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

Some promising perspectives in final demand

Gospodarska gibanja 456

Total domestic demand in January decreased, while its longer term dynamics improved. The shift occurred in households spending and in investment. After a crash in December, government spending recovered and export demand intensified. However, aggregate demand remains a key obstacle to accelerate growth. The decline in household consumption is expected to stop as the anticipated larger purchases rose a little for the first time after a year, and the decline in export expectations died out. Dynamics in consumption of goods will not significantly change, the situation in services is worse; it is expected to stagnate at the level well below long-term average.

Annual increase in foreign trade in January was caused by a surge in exports to non-EU countries and a rise of imports from the EU; the deficit in trade with non-EU countries is unusual. Annual rate of growth of trade is higher than in the EU, even though the terms of trade deteriorated for Slovenia, while they improved for EU27. Economic climate has warmed slightly as confidence in manufacturing, services and retail trade has grown, while it has stagnated in construction; but all at levels below long-term averages. Lack of demand is faced everywhere. In EU27, total economic climate deteriorated in March.

Industrial production in the annual comparison improved, while the mining activity shrank for a fifth. In the EU industrial production fell slightly, it increased in nine and decreased in nine EU countries reporting. The value of construction works and the number of hours worked in the construction industry continued to shrink. Tourism declined sharply in January; foreign tourists joined the fall in the number of overnight stays of domestic tourists. Fluctuations and crisis corresponding shifts in transport continued, number of passengers in public road transportation was growing in air transportation decreasing, the maritime transportation in January lagged behind transportation in January 2011.

The labor market situation has eased somewhat, the basic features remain unaltered: the reduction of the number of employees and fluctuations in the number of job seekers. In the EU, and especially in the euro area, unemployment rate continues to rise, the differences between the States remain large. Austrians continue to be the best performers while the worst Greeks and Spaniards will soon be joined by Cypriots.

In March, the cost of living rose, but by less than the normal seasonal growth, the long-term dynamics of inflation therefore fell. Differences in inflation between the groups are large; prices of goods went up, prices of services went down. Reduction of long-term dynamics is particularly visible in the harmonized index of consumer prices, which is moving closer to the euro zone average. Differences in the growth of producer prices have increased, prices of products for export to the EU went up, products for export to the non-EU countries became cheaper. Price expectations show that we can expect further moderation of inflation. World commodity prices in Euros have risen in the last month, mainly due to a fall in the exchange rate of the Euro; in a year the prices of raw materials decreased.

Average wage fell in January, and declined also in the longer term, the most in the public sector, especially in  education and health. The lowering continued shrinking of relative labor costs in Slovenia compared to the Euro area. The data do not support the general belief  that during the crisis the average wage in the economy shrink more than in the public sector. Indeed, labor costs in the public sector were kept down by keeping wages down, in the private sector they were kept down by layoffs.

Economic policy in the first half of 2012 (“tax reform” and reduction of salaries) brought predictable reduction of government revenues and corresponding increase in budget deficit. Tax revenues in March fell even more than in the first two months, which applies to indirect and direct taxes. Improvement in the fiscal balance, which resulted in a reduction of wages in the second half of 2012 will be in 2013 halved by the fall of tax revenue. As social contributions are the largest and stable tax form, their trend dynamics posts clear and durable impact on fiscal performance. Financial flows which are generated by domestic banking system continue to deteriorate. Loans to companies and households fell again in February, longer-term dynamics remained unaltered; lending to companies fell more than lending to households. As some large companies borrow abroad the financial barriers for activating economy have not increased. Despite contraction in loans to private units, the level of total deposits of non-financial corporations and households has increased. Interest rates on non-financial sector rates have been barely changed; lending rate for the population rose, lending rates for businesses fell slightly! Consumer loans in Slovenia remain cheaper than in the euro area, corporate loans are about 2 percentage points more expensive.

In January, current account deficit (higher than last year) increased mainly due to higher trade deficit. Indebtedness abroad in January fell by one percent of GDP. Capital has flowed in through direct investment (asset sales) and flowed out through portfolio and other investments. The current account surplus in 2012, which exceeded 2.5 percent of GDP (the highest in twenty years) was a result of a much smaller trade deficit and surplus in services; it was lowered by a large deficit in the income account (capital), through which the rest of the world got 3 percent of GDP. The most negative current account balances in 2012 were with Italy, Austria and China, the most positive with Germany, Russia and Serbia. Net external debt of Slovenia at the end of 2012 exceeded 40% of GDP, it was a billion higher than at the end of 2011.

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