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

Growth, deflation and uncertainty

Gospodarska gibanja 482


What might happen in the next few months is rather unclear, there are signs of further growth but also signs which point to the end of growth. Domestic consumption decreased in August, more long-term dynamics remained positive. In August, all components of domestic demand were decreasing, in the longer term dynamics only investment shrank. Current exports were increasing in September, but the annual rate declined. So far, the lion's share of the growth have been generated by exports; some components of domestic demand have joined recently, which is crucial for the sustainability of growth; without growth of these components the overall economic growth depends exclusively on a very uncertain dynamics on export markets. Changes in spending of households for durables are largely determined by developments in the residential property markets, where the number of transactions is growing and the prices of residential real estate began to turn upward, indicating that the situation for the consumption of durable goods is favorable.

Despite large foreign trade surplus in September, annual dynamics of foreign trade is leveling out and is becoming weaker than comparable dynamics in the EU, despite more favorable changes in terms of trade in Slovenia than in the EU. In nine months, Slovenian dynamics of foreign trade nevertheless remained above the EU average.

Business optimism in October was most affected by an increase in confidence in the manufacturing and services sectors, a recovery in construction, while the expectations in the retail trade faded. Economic sentiment in October compared with the same period in 2014 across the EU28 in general improved.

Industrial production increased in the year to year comparison, short-term dynamics is also favorable. Industrial production in the EU28 and even more so in the euro area declined; it rose the most in Croatia and Hungary, while the biggest decrease was in Ireland and Lithuania. The value of finished construction works was in September lower than in August and lower than in September last year, the impulse trend of the construction shrank. Total number of tourist overnight stays increased in the late summer, this time domestic tourists contributed more but their current dynamics is shrinking, contrary to the growing dynamics of foreign tourists. Air traffic continues to grow, urban road transfer is waning, the transport of goods in the Port of Koper continues to increase.

Labor market situation worsened and the number of job-seekers increased though mainly due to seasonal factors. Among newly registered job seekers there are more of those who signed up for the first time, than those who lost their precarious jobs; among those departing employment offices less than previously found new jobs. In the euro area and the EU, unemployment rates compared with previous year decreased; they are higher in the euro countries than in the non-euro countries. Top performers are Germany and Czech Republic, while Spain and Greece are the worst.

Deflationary pressures continue to soar. The prices in October did not change; prices of services remained unaltered, prices of goods went up. In a longer-term dynamics, prices of both decreased.  Price changes by product group were primarily seasonal. The harmonized consumer price index was unaltered in October, while it was pushed down on a year to year basis. In the EU, a year to year price growth turned positive again in October, while Slovenia was lagging. Because of too late intervention, the ECB is, despite large monthly doses of base money, no longer able to perform its most basic task – keeping price growth in the near, but below 2%. It is thus illusory to expect that ECB would be able to do something for strengthening economic activity.

Industrial producer prices in September declined for all groups of products and for all markets. Price expectations are also lower, so one can expect strengthening of deflationary trends. Repressed domestic consumption will be exposed not only to austerity measures of fiscal policy but also to  inadequate policy of the ECB compressing  domestic consumption by tightening banking regulation.

While retail prices of goods decreased, the prices of real estate increased. Prices of second-hand real estate are less vivid than the price of new housing, prices of apartments more than prices of houses. In October, the prices of raw materials increased, the most food prices, the least metal prices and gold.

Long-term wage growth has virtually stopped. In September, current average wages decreased, reducing the current and more long-term dynamics. In general government, wages rose in administration and education, they fell in health care. A more long-term dynamics of wages was low in all activities. Wages in general government have not changed; they stagnate in administration and health care, while in education wages fell. Considering longer term the gap in the dynamics between the wages in industry, thus in the enterprises which, as exporters do not have problems with demand, and wages in enterprises in the service sector which face weak demand is widening.

Unit labor costs in manufacturing is since the beginning of the crisis growing in step with the appropriate costs in the euro area, while unit labor costs in services were stagnating at the level reached in 2008. Recent recovery of unit labor costs in the sectors of market services induced growth about as fast as in the euro area, but due to the previous lag unit labor costs are lagging. The backlog is similar to that in the euro countries that have received financial assistance.

In October, revenues of general government sector rose sharply, both indicators of more long-term dynamics increased. The main reason is the shift in the timing of payments, which were partly shifted from September into October. Until October, government revenues have been cumulatively for 308 million € higher than last year, one can therefore expect that this year's fiscal revenues will be by 1% of GDP higher than last year. Direct taxes and other revenues in October remained practically unaltered, while domestic taxes on goods and services rose, as the impact of the timing of payments is most significant in these taxes.

The downward trend of credit continues. In September, loans to businesses were reduced, Although economy in Slovenia is growing almost twice as fast as in the euro, loans to business sector in Slovenia have continued to fall faster than in the euro area. Loans to households stagnated despite the fact that households in Slovenia are the least indebted of all the countries in the euro area.

Great "threat" of bank balance sheets with non performing loans (NPL) which has been used to justify the contraction of credits, is questionable. The structure of banks' portfolios is quickly improving though good clients are leaving the banks which automatically worsen the portfolio of banks. Total deposits of enterprises and households in September rose; household deposits grew, corporate deposits stagnated. A more long-term dynamics of deposits remains high, especially in deposits of enterprises.

Despite eroding dynamics of trade in goods, balance of payments surplus in September reached a  record value. Slovenia was among half of EU28 Member States with a positive current balance of payments. The overall surplus was mainly due to otherwise traditional surplus in the balance of services, not traditional surplus in balance of goods and growing deficits in the accounts of primary and secondary income. The yield on Slovenian 10-year government bonds stood 1,653 on 18 November, similar to the yields on Italian bonds a bit lower than the Spanish yield. Gross and net external debt of Slovenia is slowly decreasing; the share of the private debt is only 35 percent.

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.


    Subscribe to a magazine and get free access to articles.


User login

Enter your username and password here in order to log in on the website:

Have you forgotten your password? Subscribe!