Improvement in a number of economic indicators going into this year

The euro area economy continued to cool in the final quarter of last year. Inflation is expected to slow further over the coming months, despite its slight rise at the end of last year. Slovenia has also seen signs of recovery in recent months, and inflation is gradually slowing. The labour market remains robust, and year-on-year wage growth remains high.

The slowdown in economic activity in the euro area continued in the final quarter of last year. The PMIs remained at similar levels to previous months, mainly in reflection of the persistent weakness of foreign demand. A base effect meant that the slowdown in headline inflation in the euro area briefly ended as expected in December, when it rose to 2.9%. Meanwhile core inflation is continuing to fall, but remains high at 3.4%.

This situation is also being reflected on the financial markets, where market participants’ expectations of the pace of interest rate cuts increased notably.

According to the available indicators, the economic situation in Slovenia has improved slightly in recent months. There was a slight improvement in assessments of demand in services and retail, while construction firms are also reporting a relatively stable business environment. The situation remains most challenging for manufacturing firms, whose performance is being curtailed by weak demand and uncertainty. Consumer confidence is showing a trend of improvement. In light of these indicators, our models’ latest estimate is that economic growth stood at around 1% in the final quarter of last year.

The labour market remains tight, amid the continuing rise in employment and fall in unemployment. The workforce in employment rose again in November to reach a new record high. The continuing rise in employment was driven by positive developments in services and construction, while manufacturing saw a year-on-year contraction in the workforce in employment. According to survey indicators, employment will continue to rise over the following months in services and in construction, but is expected to remain broadly unchanged in manufacturing. In the very tight labour market, year-on-year wage growth also remains high, albeit lower than at the beginning of last year.

Inflation in Slovenia slowed to 3.8% at the end of the year, primarily as a result of base effects, the easing of price pressures in production chains, and current falls in energy prices supported by cuts in excise duties and margins on motor fuels. Core inflation is also falling, and stood at 4.4% in December, but is still outpacing headline inflation, primarily on account of high service price inflation, which is being driven by growth in labour costs.

Developments in foreign trade remained weak towards the end of the year, on account of geopolitical tensions and the situation in European industry. Falling demand in the euro area reduced nominal merchandise exports, but the year-on-year decline in imports was even larger. Developments were more encouraging in most segments of services trade. The 12-month current account surplus thus reached EUR 2.3 billion, its highest level of the last two years.

The consolidated general government deficit amounted to EUR 1.1 billion over the first eleven months of last year, around EUR 330 million wider in year-on-year terms. The highest growth on the revenue side was recorded by social security contributions, personal income tax, and taxes on goods and services, in reflection of the favourable situation on the labour market as far as public finances are concerned, and the high inflation. The slightly higher growth in expenditure was driven by subsidies, wages and investment. The widening of the deficit was also attributable to the expansion of the support measures to mitigate the rise in energy prices and the post-flood reconstruction.

Publication Review of macroeconomic developments, January 2024 is available here.