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

Economic momentum is slowing

Gospodarska gibanja 471


The momentum of the economy is slowing, though three components of domestic demand were rising in July. Foreign trade growth slowed, and the deficit was created with non-EU countries. The slowdown points to the possibility of a new recession in the EU, especially in the euro area. The drop in exports in August was significantly higher than seasonal and the drop of exports to countries outside the EU (though it appeared later than in other EU countries), began in July. The development in Ukraine most likely contributed to it; further deterioration can be therefore expected in the coming months.
In the past five quarters, economic activity was increasing, but the increases were uneven. In the short-term, value added was growing strongly in trade and catering, construction, industry and information and telecommunications activities, but there were no signs of recovery in real estate sector. In comparison with the situation before the crisis, the activities can be classified into three groups. In the first, the activities which are lagging behind a bit include industry; in the second, lagging more, are trade, transport, hotels and restaurants, financial intermediation and insurance, while in the third far behind is construction, which despite recent growth lags a quarter behind the level before the crisis. In all activities, the backlog of pre-crisis levels is larger than in the euro area.

The economic climate warmed in September, confidence in the manufacturing sector has not changed, climate in the service sector has cooled down, confidence in the construction sector has stabilized in the retail trade has strengthened. In the EU28, the economic climate in September compared to the same period in 2013 worsened, orders increased only in construction, expectations in retail trade and manufacturing deteriorated.
Industrial production in Slovenia compared to the same month a year ago recovered, but it turned to contraction, while in the EU it decreased also in a year on year comparison. Large monthly fluctuations remain a key feature of industrial production in the EU states; in Germany production fell sharply in August. The rapid pace of remaining Slovenian construction ended. Total number of overnight stays decreased in the peak of the summer; demand of foreign guests continues to be stronger than demand of domestic guests. Air and road urban transport grew, traffic in the Port of Koper stalled in August.

The labor market situation recovered somewhat. In August, number of economically active population and employees by legal entities increased from a year ago. In September, there were fewer job seekers; the number of newly registered increased, but number of those who have left employment services increased even more; most of them got new jobs or became self-employed. The EU unemployment rate in August remained unaltered, it was but lower than a year ago; the situation in the euro group is worse than in the whole of the EU, the best is in Austria and Germany, the worst in Spain and Greece.

Prices are lower; the structure of their dynamics changed; prices of goods went up, services decreased; the changes were mainly seasonal. In the Euro area, annual inflation is expected to continue declining slowly; in September, it was higher than in Slovenia. Industrial producer prices in September rose, while they decreased in the long-run. Residential real estate prices continued to fall. Price expectations do not show significant changes. Prices of raw materials indicate the cooling of the global economy. Commodity prices in Euro have fallen in the last month, the most prices of metals, the least prices of agricultural raw materials. The annual dynamics of the price structure was almost the inverse of the structure of monthly dynamics.

In August, average wage decreased, and the decrease was accompanied by the longer term dynamics. Among economic activities, wages increased only in electricity, gas, steam and air provision, and in mining. In the public sector, average wages increased in education and health services, while they decreased in the narrowly defined public services.

Long-term lag in labor costs in Slovenia behind the euro area average is increasing; episodic wage increases do not reach the increase in the countries that have received EU “aid”. The backlog of unit labor costs in Slovenia relative to the euro area is increasing; from the beginning of the crisis, the competitiveness of Slovenia exceeded the competitiveness of the euro area by 8 per cent and lagged 4 per cent  to the competitiveness of countries that have received aid. Lagging of unit labor costs of general government is even greater than the lagging of unit labor cost in the economy.

Government revenues in September rose by a tenth, a more long-run dynamics increased considerably, as well; the revenues of both direct taxes and indirect taxes rose. Domestic taxes on goods and services in September increased by a quarter; all three major tax forms of domestic taxes on goods and services grew in September while in the third quarter reductions in excise tax are mainly due to the contraction of petroleum products prices.

Long-term comparable level of general government revenue shows an improvement compared to the pre-crisis level. At the beginning of the year negative effects of ZUJF were been neutralized, an additional rise in the trend level of revenues appeared in the third quarter. Total tax revenues of September still lag behind pre-crisis level; while domestic taxes on goods and services and contributions already exceeded the pre crisis level; direct taxes barely rose above the bottom and they were in September a quarter lower than before the crisis.

In August, loans continued to decrease; the decline in loans to households stopped, the decline of credits to corporations continued. Since the transfer of bad assets from banks' balance sheets, the decline in corporate loans even accelerated. Banks apparently continue to tighten credit conditions. Also lending to companies and households in the euro area is falling; pace of decline of loans to households is similar to that in Slovenia, corporate loans are falling much more slowly.

Total deposits of enterprises and households in August continue to rise again; they are growing faster than in the euro area. Since loans are falling, the balance of payments shows no large net financial inflows from abroad through a sector of households and businesses, and because the dynamics of government spending has not changed, the rapid increase in deposits may be due to a lower retention abroad.

With lower surplus on the current account compared to last year the inflows continue to grow and the indebtedness to fall. The surplus of 1.2 billion euro in eight months was created by surpluses in the goods and services accounts and deficits in the income and transfer account. The burden of debt increases despite enormous decline of yields on government bonds. The balance on the capital account is created by the inflow of FDI and borrowing by bonds while the outflow is created by repayment of debts. In the gross foreign debt the share of government is increasing, net foreign debt decreased to the level at the end of 2008. 

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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