Economic activity remains high; disruptions to supply chains putting brake on

The economic recovery is continuing in the euro area, including Slovenia, but is losing a little momentum as disruptions to supply chains hold back manufacturing and certain services. Inflation is rising, but the prevailing assessment remains that the current spike is temporary, given the number of one-off factors at work. The financing conditions in the euro area remain highly favourable for the government sector and the private sector alike. In its Economic and Financial Developments publication, Banka Slovenije finds that the labour market remains in good shape.

Following the high economic growth in the second quarter, which was largely driven by private consumption as the containment measures were relaxed, growth has remained high in the euro area in the third quarter. The economic recovery did however lose strength during this quarter amid disruptions to supply chains, which in September curtailed the performance of certain service providers in addition to manufacturing firms. In the strong economy the situation on the labour market is improving, and firms are increasingly reporting labour shortages. Wage growth remains moderate for now, and the cost competitiveness of the euro area is good.

Inflation in the euro area is temporarily elevated, and stood at 3.4% in September, driven mostly by rising energy prices, and partly by constraints on the supply side. The effects of administrative measures are also evident. The long-term market inflation expectations are also slightly higher. Our assessment remains that the current spike in inflation is temporary, given the number of temporary factors at work, although the risks of continuing inflation are rising.

The situation on global financial markets has been slightly more volatile since the spring, but the financing conditions in the euro area remain highly favourable. Amid the increased uncertainty surrounding the impact of the renewed spread of the epidemic, borrowing costs on the debt security markets fell during the summer, followed by a rise in September that took them back to the level seen before July. The rise was driven primarily by the temporary rise in inflation and the expectation that certain major central banks would respond by gradually dialling back the accommodative stance of monetary policy. The Eurosystem is maintaining its strongly accommodative monetary policy, while remaining alert to current inflationary pressures.

Signs too of a slowdown in the high growth in the domestic economy

Economic growth remains high in the domestic economy, but there are signs of a slowdown. Capacity utilisation is high, and the pre-crisis level of activity has been reached, while shortages of raw materials, intermediate goods and skilled workers are evident, and growth in freight transport has also slowed.

The situation on the labour market provides a foundation for further growth in private consumption. The workforce in employment reached almost 902,000 in July, its highest figure to date, while registered unemployment declined again in August and September. Firms are increasingly hiring foreign workers, which is easing wage pressures. The year-on-year growth in the average gross wage, which stood at 7.1% in July, is largely being driven by wage increases in the public sector.

Inflation stood at 2.7% in September, although the main factors were temporary in nature. The main driver remains energy price inflation caused by last year’s low base and the continuing rise in oil prices. At the same time non-energy industrial goods are rising in price at a faster rate than any time since 2008, as firms have issues with high commodity prices and disruption to supplies of intermediate goods. It is also easier for rising costs to be passed through into final prices on the domestic market in the booming economy. After the relaxation of containment measures in the spring, prices of certain services also began to rise.

The fiscal position improved in year-on-year terms in the first half of the year amid the high economic growth. General government revenues grew even more strongly in the second quarter than in the first quarter, thanks to a base effect and a further rise in economic activity, while growth in general government expenditure slowed considerably, which therefore reduced the deficit. The scale of the measures remained large in the first half of the year, but the largest in financial terms expired in June. Various anti-coronavirus measures nevertheless remained in place in the second half of this year.

Figure: Shortage of raw materials in manufacturing

Source: SORS

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