Economic situation in Slovenia remains good; relatively little impact from deterioration in epidemiological situation

The indicators for the euro area and also for Slovenia in the final quarter of last year suggest that the impact of on economic activity from the epidemiological situation was relatively small. Economic growth has slowed slightly since Slovenia regained its pre-crisis level of activity, but it remains good. The situation is also being reflected on the financial markets, where there is a faster move away from an accommodative stance by central banks. The domestic labour market remains very buoyant, with firms increasingly opting to hire foreign nationals as the domestic pool dries up. Banka Slovenije’s assessment is that certain macroeconomic risks nevertheless remain significant, owing to the record case numbers and high energy prices.

Economic growth in the euro area remained high at the end of last year, but slowed slightly amid the challenges faced by firms. The situation does vary greatly from sector to sector, depending on the reimposition of certain containment measures, shortages of raw materials, and increasing difficulties in securing qualified workers in certain segments of the economy. Work processes are also being disrupted by absences caused by the sharp upswing in the pandemic.

A major feature of the financial markets in the final quarter of last year was the faster scaling-back of the accommodative stance of central banks. The ECB was no exception, although its monetary policy stance nevertheless remains among the more supportive in the eyes of market participants, compared with other central banks in advanced economies. Market interest rates in the euro area rose further, and suggest that the financial markets see a possibility of emerging from the negative interest rate environment significantly more quickly than was anticipated before the pandemic.

In a situation of surplus demand and strong price pressures in the international environment, inflation in the euro area and in Slovenia reached its highest figures for many years in December, and the forecasts of a slowdown over the following quarters come with major risks. The figures for January will be available in early February, like every year.

In the domestic economy too, the adverse impact from the deterioration in the epidemiological situation is relatively small for now. The high economic growth has slowed slightly since Slovenia regained its pre-crisis level of GDP. Amid heavy government investment, growth is being driven markedly by domestic demand, which is significantly stronger than the euro area average. This is being reflected in a rapid narrowing of the current account surplus. Our assessment is that certain macroeconomic risks remain elevated, most notably on account of the increase in absence from work amid record case numbers, high energy costs and high inflation, which is already curtailing real growth in household income.

Employers are facing growing shortages on the domestic labour market. The workforce in employment again reached a record high in November, and rising employment is evident in almost all sectors. The rapid fall in domestic unemployment is driving firms to hire foreign nationals, who last autumn accounted for approximately half of the year-on-year rise in the workforce in employment (excluding self-employed farmers).

Figure: Limiting factors in Slovenia

Note: * Banka Slovenije estimate based on share of value-added. Includes firms in industry, construction and other services that in the survey cited labour shortages as a limiting factor.
Sources: Eurostat, Banka Slovenije calculations

The strong economy is also being reflected in the general government position. The general government deficit over the first nine months of last year amounted to 5.2% of GDP, down 1.8 percentage points in year-on-year terms. Growth in general government revenues was high at almost 11%, thanks to strong economic growth driven largely by booming final consumption, and a sharp rise in employment and wages. Growth in general government expenditure was around 4 percentage points lower. Growth in government investment was notable at 26%, and the year-on-year rate hit approximately 40% in the third quarter. The scale of the anti-coronavirus measures in the second half of the year was smaller than in the first half, following the expiry of the largest measures in June. The nominal debt remains well above its pre-crisis level, despite the improvement in the public finance indicators.

Publication Economic and financial developments January 2022 is available on the link.