Inflation continues to fall as the economy remains sluggish

Slovenia and the euro area overall both saw relatively modest economic growth in the second quarter. Meanwhile wage growth remains high in the tight labour market. Inflation continued to fall in August, and remains lower in Slovenia than in the euro area overall. 

Quarterly economic growth in the euro area stood at 0.3% in the second quarter, unchanged from the previous quarter, although developments in individual countries varied. Services remain the main driver of economic growth in the euro area overall, while manufacturing is likely to contract again in the third quarter according to the survey indicators. Uncertainty is continuing to worsen the economic sentiment, and the weak activity is being reflected in the ongoing fall in headline inflation: the euro area average slowed to 2.2% in August. Core inflation meanwhile slowed to 2.8%, and is continuing to reflect the relatively robust service price inflation. According to the June projections drawn up by the ECB, the euro area economy is forecast to expand by 0.9% this year, and by 1.4% next year. There were similar forecasts in the IMF’s July projections (2024: 0.9%; 2025: 1.5%).

Economic growth in Slovenia in the second quarter was comparable to that in the euro area overall (quarterly growth of 0.2%, year-on-year growth of 0.7%). The year-on-year growth was driven primarily by government consumption and household consumption. The latter was boosted by the fall in inflation and the persistent buoyancy of the labour market, while the high growth in government consumption reflected the increased expenditure on healthcare and on the post-flood reconstruction. Economic growth was curtailed by a decline in exports driven by the weakness of activity in key trading partners, and by lower construction activity. Construction is no longer contributing to economic growth, but activity in the sector remains strong. Growth in private-sector services strengthened, while value-added in manufacturing is also up this year after last year’s challenges. The economic sentiment over the summer remained broadly unchanged from its level at the end of June. The nowcasts are predicting quarterly GDP growth of 0.4% in the third quarter on the basis of a relatively limited dataset.
The labour market remains tight at the mid-point of the year. The workforce in employment fell slightly in June, but remains close to its record high. Meanwhile the survey data suggests that hiring will continue in the second half of the year. The tightness of the labour market is also evidenced in a labour shortage, and employment growth continues to be driven by foreign nationals. Year-on-year growth in the average gross wage remains relatively high at 5.2%, albeit down almost a half on a year ago. 

The trend of decline in domestic inflation continued in August. The year-on-year rate slowed to 1.1%, and thus remains below average headline inflation in the euro area. The fall was primarily attributable to the further deepening of the fall in prices of other goods and energy, while service price inflation was also down slightly on July. The accelerating fall in prices of other goods is also being reflected in developments in core inflation: it fell for the sixth consecutive month to reach 2.1% in August. Food price inflation strengthened again by contrast.

The narrowing of the general government deficit is attributable to high growth in revenues driven by the persistent buoyancy of the labour market, large corporate income tax settlements, and the declining impact of extraordinary measures.

Publicaton Review of macroeconomic developments, September 2024