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

Economy is not hindered by high labor costs but by bankers

Gospodarska gibanja 476


There are no new data on the movement of GDP and its components in the first quarter, but more or less indirect indicators suggest that the trends from last year might continue. However, reliance on foreign demand becomes increasingly questionable. The key is the dynamics of investment, which is closely linked to the fate of small businesses; large companies react to the crisis by reducing rather than by abandoning investment activity, a large proportion of small firms react to the crisis by suspending investments.

A significant drop in trade with non-EU countries, as much as one-tenth compared to last January, and rarely present deficit in trade with them, is due to the situation in Ukraine and the weakening of the ruble. In the mutual trade within Euro group Slovenia continue performing better than average.
According to an annual growth of total exports in January is on the fifth-eighth place, by growth in total imports is the fourth, and it is among twelve states with a positive trade balance.

In March, economic climate warmed. Confidence in the manufacturing sector was increased by new orders and production expectations. Climate in the service sector improved, confidence in the construction sector, due to the drop of orders, rebounded somewhat, while confidence in the retail trade dwindled considerably.

In the EU28, economic climate in March compared with March 2014 improved. In construction, the orders with respect to the previous month fell but they were significantly higher than in March last year. Compared to February, March strongly increased expectations in retail trade, improved the expectations in manufacturing and general business optimism.

Consumers have remained optimistic. Their confidence in the second half of last year and early this year returned to pre-crisis levels; their assessment of the present and future of their own financial situation and of the state of the economy continued to grow. They are more cautious when assessing the suitability and readiness for major purchases and suitability for saving.

Industrial production, mainly manufacturing activity, in January increased if compared to January 2014 and impulse trend was highly positive. In the EU28, industrial production in January was equal to production in December and one and a half percent higher than a year earlier.

The value of construction works in January was higher than in December and higher than in January last year, while the number of working hours decreased. In tourism, the number of overnight stays increased, this time due to a significant contribution of domestic tourists, as the trend of foreign tourists reversed.

The situation in the labor market has stabilized. Since January last year the number of employees in companies and by individuals increased by almost one and a half percent. Unemployment ceased to grow and the number of unemployed started to decline. Contract work has become a normal component of the labor market. Among the newly registered with the employment offices most are those who lost jobs in fixed-term employment, among those who leave the offices most are getting a new fixed-term employment or start uncertain self-employment. The unemployment rates in the euro area and the EU28 as compared with February declined slightly, Spain and Greece remain on the top while Germany and Austria are at the bottom with five times lower unemployment rates.

Deflation on an annual basis is slowing; in Slovenia it is somewhat more persistent than in the entire euro area. Industrial prices continue to fall; the pressures on prices of products sold on the domestic market are harsher than the pressures on the prices of products for foreign markets.

January's monthly earnings were lower than in December and lower than a year ago, hourly wages were higher. By far the most successful at the level, monthly and annual dynamics are the employees engaged in financial and insurance services, while the employees in the construction, catering and various business activities are the losers.

Data on total labor costs do not support the mantras of foreign and domestic "employers" of excessive tax burden. The growth of total labor costs in the business sector was until 2012 on the EU average, since then they began to fall behind, which is also true for total labor costs in the public sector, which lagged also behind total labor costs in the private sector. In 2008, Slovenia was by the absolute amount of labor costs in the business sector on the sixteenth, in 2014, on the fifteenth place in the EU28, while  in the public sector, it was thirteenth and fourteenth. The crisis in EU28 reduced total labor costs of labor in the public sector more than in the business sector. In Slovenia, much higher total labor costs in the public sector before the crisis moved very close to total labor costs in the business sector.

In February, all public purses collected less money than in January. But, as February is a seasonally weak month, the inflows in February greatly improved revenues in the first two months. Total government revenues in two months were 115 million € higher than in the first two months of last year. February's payments to the health fund, covered the January "hole" in direct taxes and contributions. Changes in revenues from indirect taxes have been even better. Higher revenues were created by value added tax on domestic production and by excise tax, less was brought by VAT on imports. Total revenues for social security within two months brought one billion € and were almost 50 million higher than last year. Last year's deficit by quarters were formed by measures related to the "rescue" of banks; without that deficits were rapidly decreasing, while the primary deficit in the second half of the year turned into a surplus. Consolidated gross government debt at the end of 2014 reached 80.9 percent of GDP.

The successful functioning of the economy confronted with drastic reduction in bank lending, raises at least three questions. What will the banks do if not crediting the economy, how the economy faces ever smaller lending, and what are the reasons for such a policy of banks. The contraction of credits and lower deposit interest rates indicate that this is not due only to cowardice of bankers, but also to the desire to meet "commitments" of Slovenia to the European Commission, according to which state-owned banks should reduce their balance sheet and credits and use non-aggressive financial policy, which together with deadlines for their sales secure their low price to potential buyers.

Interest rates in the money market remain close to zero. The deposit interest rates on new deposits, approach to zero as well, while lending rates for new loans remain high and are only slowly decreasing.

January's positive balance of payments, almost twice the comparable of January 2014, is the result of surpluses in goods and services trade and deficit in the balance of primary incomes and current transfers. External debt increased, debt structure is increasingly inclined to the side of the public debt. In early April, yield on 10-year government bonds for Slovenia rose; on April it stood at 1.09% which is lower than in PIGS.



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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