Economic situation remains good for now, despite new coronavirus variants and disruptions to supply chains

Despite the major barriers in international trade, and the spread of new coronavirus variants, the economic situation in Slovenia and in the euro area overall remains good. The domestic economy surpassed its pre-crisis level of activity in the third quarter, driven in particular by continued growth in private consumption. Activity in Slovenia, similarly to the euro area overall, is being curtailed by shortages of intermediate goods, while shortages of skilled labour are also increasingly prominent. Employment is at a record level, and firms are strengthening their hiring of foreign workers, having exhausted the pool of domestic labour. Inflation remains elevated going into the new year, amid a number of one-off factors, most notably high energy prices.

Economic activity in the euro area practically caught up with its pre-crisis level in the third quarter of this year: it was down just 0.5%. Growth is expected to be slightly slower in the final quarter of this year, particularly in light of the potential expansion of containment measures to prevent the renewed spread of the pandemic. Furthermore, the risks associated with the bad epidemiological picture in Europe, the spread of the new coronavirus variant, bottlenecks in supply chains, and high energy prices and input commodity prices are all growing. Inflation is also rising, and stood at 4.9% in November according to initial estimates.

The situation on the financial markets remains good, amid continuing economic policy support. A slight increase in volatility is evident, which is attributable to uncertainty on the part of market participants in connection with the duration of the increased inflationary pressures, the rise in Covid-19 case numbers, and the expectation that global central banks will begin gradually scaling back their accommodative stance. The financing conditions remain highly favourable for the government sector and for private-sector issuers alike. The yield on 10-year Slovenian government bonds is currently around 0.20%, approximately 50 basis points above the German benchmark.

Developments remain favourable in Slovenia, although quarterly growth in GDP slowed to 1.3% in the third quarter (taking year-on-year growth to 5.0%). Economic activity is now 1.2% above its pre-crisis peak. Growth in value-added is strongest in private-sector services, in keeping with the strength of domestic private consumption. Amid heavy investment, including a build-up of inventories, growth in imports significantly outpaced growth in exports. The situation in industry remained favourable, although firms are reporting high capacity utilisation and shortages of intermediate goods, which is already curtailing growth in exports. Firms are also seeing growth curtailed by higher commodity prices and energy prices, and a shortage of skilled labour. Quarterly growth in value-added in industry thus slowed to 0.5% in the third quarter. Other sectors saw current growth in activity either maintain the same level as the second quarter, or pick up pace.

Figure: GDP in Slovenia and the euro area

*seasonally and calendar adjusted
Sources: SORS, Eurostat

The situation on the labour market remains highly favourable from the perspective of household purchasing power. The workforce in employment increased significantly again to stand at 906,434 in September, up 2.2% in year-on-year terms, and setting a new high since records began for the third consecutive month. Registered unemployment rose slightly in October in keeping with the usual seasonal developments, but at 66,654 was down by fully 17,000 in year-on-year terms. Wage growth slowed in previous months (reaching 4.1% in September), primarily in reflection of lower wage growth in the public sector driven by a decline in bonus payments.

Energy prices remain the main driver of inflation

Inflation rose again, under the influence of several one-off factors. It reached 4.9% in November, of which energy prices accounted for 2.8 percentage points. The rise in energy prices was attributable to a low base effect, and high prices of oil and natural gas on international markets, while prices of emissions allowances are also rising. Thermal energy and motor fuels again recorded sharp price rises in November. Goods also rose in price, and accounted for 1.3 percentage points of annual inflation amid rises in import prices and producer prices. Core inflation excluding energy, food, alcohol and tobacco meanwhile stood at 2.7%. The expectation is that inflation will persist at higher levels over the coming months, until the situation eases in global supply chains and on the energy markets.