Economic activity slows in third quarter

According to figures released today by the Statistical Office, economic growth slowed sharply in the third quarter of this year, driven by a slowdown in household consumption. The adverse quarterly developments have not yet been reflected on the labour market, which remains extremely buoyant. Banka Slovenije expects the economy to remain sluggish in the final quarter of this year, which would entail economic growth of around 5% at year end.

According to today’s figures from the Statistical Office, economic activity in Slovenia declined sharply in the third quarter, contrary to expectations and the current figures. GDP was down 1.4% on the second quarter, significantly worse performance than in the euro area overall, which recorded weak but positive quarterly growth during this period. Thanks to a strong carry-over effect from last year, year-on-year economic growth remained above the euro area average at 3.4%. The Statistical Office also revised its figures for the first half of the year: the latest release revised the quarterly growth figures downwards from 0.7% to -0.1% in the first quarter, and from 0.8% to 0.2% in the second quarter, which has significantly altered the understanding of the economic picture in the first half of this year.

Amid high inflation, which surpassed 11.0% in the third quarter, year-on-year growth in final household consumption is slowing sharply according to the latest figures, and reached 2.6% in the third quarter. Consumer confidence is also very low, which is being evidenced in a sustained decline in appetite for major purchases. Private consumption has nevertheless remained well above its pre-pandemic level for some time now, which is also being reflected in part in rising core inflation. Spending on the domestic market was strongly supported in the third quarter by good performance in the tourism sector, where turnover exceeded EUR 1.1 billion, the largest quarterly figure to date.

At the same time the adverse quarterly economic developments are not yet evident on the labour market: employment remains at a record high, and unemployment at record low levels, while the number of vacancies is also extremely high. 

Investment activity in the private sector is slowing. Investment in machinery and equipment is weakening in particular, which is attributable to the increased uncertainty, the rise in production costs, and the worsening outlook for growth in foreign demand next year. Although debt financing is rising in price as expected amid the withdrawal of accommodative monetary policy, firms continue to assess their access to financing and their financial position as good. Aggregate investment has been strongly supported by the government sector this year, which has been directly evident in growth in construction investment in particular.

Merchandise exports picked up pace in the third quarter, despite the decline in survey assessments of foreign demand by manufacturing firms. The impetus is attributable in part to outstanding orders being met as the situation in supply chains gradually normalises, and to large inventories of final products. With services exports strong, the contribution to year-on-year GDP growth in the third quarter made by net trade turned positive in the amount of 0.8 percentage points after a long period in negative territory, which was also reflected in the current stabilisation of the current account balance. 

The uncertainty in the international environment, the rising production costs and the current decline in new orders had an adverse impact on manufacturing activity, particularly late in the third quarter. Quarterly growth in manufacturing output remained positive at 0.3%, albeit in the wake of a monthly decline of 3.2% in September, which also reduced the year-on-year rate to 2.4%. Much output remains in inventories, which in the third quarter were up 25.4% in year-on-year terms. Recently the worst-hit sectors have included the wood, foodstuffs, chemical, paper and metal industries. At the same time the situation remains favourable at high-tech firms, most notably the pharmaceutical sector, which saw high growth in exports in the third quarter of this year. Year-on-year growth in value-added in construction rose to 10.4% in the third quarter.

Activity in private-sector services remained high in the third quarter, albeit with signs of a significant decline in year-on-year growth in numerous sectors. Year-on-year growth in retail turnover slowed again to below 2%, excluding the strong sales of fuels, driven in part by the summer holiday season. Car sales remained down in year-on-year terms, with manufacturers continuing to face shortages in supply, while there were also sharp price rises. Year-on-year developments in turnover also remained favourable, albeit weaker, in most other categories of private-sector services, most notably transportation and storage, accommodation and food service activities, information and communication, and professional, scientific and technical activities.