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

The End of Deflation?

Gospodarska gibanja 488


In April, the strength and the structure of the dynamics of final demand did not change much; domestic demand remained weak. Household spending stagnated, investment spending increased, and government spending decreased. The dynamics of investment in machinery and equipment strengthened while the dynamics of investment in housing and other construction works shrank. The transactions in the residential property market do not indicate that the contraction of investment in residential construction is coming from the housing market. Transaction volume is increasing, the recovery in demand is greatest for older homes. Expected dynamics of demand does not indicate noticeable changes except for construction, where expected demand in the last two months exceeded the long-term average. In contrast to stagnation of domestic demand, export demand continues to grow.

April's merchandise trade surplus was large due to stronger exports and weaker imports. In May, the increase in exports was accompanied by the surge of imports; the resulting surplus was thus smaller but came from trade with EU and non-EU countries. In the first five months, exports and imports were higher than in the same period last year, trade surplus exceeded half a billion €. The terms of trade contributed significantly to the volume of trade but not to trade surplus. The EU's trade is shrinking which is reducing also its surplus.

In the last decade, Slovenian trade balance was shaped by a continuous trade surplus in consumer goods, trade deficit in equipment, and reduction of the deficit in trade in reproductive materials. Contributions of the terms of trade to the balance of trade were modest.
Economic outlook in June recovered; it was most affected by higher consumer confidence and trust in the service sector. Confidence in the manufacturing sector remained unaltered, but is beyond the long-term average and with better prospects. In the service sector, the situation is improving; even in the construction sector confidence improved again, confidence in the retail trade improved even faster. Economic optimism in the EU28 in May compared to the same period last year decreased slightly. In construction, however, the orders increased compared to April this year or to May 2015. Expectations in retail trade decreased, they increased in manufacturing.

Industrial production, thanks to its manufacturing, improved in the annual comparison and if measured by impulse trend. Mining activity in comparison with April 2015 decreased by a tenth and its trend is also shrinking. Industrial production in the EU28 and in the euro area compared with March this year and April last year rose; most in Ireland and Portugal.

The value of construction works in April was higher than in March, but its level was as much as a third lower than in April of the previous year, the trend is rapidly shrinking. Total number of overnight stays declined slightly. The demand of domestic tourists increased while the number of foreign tourists decreased. Number of passengers and passenger-kilometers in the air traffic increased. In urban transportation there were more passengers than in April 2015. Passenger traffic at Brnik in April compared to April 2015 fell by 10 per cent, in the port of Koper the loading of goods in April was for a fifth lower than in April last year.

The situation on the labor market is improving; the number of working persons increased. The number of employees by legal entities increased by as much as two and a half percent, while the number of those employed by natural persons decreased. At the end of June and after several years less than 100 thousand job seekers registered. Among the newly registered the largest share belongs to persons who lost their temporary jobs, among those who left the employment offices most were re-employed or self-employed. The unemployment rate in the EU dropped significantly; in the euro area it remained unaltered and higher. The lowest are unemployment rates in the Czech Republic, the highest in Greece and Spain.

At the end of the second quarter the prolonged epoch of stagnation or decline of prices which had lasted more than a year and a half ended; annual growth rate of prices and their impulse trend became positive. Prices of goods and services increased in the longer term, however, only prices of services rose significantly.  In June, the harmonized index of consumer prices in Slovenia in June rose more than in the euro area. Also producer prices increased a little, but more long-term decrease continued in all markets (domestic, EU and non-EU).

Price expectations indicate an alteration of price movements and that in the next few months one can expected a significant increase of the retail price of goods and services and industrial producer prices. Common residential property prices are slowly increasing, but they remain a quarter below the level of 2008. World commodity prices rose in the last month, but fell during last year.

Average wages declined in April; also a more long-term dynamics was slightly lower than in March. A reduction of average wages was due to lower number of hours paid, as the average hourly earnings increased significantly. Wages in mining, quarrying, electricity, gas and water production lagged while they strengthened in trade and other business activities. In the government sector, wages rose below average; high annual rates of growth in public services and education are probably the result of delayed promotions.

In the first quarter of the year there were no major changes in the dynamics of labor costs; the dynamics lags significantly behind the pace in the euro area and is also much more variable. In the public sector, the differences in the dynamics of unit labor costs between Slovenia and the euro area increased even more.

In June, public revenues lagged behind those of May, more long-term dynamics decreased, but the growth trend remained strong; reduced annual rate is the result of a shift in the timing of payments. The revenues from domestic taxes on goods and services and revenues from direct taxes (personal income tax, corporate income tax) and other revenues increased. Revenues from domestic taxes on goods and services were in June significantly lower due to the halving of excise duties and the reduction in the revenues from value added tax on imports.

In the first half of the year, government revenues were on an annual basis almost 1.5% of GDP higher than last year. The increase was driven mainly by higher revenues from taxes on corporate and personal income, revenues from value added tax, revenues from contributions and administrative services, while the biggest decrease was due to excise duties and fines.

It seems that April was an exception in credit activity; in May loans to businesses and households declined again. The structure of the contraction remained unaltered, loans to companies rapidly falling, while loans to households stagnating. Loans in the euro area grow much faster than in Slovenia; in addition the level of credits is much higher there than in Slovenia, and the growth of the Slovenian economy is a half faster. Therefore, the difference in the credit supply is even greater. Despite the rapid contraction of credits the deposits of companies and households are increasing rapidly, both faster than in the euro area. Such financial potential of non-financial companies and households is almost exclusively the result of surpluses in international trade. This also highlights the potential dimension of the collapse of the economy in the event of significant sudden drop in export demand.

In May, interest rates did not change noticeably. Deposit interest rates in Slovenia and in the euro area remained unchanged. Lending rates for households and companies in the euro area declined slightly, while in Slovenia the borrowing interest rate for the population remained unchanged, those for the companies were reduced for small loans and increased for large loans.

In April, the current account surplus reached a new record; the cumulative surplus in the first four months is already quite close to 1 billion € or 8%  of GDP in the period. External debt fell in April so did the yields on Slovenian government 10-year bonds, which are lower than the yields on Italian and Spanish bonds, indicating a better international economic situation of Slovenia.

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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