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

Collapse of domestic demand

Gospodarska gibanja 455

A collapse of domestic demand in the last quarter of 2012 had been foreseen by expectations but it was partly covered by seasonal factors. Private consumption plunged most moderately, however it was more than four percent lower than in the same quarter of 2011. The fall of investments in December was seasonal, government expenditures dropped drastically.

Foreign demand slowed considerably at the end of the year, as well, less on the non-EU markets. Fast reduction of domestic demand and acceptable dynamics of exports increased the contribution of balance of trade in goods and non factor services to the growth of GDP; the contribution in the last quarter amounted to 7 percent. This places Slovenia in the second group of net exporters in the EU. Continued generation of such surpluses could neutralize outflow of capital needed to service foreign debts of banks. Expected export demand began improving, expected domestic sales remained on the long run average level.

A revival of foreign trade which had followed the bottom of the depression in 2009, ended in 2012. Exports stopped growing, imports declined. Both can be attributed to the deepening of the recession and partly to worsened terms of trade.

Business climate in February stabilized at the level which is however 14 percentage points lower than longer run average. The confidence in manufacturing was the strongest, in services it stabilized at a very low level, it was worsening in the retail trade, the last activity hit by the crisis. In EU27, general business optimism improved slightly in January; according to IFO data for February business climate in German manufacturing has improved most since July 2010.

Slovenian industrial production declined considerably at the end of the year; in EU27, industrial production increased in fourteen and decreased in six countries with available data. The sinking of Slovenian construction sector continued, improvement in tourism was brought by foreign tourists; the number of domestic tourists declined. The trends produced by the crisis continued in transportation, more passengers in public road transportation and less in air transportation. Maritime transportation decreased considerably.

Situation in the labor market worsens rapidly; the number of job seeker is increasing fast; there are many more newcomers than leavers of the employment offices. Among newcomers majority come because they lost jobs for a determined period, among leavers two third get new jobs, one third move to non-active population. The effects of the recent development on the labor market will be long lasting; number of active population decreased by 3 percent in 2012. Unemployment rate in the euro area increased in a year for one percentage point reaching 11.7%, the appropriate figures for the whole EU27 are 0.7 percentage point and 10.7%; among member states Austria has remained the best, Spain and Greece the worst.

Considerable yearly growth of costs of living continues; in February, inflation in Slovenia increased, in the euro area decreased. Prices of industrial producers did not change much. In January, prices of products for exports decreased slightly, prices of products for domestic market did not alter. Price expectations point to the continuation of present dynamics. In the latest month (to the middle of February) prices of raw materials on the world market increased, while in a year they decreased. In December, wages dropped, longer run dynamics improved slightly but remained negative. Rather general drop of wages was strengthened by the decrease of working hours. This development affects income structure of GDP, as the sum of wages and other labor related incomes lag more and more behind GDP growth. The share of labor in the beginning of 2013 lags behind the share at the beginning of the crisis and also behind the share in EU. The major part of wage contraction took part after
2010, when economic activity turned down again; the contraction of labor share continued in 2012.

The data on public revenues remain incomplete. In January, the revenues of direct taxes decreased while those of domestic taxes on goods and services increased. Longer run growth of direct taxes was negative; among important taxes, only income taxes increased, while revenues of profit taxes decreased, contributions for social security were also weak. Domestic taxes on goods and services increased in January, trend dynamics strengthened as well. However, tax revenues were lower than a year ago. The structure of domestic taxes on goods and services continue changing on the account of value added tax and in favor of excise tax.

Credits to non financial customers have been falling since middle of 2010. Similar turn in dynamics appeared in the euro area; however in the third quarter of 2011. Since then, the acceleration of the shrinkage in credits to non financial business is similar. Credits to households are also decreasing faster and faster, while in the euro zone they are stagnating. Despite that, overall deposits are decreasing very slowly; surplus in the current account is one of the likely reasons. ECB interest rates have remained unaltered, the banking sector interest rates have not changed since October, also lending interest rates have remained rather stable.

In 2012, Slovenia attained current account surplus of 2.5 percent of GDP, mainly due to extremely low deficit on the trade account, which is a consequence of low domestic demand, and partly due to surplus on the account of current transfers. Last year balance on the financial account corresponds to surplus on the current account; it indicates a reduction of foreign indebtedness.

User login

Enter your username and password here in order to log in on the website:

Have you forgotten your password? Subscribe!