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

Where does European Commission see the overheating of the economy?

Gospodarska gibanja 486


State of the economy is solid, but it is certainly not overheated. Household spending and export spending strengthened; but total domestic consumption was weak in January. Export spending in January weakened as well, but strongly reinforced in February. The dynamics of consumption of durable goods is particularly important for sustained growth. In the beginning of recovery it was catching up with adequate spending in the EU. Since the end of 2014, the dynamics has stabilized, the share of durable goods has remained slightly below the corresponding level in the EU.

Because the economy was in the last two and a half years driven by export demand, the added value in manufacturing was the fastest growing. Fast services exports have been driven by tourism and transport, the dynamics of added value in these sectors is therefore much higher than in the euro area. Speeding up of the construction works in 2014 drove the value added in the construction industry, it is now going down. The value added in the financial sector lags even more since the beginning of the banks rehabilitation.

The expectations do not indicate any significant changes in demand. Export demand and domestic demand for goods is slightly above the long-term average and stagnant. Household consumption of goods shall be most likely more vigorous. Expectations in the construction sector stagnate, similarly also in services.

After the fall in January, the dynamics of imports and exports in February is positive, exports exceeding € 2 billions, are growing faster than imports. The terms of trade for Slovenia and the EU are favorable. Slovenia's share in the trade surplus significantly exceeds its share in the GDP of the euro countries.

Economic sentiments in March barely warmed. Their increases in relation to the previous month were most affected by increases in confidence in the services sector and confidence of consumers.  Confidence in the manufacturing sector was weaker in March than in February and in March last year, but stronger than the long-term average. Expectations for the next three months have improved. Climate in the services sector was better than in a month and in a year ago and also of the long-term average. Confidence in the construction sector is weaker; it has fallen behind the levels of the previous month, a year ago and the long-term average; the expectations have weakened. The confidence in the trade sector decreased slightly but remained higher than a year ago.

Economic sentiments in the EU28 in March compared with the same period in 2015 deteriorated. The value of construction contracts decreased with respect to the previous month, expectations in the retail trade and manufacturing improved. General optimism has increased.

Industrial production, especially in manufacturing increased in February and is much larger than a year ago; the trend is increasing as well. The mining activity in the year declined slightly, but the trend is increasing. Industrial production in the EU28 and in the euro zone in February compared to January fell, the most in Ireland and Greece.

The value of construction works in February was lower than in January and in February 2015, the number of construction working hours decreased as well. The number of overnight stays increased substantially; in January it was a tenth higher than in January 2015. The impulse trend indicates that the total number of overnight stays in the first month was rising.  Foreign tourists again defeated domestic tourists. Urban public bus transport carried slightly more passengers, while there were many more passengers in the air flights. The Port of Koper handled over two million tons of goods, much more than in February last year and also more than in January.

The labor market situation stabilized. The number of employees increased in comparison with the previous month and also with last year; the number of employees in companies increased while the number of those employed by individuals decreased. At the end of March, there were over 110 thousand registered job seekers which is  less than in the previous month or in March last year. Among the newly registered job seekers continue to dominate those who had previous job for a fixed period, between the departing, those who are re-employed. The unemployment rate in the euro zone and in the EU28 dropped, the lowest being in Germany and Czech Republic, the highest in Spain and Greece.

In April, prices rose but lagged behind the prices in April 2015. In a longer term, prices of goods continue to grow while prices of services continue to lag; the changes are small. The harmonized index of consumer prices in April was lower than a year ago; the index fell also in the euro area. Core inflation in the euro area was positive in April, but the lowest in the last five months. It seems that the ECB is gradually losing the battle with inflation. Also, producer prices are weakening; the pace is dictated by the energy prices. Price expectations continue to show a slack. In the last month, prices of raw materials increased, the strongest growth was in the prices of food commodities. Oil was finally a little more expensive.

Annual wage growth was stronger. In February, the average wage increased, more long-term increase is the largest in more than two years. Wages in manufacturing increased the most. The salaries in the general government were lower in February in all activities, but higher than a year ago. Rapid growth of economic activity facilitated an increase of unit labor costs; until the middle of last year they grew faster than in the euro area, then, they were greatly reduced, so that at the beginning of this year they were approximately as high as in the euro area. In administration, unit labor costs continue to increasingly lag behind the unit labor costs in the euro area.

General government revenues were slightly lower in March than in February, but the indicator of long-term growth strengthened markedly. The bulk of reinforcements was brought by an increase in direct taxes and social contributions. In a year, revenues for health insurance and taxes on corporate profits increased most. The yields of domestic taxes on goods and services declined further in March and in the first quarter these revenues were slightly lower than last year. The overall decrease is the result of significantly weaker excise duties which were partly compensated by value added tax.

March is the thirteenth month of continuous reduction of total credits. The loans to households increased slightly more than they fell in February but only achieved the same value as in March last year. The loans to companies accelerated the decline. Corporate loans also lag fast behind the loans in the euro area, where loans are stagnating, while in Slovenia they are declining at annual rate of around 10 percent for the third consecutive year. Such dynamics of loans is quite unusual in relation to the argument of the European Commission, according to which Slovenian economy is among the most overheated in the EU. Total deposits of companies and households continue to accelerate, those of companies faster.  Such extremely rapid growth of deposits in relation to the decline in loans is also in odd with the arguments of the European Commission on the noteworthy unusual developments in the financial sector in Slovenia.  Lending rates have again moved upwards, deposit interest rates in February did not change.

In February 2016, the surplus in the current balance of payments was higher than last year mainly due to higher trade surplus; the surplus in services remained unchanged, the deficits in primary and secondary income were lower than last year. In the first two months, the picture is similar. The financial account shows an increase in liabilities, which consists of the drop in liabilities from direct investments, the rise in liabilities of portfolio investment and the decrease in liabilities of other investments.

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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