The economic impact of Russia’s military aggression is limited for now, and is being reflected in high growth in energy and commodity prices

Economic growth in the euro area remained sluggish in the first quarter of this year. This is also being reflected on the financial markets, where the main developments are the gradual normalisation of monetary policy and the anticipated next steps by central banks. The Slovenian economy is strongly outperforming the euro area overall. Growth continued to be driven by heavy investment alongside household consumption, although the level of domestic demand did drive growth in imports.

The impact of Russia’s military aggression against Ukraine and the resulting sanctions is for now primarily being reflected in high growth in energy and commodity prices. This was a key factor in the renewed rise in domestic inflation in May (to 8.7%), where high food price inflation should also be highlighted as a major factor.

The sluggish growth in the euro area economy seen in the previous quarter continued in the first quarter of this year (it again stood at 0.3%). The risks over the coming months come mainly from developments in connection with Russia’s military aggression against Ukraine. 

The economic slowdown is also being reflected on the financial markets, where the main developments relate to the gradual normalisation of monetary policy by central banks. The anticipated changes in monetary policy are also being reflected in rises in government bond yields.

The situation in the domestic economy remains significantly better than in the euro area overall. Alongside household consumption, activity continued to be driven by heavy investment, where construction accounted for a significant share. Domestic demand also drove growth in imports, which remained even stronger than the otherwise high year-on-year export growth. Russia’s military aggression and the resulting sanctions are therefore only being reflected in the Slovenian economy to a limited extent for now. The shock is mainly being evidenced in large rises in energy prices and commodity prices, which is further strengthening inflation via rising import prices.

Banka Slovenije should also highlight that Slovenian firms came into this new situation in good shape. Analysis of the closing accounts of corporations, sole traders and cooperatives shows that non-financial corporations’ net profits exceeded EUR 6.1 billion last year, up just over a fifth on 2019. At the same time their indebtedness as measured by the ratio of total debt to total equity and liabilities remained low, at 50.3%. Labour productivity reached EUR 51,900 per employee, up fully 13.7% on its pre-pandemic level.

The labour market remains buoyant. Employment is continuing to rise, and employers are increasingly highlighting difficulties in hiring qualified workers amid strong demand for labour, record-high employment and record-low unemployment. The average gross wage in March was again down year-on-year in real terms, primarily on account of the high inflation and the year-on-year effect of the ending of pandemic bonus payments in mostly public services. The year-on-year change in the total wage bill was also negative in real terms for the third consecutive month. The average nominal gross wage in March was up 5.1% in year-on-year terms in the private sector, but down 11.8% in the public sector.

The entire euro area, including Slovenia, is continuing to see elevated consumer price inflation. Inflation in Slovenia as measured by the HICP reached 8.7% in May, up 1.4 percentage points on April, the rise being driven primarily by increased contributions from energy prices and prices of processed food. The rise in inflation and the deterioration in geopolitical relations have also created high inflation expectations on the part of consumers and firms.

Publication Review of macroeconomic developments, June 2022, is available here.