• Velimir Bole
  • Jože Mencinger
  • Franjo Štiblar
  • Robert Volčjak

Government crowds out private credit takers

Gospodarska gibanja 451

All three components of domestic final demand decreased; the least private spending, more government spending and investments. Insufficient demand in industry became higher barrier than it had been in the middle of 2011, while insufficient demand in services has not altered since the beginning of the crisis in 2009. Expected dynamics of demand decreased rapidly both in industry and services. Expected dynamics in services decreased in EU, as well. Exports are gradually loosing power to be the locomotive of economic activity which is not surprising taking into account recession and pessimistic predictions in EU. Faster drop of imports than exports indicates that recession tendencies in Slovenia are stronger than in EU – trade balance is being achieved by impoverishment. Business climate in October cooled because of decreased confidence in all economic activities; all are affected by insufficient demand. Business climate and optimism worsened in EU27 as well, mainly due to lack of orders.

Industrial production shrank again, in manufacturing more than in mining; it is decreasing also in EU27. In September, industrial production decreased in eighteen and increased in four among twenty two countries for which data exist. Construction and domestic tourism declined, tourism was being rescued by foreign tourists. Activity in transportation branches declined, with air transportation being in the worst state, while maritime transportation being an exemption. The situation in the labor market worsened; number of active population decreased while number of registered job seekers returned to the last year record level. Among jobseekers majority are newcomers; they are followed by people for whom job terminated. Among those leaving employment offices, half got new jobs. Unemployment rate and number of unemployed in EU27 and in the euro area continue growing.

Retail sale prices increased in October, longer run dynamics remained unaltered; prices of goods increased, prices of services decreased. Harmonized costs of living index in Slovenia increased more than in EU27 mainly due to higher jump of energy prices. Producers prices did not alter, prices of the products for domestic and non-EU countries lead, prices of the products for EU market lag. Expectations do not point to considerable changes of the dynamics of producers and retail sale prices of goods, while prices of services stagnate at the level of 2009. Prices of raw materials (in Euro) dropped in the last month (until the middle of November), particularly prices of food, while prices of gold increased. However, prices of raw materials in November were higher than in November 2011. Average wages continued to decrease, their longer run dynamics decreased as well. Because of enormous drop in the number of working hours average wage per hour increased.

After enormous drop of tax revenues in September tax revenues in October increased and substituted the drop. As the drop was the largest in the revenues of direct taxes, their recovery was also the strongest. The revenues of domestic indirect taxes increased considerably, as well. The uncertainty about trends remains due to problems with the data series. Credits to the non financial companies and households continue to decrease, so do the deposits. Credits and deposits decrease in the Euro area as well. In Slovenia, the decline of credits began when BS intensified the requests for capital-assets ratio already in the middle of 2010, in the Euro area this happened when EBA strengthened the request in September.

Many banks reacted by lowering credit activity. After the second quarter of 2011, growth of credits was reduced by government activity as well. Due to hard access to capital abroad, government turned to domestic banks and reduced deposits. In such a way, government decreases the support of the banks to business and households, increases instability of the banks liquidity, endangers quality of banks portfolio and results of the banks. Successful balancing of trade balance (by decreasing exports and imports) and increasing surplus on the service account led to a considerable surplus on the current account and consequently to the reduction of foreign debt.

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