices, oil prices in particular.

The general government deficit stood at 8.3% of GDP in the first quarter, as year-on-year growth in general government expenditure outpaced growth in revenues for the sixth consecutive quarter, in reflection of the measures to alleviate the impact of the epidemic. By contrast, the situation on the revenue side improved: there was a significant increase in revenues, driven by rises in wages, private consumption and economic growth. The general government debt had risen to 86% of GDP by the end of March 2021. The majority of the additional net borrowing took the form of bond issuance in January, and loans from the EU’s SURE mechanism in February. Borrowing terms remain favourable, and treasury bills have continued to be issued at negative interest rates.

Publication Economic and Financial developments, July 2021 is available on the link.