Latest data paints favourable economic picture in second quarter
The latest incoming data shows economic activity strengthening in the second quarter in Slovenia, while growth in the euro area overall remained more modest. Inflation is slowing domestically and in the euro area, although service price inflation remains high. The domestic labour market remains robust, with low unemployment and relatively high wage growth.
The latest data shows modest economic growth in the euro area in the second quarter. It was mainly driven by the ongoing growth in the service sector, while manufacturing is continuing to face a decline in orders. According to the data on economic sentiment, economic activity is expected to strengthen slightly in the second half of the year. Inflation is slowing: the headline rate in the euro area stood at 2.5% in June, while core inflation was unchanged at 2.9%.
The latest data for Slovenia shows stronger economic growth in the second quarter. There was an improvement in the situation in manufacturing, and the conditions for further growth in consumption on the domestic market remained good, with real household income strengthening. There were rises in consumer confidence and in the number of overnight stays by foreign visitors, while the value of card payments and ATM withdrawals continued to grow in real terms. By contrast, construction activity has begun to slow significantly. Based on a broad dataset for the second quarter, the average nowcast for quarterly GDP growth currently stands at 1.0%.
The labour market remains robust. The workforce in employment hit a new high in April, while the survey data points to continuing growth in hiring in the months ahead, particularly in services. The surveyed unemployment rate remains low (3.4%), which is a reflection of the very tight labour market, given that the vacancy rate remains relatively high. In these circumstances wage growth remains relatively high, despite a discernible trend of decline.
The trend of slowing inflation is continuing. Core inflation remains elevated at 2.7%, driven primarily by stubborn service price inflation. This is attributable to domestic factors, in particular the still relatively high wage growth and the solid growth in demand. Headline inflation slowed to 1.6% in June, where the largest factor was a year-on-year fall in energy prices, while food price inflation strengthened again.
The current account surplus remains large, and amounted to more than EUR 3.1 billion over the 12 months to April. Once again the main factor was the services trade surplus, which reached its highest level to date in April.
The general government deficit is narrowing, primarily on account of the buoyant labour market and last year’s good performance by firms, which drove up tax revenues. Reductions in extraordinary measures also had a beneficial effect. The developments in public finances over the remainder of the year will mainly depend on the outcome of wage negotiations, the ongoing work on post-flood reconstruction, and the progress on planned reforms (taxes, pensions and others).