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

Are we threatened by deflation?

Gospodarska gibanja 466

Total domestic demand decreased in January, but only seasonally; all components were lower than in December. However, in the longer run household spending and investment grew, only a very variable government spending was significantly reduced. Dynamics in all types of investments is instable, similar to their dynamics in the euro area. Foreign demand remained strong, especially in the area outside of the EU. Expected final demand continues to improve, the most in construction and retail trade. Expectations in the manufacturing sector are better than the corresponding expectations in the euro area; the lagging behind the long-term average is particularly small in export demand. Services have by far the worst anticipated spending.

With solid growth in the beginning of 2014, the imbalances in Slovenian foreign trade declined; deficits in the EU and surpluses with the rest of the world were smaller; regarding foreign trade, Slovenia ranks among the more successful EU28 states.

Business climate warmed in March. The confidence in manufacturing grew, it improved in the service sector, while confidence in the construction sector reached its highest level since October 2008. It was mostly driven by higher expected employment and higher number of orders. Confidence strengthened a little bit also in the retail trade but remained affected by weak demand. Economic optimism in EU28 in March largely improved compared to the same period last year; with orders in the construction industry up, improved expectations in the manufacturing sector, and weakened expectations in the retail trade.

Industrial production compared to February increased slightly, the trend is much stronger. Mining activity shrank but maintained positive direction, production in manufacturing increased modestly and was growing. Industrial production on the year to year comparison grew in the EU28 and the euro area; large fluctuations among countries continued.

The value of construction works was in February lower than in January due to seasonal characteristics of the activity as it was at the same time by one-third higher than a year ago. Part of the increase is probably due to the elimination of damage by ice. In tourism, a number of overnight stays decreased slightly compared to last year; a relatively large increase in foreign tourists stays is accompanied by less domestic tourists. The trend in both, foreign and domestic demand turned down. Developments in the transport branches are much better than before, which is especially true for air and airport traffic and transport in the Port of Koper.


Labor market situation improved, although the numbers of active, employed persons, and employees are lower than last year. The number of registered job-seekers in March decreased significantly, but remained higher than before; employment offices reported fewer job seekers than in February last year; most of them were due to the expiry of fixed- term employment. Outflow from the records of the employment offices increased, most of them got a new job or self-employment. The unemployment rate in the euro area remained unaltered and decreased in the EU28; extremes continue to be Austria and Germany on the low side, and Spain and Greece on the high side.

The cost of living rose in March. Longer term dynamics of prices remained virtually unchanged, prices continued to follow a downward trend. Prices of goods went up almost as much as prices of services, while longer term dynamics of prices for services continued to be higher. Commodity prices on year to year decreased for the third month in row. Harmonized index of consumer prices indicates that deflation is increasingly threatening the euro area. In March, prices shrank in eight countries. Poorer performance of the euro area in the real sector, until now accompanied by declining credits and appreciation of the exchange rate, is now supplemented by falling prices.

Producer prices of industrial products rose in March, but continued to fall in the longer run; there are no significant differences among markets. Expected prices do not indicate that the price dynamics would strengthen. World prices of raw materials increased in mid- April, the most prices of metals and crude oil, but remain lower than last year.

Average wages fell in February, the decline was however smaller than seasonal and longer term growth strengthened. Wage growth remains positive in more than half of the activities. Wages in mining and electricity production increased most, lower were the increases in manufacturing and agriculture. In all other sectors, wages stagnated or declined; particularly in health services and education. Increased growth of uniform labor costs stopped at the end of 2013. Hourly labor costs in Slovenia are close to euro area average; for the whole economy, average hourly cost in Slovenia amounts to 14.6 euro, while it is 28.4 in the euro area.

General government revenues fell in March, indicators of longer term dynamics differ; annual rate increased, impulse trend went down. Impulse trend growth declined both in direct taxes and other revenues and domestic taxes on goods and services. Direct taxes and other revenues in March were considerably lower than last year. The more long-term reduction of tax revenues was caused by the decline of social contributions. Domestic taxes on goods and services in March increased in March, annual growth strengthened, but longer term dynamics remained negative.

The loans (to corporations and households) continued to decline, although the current rate of decline (after the transfer of receivables to DUTB) began to weaken; the annual growth rate of loans to enterprises moved to new by about 12 points lower levels. There are no signs of improved credit activity, loans fall in the euro area as well with the reduction decreasing. Loans to households continued to slowly decrease. The current rate growth of deposits is around zero; growth of deposits by companies began slowing down, the deposits of the households accelerating which is, due to negative annual rates, not noticed. ECB interest rates in the last month have not changed, the interest rates on the interbank market rose slightly, active and passive interest rates for companies decreased, those for households largely stagnated. Euro rose against the dollar.

The surplus in the current balance was lower than last year. It was mainly due to a surplus of goods, while surplus in services was smaller, and the deficit on the income account and net outflow of current transfers was much higher than before. The numbers on the accounts in the financial balance reflects this year’s state borrowing to repay maturing debt. Net foreign debt rose slightly, but at the level almost two billions less than the maximum at end of 2012. In February, gross debt increased, more than half of gross debt is government debt or by the state-guaranteed debt.

Full article is available in Slovenian language.

Only a part of the articles in the publication Gospodarska gibanja (Economic Trends) is written in the English language. Please visit the Slovenian web page.


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