Economy slows after good first half of year

Slovenia saw high economic growth in the first half of this year, but the latest data for the third quarter is indicative of stagnation. Banka Slovenije finds that these developments point to GDP growth of around 6% this year, in line with our expectations from the latest projections. Inflation remains at persistently high levels, in Slovenia and in the broader international environment. In these circumstances central banks including the ECB are continuing the normalisation of monetary policy. The Governing Council of the ECB will decide on next steps this month.

While economic developments in the euro area were favourable in the first half of the year, with the strong demand for services particularly encouraging, the latest figures suggest activity might be cooling in numerous sectors. The IMF has raised this year’s economic growth forecast to 3.1% in light of a good second quarter, but has cut its forecast for next year to 0.5%. The forecasts are accompanied by great uncertainty, particularly in connection with the disruptions to gas supplies and the broader consequences of a longer war in Ukraine.

Slovenia is also seeing an economic slowdown in the third quarter, after extremely good growth in the first half of the year. The situation in manufacturing remains better than expected, but activity is slowing in services and, in part, in construction. Year-on-year growth in the real value of card payments and ATM withdrawals in September was down significantly on previous months.

According to the latest developments, the nowcasting for quarterly GDP growth indicates a stagnation in the third quarter, which would entail annual GDP growth of around 6% under the assumption of similar developments in the final quarter. Banka Slovenije finds these developments to be in line with the expectations from its projections released before summer.

The labour market remains extremely buoyant. Registered unemployment is at its lowest level since records began. The year-on-year rise in the workforce in employment slowed over the summer months, but remained above its long-term average. Wage growth remains moderate.

The current account deficit is widening amid high import prices of energy and commodities. The current account deficit over the first eight months of the year amounted to EUR 210 million, while the merchandise trade deficit reached EUR 1.6 billion, compared with a surplus of EUR 1 billion during the same period last year. Half of the year-on-year change was driven by the widening deficit in energy trade, under the influence of high prices on the global market. The reversal of merchandise trade with Russia from surplus to deficit was a major factor. The services trade surplus is widening at the same time. Nominal year-on-year growth in foreign trade remains extremely high, amid favourable external competitiveness.

The general government deficit over the 12 months to June narrowed to 3.0% of GDP thanks to the growing economy and a decline in spending on emergency measures. The government is forecasting that it will temporarily widen to 5.0% of GDP next year, driven by measures to mitigate high energy prices.

Similarly to the euro area overall, inflation in Slovenia remains at high levels and is increasingly broad-based. Evidence of this comes from the rise in core inflation (excluding energy and food prices); almost 60% of the goods and services included in the measurement of core inflation saw year-on-year price rises of more than 5% in September. Energy and food prices also remain high. Even higher inflation in September was averted by the government measures to support households, which are mainly acting to reduce energy prices for heating. Energy prices were nevertheless up more than a quarter in year-on-year terms. Food prices are also rising consistently, as food production costs rise, exacerbated by the dry summer in Europe. Inflationary factors remain pronounced: import prices continue to rise, while domestic producer prices are also being driven up by rising input costs.

In light of the persistence of high inflation in the euro area, September’s meeting of the Governing Council of the ECB took the decision to raise the key interest rates by 0.75 percentage points. Other global central banks are responding similarly, which is driving a rise in risk-free interest rates on the money market, and further rises in government bond yields. At the same time investors remain concerned about slowing economic growth, which has driven increased volatility on the financial markets, falls in the value of higher-risk asset classes, and a rise in the US dollar against most major global currencies.

Figure: Components of inflation

Sources: SORS, Eurostat, Banka Slovenije calculations; Latest data: September 2022

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