Press release - Summary of Macroeconomic Developments and Monthly information on bank performance in December 2016

The Governing Board of the Bank of Slovenia discussed and approved the February 2017 Summary of Macroeconomic Developments and Monthly information on bank performance in December 2016.

1. Summary of Macroeconomic Developments, February 2017

Global economic activity has been encouraging in the early part of this year, notwithstanding the increased political uncertainty. In this year’s assessments of global risks, the World Economic Forum also gave no emphasis to those from the economy. The European Commission was of a similar mind in its latest economic growth forecasts, having judged European economies to be relatively robust in the face of global economic, political and security challenges, which in 2016 did not constrain the forecast economic growth. It is also forecasting a two-year period of positive economic growth for all EU Member States for the first time in just under a decade, with Slovenia forecast to achieve growth of 3%, 1.3 percentage points above the euro area average. 
The Slovenian economy is on the rise. The economic sentiment improved further, while consumer confidence is also high. At the same time firms in all sectors are expecting strong growth in demand in the first quarter of this year. The relatively high economic growth seen at the end of last year, which at least according to the monthly indicators was marked by a further increase in private consumption, is therefore expected to continue. According to figures showing high growth in activity in certain segments of construction, investment in residential and commercial real estate is also thought to be strengthening. Growth in exports remained solid towards the end of the year, while the engines of growth in demand were widely diversified in geographical terms. At the same time growth in industrial production remains among the highest in the euro area. It stood at 10.2% in December, more than 8 percentage points above the average across the euro area.
Economic growth has been profoundly labour-intensive since the initial emergence from the crisis, which has resulted in low labour productivity, which given the necessity of maintaining external competitiveness has constrained the convergence of income on the euro area average. Employment growth sharply exceeded expectations last year. The workforce in employment excluding self-employed farmers was up more than 3% in year-on-year terms in December. Unemployment is continuing to fall rapidly at the same time. It was down just over 12% in year-on-year terms in January of this year. Registered unemployment nevertheless remained above the 100,000 mark, which for the moment is still curbing wage growth in the private sector. Year-on-year growth in nominal gross wages in the private sector stood at 1.7% last year, which does not differ significantly from growth in labour productivity in the total economy, and for the moment is not reducing cost competitiveness. 
Productivity growth in the current phase of economic expansion is significantly lower than before 2008. Persistently low growth in productivity could constrain economic growth in the future, if falling unemployment brings a rise in wage growth and a decline in employment growth. To achieve high levels of economic growth over the longer term, there need to be improvements in its structure, including via investment. The issue of low productivity growth is also seen across the euro area, albeit from a more advanced economic standing.
The consolidated general government deficit declined significantly over the first eleven months of last year. It amounted to EUR 510 million, almost EUR 300 million narrower in year-on-year terms. The reduction in the deficit was largely achieved via growth in tax revenue, which was driven by the favourable economic situation, particularly in the labour market. Austerity measures in public-sector labour costs have gradually been relaxed since the end of 2015, while pensions and certain social transfers have also been increased slightly. Government investment is also expected to make a positive contribution to GDP growth this year. In light of the current good economic situation and the latest forecasts by the European Commission, growth in tax revenue could be higher than forecast in the current state budget, which should not be allowed to justify a further increase in expenditure, but should instead be directed into a faster improvement in the general government position. 
The European Commission is forecasting that the Slovenian economy will begin overheating as early as 2017, according to its data. This would trigger a rise in the structural government deficit, but numerous macroeconomic indicators offer no evidence of overheating for the moment. Core inflation and wage growth in the private sector remain low, while growth in bank loans to the private sector is weak, and the ratio of investment to GDP is low. The current account surplus remains large at the same time, despite growth in private consumption and investment. It amounted to 6.8% of GDP in 2016. 
January’s rebound in inflation to 1.5% was primarily the result of the year-on-year rise in oil prices, while domestic inflation factors remain relatively weak for the moment. Although year-on-year inflation as measured by the HICP reached its highest level of the last three years in January, it remained below the euro area average of 1.8%. Had oil prices remained unchanged in year-on-year terms in January, inflation in Slovenia would have been just under 1 percentage point lower. The contribution to headline inflation made by food prices increased, primarily as a result of the ongoing high growth in prices of unprocessed food. The contribution made by services prices declined, while the fall in prices of non-energy industrial goods intensified. Core inflation thus remains weak, and is actually below its level of the middle of last year. Core inflation excluding energy prices stood at 0.7% in January, unchanged from December, and 0.3 percentage points less than the average across the euro area.

2. Monthly information on bank performance in December 2016

The Slovenian banking system’s total assets increased by EUR 398 million in December to EUR 37 billion. This reduced the overall contraction in the banking system’s total assets in 2016 to just 
0.9%. On the investment side there was a sharp increase in loans to the non-banking sector, while on the funding side there was an increase in deposits by the non-banking sector and liabilities to the Eurosystem. 
Loans to the non-banking sector increased by EUR 830 million in December, which brought a reversal in the year-on-year dynamic, which turned positive after a long period of contraction. All sectors other than non-residents saw an increase in loans in December. The government sector, which partly repaid maturing BAMC bonds via loans from five banks, was a one-off factor in credit growth, while it cannot yet be assessed for certain whether there has been a lasting improvement in credit growth in respect of non-financial corporations. December’s increase of just under EUR 400 million meant that the stock of corporate loans was down just 1% in year-on-year terms. The trend of growth in household loans strengthened throughout 2016, and according to data from bank balance sheets household loans were larger than corporate loans for the second consecutive year. The stock of household loans in December was up 4.6% in year-on-year terms, primarily as a result of stable growth in housing loans and faster growth in consumer loans. The latter stood at 7.3% in the final quarter, and outpaced growth in housing loans. 
Deposits by the non-banking sector, household deposits in particular, strengthened their role as the most important source of funding in 2016. They increased by 6.7% or EUR 1,036 million last year, the largest increase since 2008. The increase was primarily attributable to sight deposits, as extremely low interest rates brought a decline in both short-term and long-term deposits. Sight deposits accounted for 65% of the stock of household deposits at the end of 2016.
With turnover and interest rates down on 2015, the banking system’s gross income declined by 2.6% in 2016, although a comparative reduction in impairment and provisioning costs saw the year end with a significant increase in profit, according to unaudited figures. Growth in net interest was negative in the amount of 10% at the end of the year, while the interest margin fell below 2% after two years above the mark. Labour costs are increasing as a proportion of total operating costs, an indication that the banks are not active enough in controlling them. Impairment and provisioning costs in December were almost double the figure in November, but were nevertheless down 73% on 2015. All the banks were profitable in 2016, and generated a total pre-tax profit of EUR 379 million, up EUR 221 million on 2015.
There have been no significant changes in early 2017 in terms of the banking system’s liquidity, which remains favourable.