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

The economy stubbornly resists awkward credit policy

Gospodarska gibanja 470

Total domestic demand increased markedly in June, a longer term dynamics was however weak; household spending and government spending increased, investments came to a standstill. After the dead-lock in May, export demand accelerated both in June and July. GDP growth in the second quarter picked up the pace and its structure became even more a "EC fashion model", driven by exports and investments, "accompanied by" households spending and restrained by government spending. In the last three quarters Slovenia exceeded the euro area average in the dynamics and structure of growth, and lifted out of "the hole" caused by ZUJFT (act on consolidation of public finance). Expected dynamics of demand does not indicate changes in growth of demand, it is expected to hover around the long-term average.

Exports and imports accelerated in the summer, the surplus in merchandise trade increased. Exports remained the pillar of economic growth of Slovenia, belonging to successful EU Member States.

The economic climate at the end of summer cooled; it has stabilized in the service sector, while confidence in the construction notched, and confidence in retail trade declined. In EU28, economic climate in August compared with the same period last recovered.

Industrial production recuperated rather strongly; according to the SURS (Statistical office) was in July by as much as 7.8 per cent higher than in July last year, it also grew rapidly in the short term. In the EU28 and in the euro area industrial production declined in June; quick increases and decreases by countries continue, which lessens the meaningfulness of the data.

The value of construction works was lower in June than in May, but compared to June 2013 it increased by 29 percent. The total number of overnight tourist stays increased; a decline in domestic demand was accompanied by an increase in foreign demand. Air transport carried more passengers than in June last year, the number of passenger kilometers in air transport and urban transport increased as well. Higher than last year was also the re-loading of goods in Koper.

On the labor market, the situation has again improved somewhat, as shown by the annual increases in the number of active and economically active population, employment in companies and self-employment, while the number of people employed by individuals decreased. Reduction of persons in employment offices decreased, the majority of newcomers entered due to the termination of employment for a fixed period, a large proportion of those who left the institutions was re-employed or self-employed. The unemployment rate in the EU28 and in the euro area is slowly declining.

In August, the cost of living remained unaltered, the annual rate became negative. Prices of goods have dropped for the third month in row, the more long-term dynamics is already noticeably negative. Prices of services are increasing, but more long-term dynamics is rapidly dwindling. Also in the euro area harmonized index of consumer prices stagnates, the prices of goods are falling and accelerated compression of prices is mainly caused by rapid decline in energy prices. The endogenous shrinkage of prices in Slovenia is more intense than in the euro area. The dynamics of the expected price does not indicate changes in the next three months. The risk of deflation is confirmed by the expected producer prices which stick to long-term average, while the actual producer prices have been falling year on year for almost a year! World commodity prices have increased in the month, with more expensive being raw food, while non-food agricultural raw materials and oil became cheaper.

Average wages and labor costs continue to be at a stand-still. In spite of that, arguments that that excessive labor costs reduce the competitiveness of the Slovenian economy and the increasing lack of competitiveness are constantly reappearing. However, after 2008 the total remuneration of employees per unit of added value has been falling and Slovenia generated the fourth largest surplus in foreign trade per unit labor costs which greatly exceeds the average of the euro area.

General government revenues rose in August, but the increase was less than seasonal. The decrease occurred only in domestic taxes on goods and services, while direct taxes and other revenues even increased. The current and longer-term dynamics of government revenues were influenced mainly by excise tax and income tax revaluation. The lion's share of the reduction, not only of domestic taxes on goods and services but also of the total government revenue was contributed by excess taxes. Although such a drastic reduction of excise tax revenues might be due to the time shift of payments, it can also indicate a likely reduction of sales of petroleum products. Also, value added tax in August fell markedly, but the decline was probably mostly seasonal. Among the most important forms of direct taxes and other revenue the income tax revenues prevailed.

Total loans in July fell again, a more long-term dynamics remained at a low level. The overall decline was due to a reduction of loans to enterprises, as loans to households remained practically unchanged. Despite the fall in loans total deposits continued to increase at rates that were normal until the second quarter of 2011, when due to a series of blocked laws, the economy fell into a bad equilibrium, and when external financing of the country became very uncertain.

Credit supply to enterprises and individuals has been after the rehabilitation of banks falling even faster than before. Since private net foreign repay their foreign debts it is becoming increasingly clear, that the economy in the current structure of demand requires virtually no support of banks as it is generating average monthly net surplus in the current account of more than 80 million, which would otherwise be the normal increase in credit supply in an economy with annual growth of about 2.5%. A large surplus in the current account, despite miserable support of the banks, enables current economic growth and increases of deposits by enterprises and households. In the current business strategy of banks (and regulators) also latest-announced "Draghinomic" moves ECB in Slovenia is not expected to change the credit support; banks in Slovenia are so well liquid that they systematically and on a large scale repay even the cheapest central bank source - only this year has decreased by 2 billion or more than halved.

In the fear of deflation, ECB reduced interest rates; deposit rates got even negative values. This did not appear anything new and will remain the case as long as the ECB shrinks their balance despite stagnation and fall of inflation. More time is needed to observe the effects of a reduction in ECB interest rates on other interest rates; except for a slight decrease in interest rates on consumer credit in June in interest rates are lull.

Balance on current account has to date exceeded one billion €. The lion's share is contributed by balance of goods balance, which is higher than last year, while a positive balance of services lagged behind last year, the net outflow through income account is higher, the net outflow through account of transfers is about the same as last year. Capital account shows a reduction of indebtedness, the structure of flows reveals continued deleveraging at the micro level being partially replaced by borrowing by the state. Gross external debt exceeds 44 billion euro, net external debt of 12 billion euro, the share of public and publicly guaranteed exceeds 56 percent. With last year's and this year's surplus and capital outflows we are paying for mistakes in the 2005-2008 period.

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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