Competitiveness of Slovenia is not lessened by labor costs
Gospodarska gibanja 469
All components of domestic final demand increased, their long-term dynamics strengthened while export demand slowed. Despite firm exports and strengthened domestic consumption low level of final demand remains the major obstacle to faster economic growth. Insufficiency of demand has major structural effects, as well; high export demand brought insufficient demand in the manufacturing sector to normal level while negative effects of insufficient demand strengthened in the service sectors. Large difference in the demand for services (the insufficiency of domestic consumption) is a key reason for the differences in the effects of demand on economic activity between Slovenia and the euro area. Furthermore, companies in the services sector have fewer resources which would enable getting access to financing. Expectations indicate that final demand will continue to rise.
In May, there were major changes in foreign trade; exports to non-EU countries decreased, imports from non-EU countries increased. Total trade surplus therefore declined despite slowdown of exports to the EU countries being smaller than slowdown of imports from the EU countries.
Economic climate cooled down slightly in June mainly due to cooling in the services sector while confidence in the manufacturing sector strengthened. Confidence in the construction and retail trade decreased. In EU28, economic climate in June compared with June last year recovered; orders in construction increased, expectations in retail trade and manufacturing improved.
In May, industrial production recovered. In EU28 and in the euro area, industrial production increased both, compared to April or compared to May last year. The largest declines were in Portugal and Sweden, the largest growth was in Romania.
Value of construction work fluctuates, but at the level two-fifths higher than a year ago. The number of overnights by tourists increased; after a short pause foreign tourists took the lead again. Air transport and public road transport strengthened, commodity transportation in Koper as well.
Labor market is recovering; the number of active population increased compared to April and also to May 2013; number of employees in companies increased, while number of employees with individual employers decreased. Number of registered job-seekers declined; among new jobseekers majority are those with expired employment contracts, among those leaving employment offices majority found new jobs or self-employment. The unemployment rate in the EU28 remained unaltered. Extremes remain, Austria and Germany with low unemployment rates on one hand, Greece and Spain with catastrophic unemployment rates on the other hand.
June was marked by a modest increase of inflation; prices of services increased, prices of goods went down. Higher prices of holidays, tobacco, fuel, energy, telephone and internet services contributed to inflation. June's inflation in the euro area was the same as in Slovenia, but lower in the longer run. Also in the euro zone, prices of services are rising faster than prices of goods. Core inflation is rising slowly, both in the EU and in Slovenia; a possibility of higher prices could only come because of developments outside the euro area. The ECB, "anxiously" observing low inflation, will not reduce the risk of debt deflation path, while other key central banks intensively increase their money supply.
Price expectations do not indicate major changes; prices are expected to continue to rise slightly faster than before, while the expected producer prices increased significantly. In the last month (until mid-July), prices of raw materials decreased, particularly prices of foodstuff and oil, while metals became more expensive.
In May, average salary remained unaltered; general decrease of wages continued. By far the fastest was rising of wages in the mining industry, followed by wages in the financial, insurance and other business activities. Salaries were decreasing in all sections of the public sector.
Since the onset of the crisis, wages and labor costs contracted more than GDP; the share of labor in GDP decreased from 54 percent in 2009-2010 to 50.5 percent in the last two quarters. Its share increased only at the beginning of the decline of GDP, as nominal wages are "sticky" and because of then introduced new regulation of salaries in the public sector. An even larger decrease of labor costs was prevented by rapid contraction in employment which particularly affected employees with precarious jobs and lower wages. There is no doubt that a "reasonable" argument according to which labor costs block export competitiveness of the Slovenian economy is a nonsense.
Revenues of the general government declined in June, but the drop was mainly due to large concession fees in May. Domestic taxes on goods and services in June decreased, but longer-term dynamics increased markedly. Revenues of domestic taxes on goods increased in the whole second quarter. In the first half of the year, total tax revenue exceeded last year's revenue by about 550 million €; the only noticeable decrease was in the revenue of value-added tax on imports, due to the decline in import prices and the entry of Croatia into the EU.
Lacking financial support remains a key obstacle to economic activity; even for companies that have sufficient demand, let alone the companies in services which continue to face insufficient demand. Credits to the private sector continue to shrink; more long-term dynamics is even lower than in December, i.e. immediately after the transfer of bad loans to “bad bank”. Both, current and longer term dynamics of credits confirm the continuation of the "improvements" in credit activity. Over-indebtedness of clients, a large proportion of bad loans and small scale insurance potential are key arguments of the regulator and banks for not expanding lending to businesses. However, credits to households decrease as well though households are not over-indebted clients, nor are they clients with high proportion of bad loans, or clients who do not have sufficient collateral.
Slovenia is not alone in the contraction of credit support. Also in the euro area credits to companies continue to fall, but the fall-out rate is slowing and current dynamics is practically stagnant. The situation in Slovenia actually worsened relative to the euro area in the period after the transfer of bad debts to “bad bank”. The dynamics of deposits normalized; long-term dynamics of deposits by households became positive after more than one and a half year. Deposit interest rates continue to fall, both for the short and longer term deposits; in the euro area, the decline of short-term deposit interest rate stopped, for the longer term deposits the rate is half slower than in Slovenia. There are much less changes in the borrowing rates.
Balance of payments surplus is increasing. After five months, current account surplus is close to 800 million euro, which is less than it was a year ago. The surplus consists of larger current account surplus of goods than last year, a smaller surplus on the services account and higher deficit on the incomes account. The structure of the financial account reflects the mode of deleveraging. Borrowing by government increased liabilities in investments in securities account, while decreasing the obligations within other investment account. Gross foreign debt of Slovenia at the end of April was 43.4 billion €, net external debt 12.4 billion, which is € 331 million less than the previous month.
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