• Velimir Bole
  • France Križanič
  • Jože Mencinger
  • Franjo Štiblar

2019 will be more demanding than 2018

Gospodarska gibanja 501

A large negative output gap (the difference between actual and potential GDP), created after the decade of the crisis and deepened by "savings" after 2011, has already shrunk significantly due to rapid growth in recent years. Economic growth will no longer be automatic and self-evident.

Total domestic spending declined from high 6.5% in the first eight months to a solid 5.5% in the past three months, which confirms that spending is weakening. Year-on-year rates of growth for August show growth for all components of domestic spending; In August, year-on-year growth relative to year-on-year growth in household and government in July decreased, while it increased in investments.   Year-on-year rates of moving (for example, three-month) averages indicate that the growth of domestic components declined by about one percentage point in August. The dominant role of export demand in driving economic activity is increasing capital exports, the risk of maintaining a stable dynamics of economic activity and opportunity tax losses. Therefore, domestic spending components need to be relatively strengthened, especially those that increase the sustainability of economic dynamics, These are primarily investments and consumption of households for durable goods. The share of durable goods in household spending is increasing in Slovenia more rapidly than in the euro area, but the increase is very slow. Short-term expectations do not indicate that in the near future more pronounced contraction of demand is expected.

Trade restrictions and geopolitical tensions are also beginning to affect Slovenian international trade. Thus, Slovenia's exports to non-EU countries were lower in September2018  than in September 2017 which contributed to the unusual deficit of Slovenia in trade with non-EU countries.

Despite heterogeneous tendencies, uncertainty on economic perspectives in the EU has been increasing in  recent months. November's survey of expectations among managers  in various economic sectors across the EU shows a deterioration of the business climate. On the other hand, there is a vigorous increase of new  orders in construction and  of expectations in retail trade. In Slovenia too, the economic climate is worsening; the deterioration covers both manufacturing (main exporters), and retail trade.

In September, industrial production was lower than a year ago. The results in the first nine months of this year are not bad. The production of equipment was 13%, while production of intermediate goods and consumer goods was about 3% higher than the comparable last year. In the first three quarters, the mining industry was down 2%, while electricity, gas and steam supplies were 2% higher than in the same period last year. Production in manufacturing increased by 6% during this period, and did not fall in any of the sectors that belong to manufacturing.

Revenues in non-industrial sectors  continue to grow. In the first nine months of the year, construction activity was 22% above comparable last year. However, the number of new building permits fell. Tourist activity is about a fifth above comparable last year; the increase is caused by the   number of overnight stays  by foreign guests.. Real turnover in trade and sale and servicing of motor vehicles in 2018  was 15% higher than in 2017.

In the first nine months of 2018, the volume of port transportation  was the same as in the previous year. The number of passengers at airports and the number of passenger kilometers in air transport increased by 11 and percent respectively. In the first half of 2018, the level of transport (ton-kilometers) in road freight transport was the same, while in railway transport it was 1% lower than in the corresponding period last year.

The number of  estimated  unemployed persons, which fell by 50,000 from the comparable level at the peak  of the crisis (2013), started to increase  seasonally and the number of job vacancies declined.

Costs of living increased by 0.3% in October and by 2.2% at annual level; prices of goods went up, prices of services dropped. Most of the price changes were seasonal. Price growth in Slovenia is only slightly higher than the average growth in the euro area. Core inflation continues to stagnate; most of the acceleration in price growth continues to be the result of rising prices of energy.

In one year, average wages of all activities increased by 3.5%. In the non-market sectors, wages in a year increased the most in health and compulsory social security, and the least in education. In sectors of non-market services, wages were noticeably lagging behind the wages in private sector as they stagnated or declined. The highest increase was registered in health care and compulsory social security, but only 0.3% while in public administration and defense they fell by 2.7%.

Although, at the end of 2017, the pace slightly weakened, unit labor costs have been for the tenth quarter rising faster than in the euro-zone. Thus, in the middle of this year, the unit labor costs exceeded corresponding unit labor costs in the euro area by more than 4% compared to the period before 2012, when they were significantly behind  due to ZUJF. The unit labor costs of education and public administration continue to lag behind the euro area.

The differences between the dynamics in Slovenia and in the euro area are large, especially between market and non-market sectors. Thus, the growth of unit labor costs in industry and market services are not lagging behind the f growth in the euro area since 2015/IV. From 2008 onwards, industrial unit labor costs have been higher than the corresponding costs in the euro area. Compared to the pre-crisis level, in Slovenia the unit labor costs in manufacturing are  in the middle of the year  already 15% higher than the unit labor costs in the euro area. Due to the slower growth in unit labor costs in the market services sector until 2015 (relative to the euro area), the level of these costs remains below the corresponding level of unit labor costs in the euro area in the middle of 2018. Only strong economic activity (production volume) allows such a large overtaking of unit labor costs to have no more pronounced price pressures on the producer's prices.

The noticeable increase in general government revenue this year was  confirmed by the October figure when total government revenue exceeded last October's by 8.2%, while overall general government revenue in the first ten months was 6.6%  or 2% of GDP (870 million) higher than in 2017. Almost three quarters of the surplus was contributed by direct taxes, directly contributed by taxes, while the rest was the contribution of indirect taxesere indirect taxes. Namely, in the first ten months of the year, the former grew by 7.5%, while the latter by  only 4.0%.

GDP continues to noticeably overtax mainly on income taxes, as by 2013 they outpaced GDP by about 0.8% per quarter. On the contrary, it happens with indirect taxes. The fact that indirect taxes are indirect (indirect taxes per unit of GDP) is noticeably decreasing since mid-2014, and it is noticeably decreasing in comparison with the euro area, on average around 1.5% per annum. The key reason for declining indirect taxes (mainly taxes on production) is the change in the structure of final consumption, namely the overtaking of export growth, or the increasing contribution of the surplus of exports of goods and services over imports of goods and services to GDP growth. By increasing this surplus, the tax base of value added tax and excise duties is reduced. Due to the large and rising surpluses of current transactions, the economy does not, therefore, lose (only exports) a huge amount of capital, but also significantly reduces the potential tax return.

There is nothing new in banking financing; deposits and credits to households are  growing, credits to non-financial companies are stagnating.  Credits to non-financial companies have stayed unaltered on the practically the same level for four last months. Year-to year dynamics was therefore  fluctuating because of year to year dynamics in 2017; in September the credits to non- financial companies were 1% lower than a year ago, while credits to households retained their current  and longer run dynamics.

Despite fast growth of the economy and despite increased exports of capital over surpluses in the current account an  growth of investments , credits to non-financial companies do not move. Dynamics of credits is miserable also in the euro area, but lagging is much slower than in Slovenia. However, despite slow growth or stagnation of credits, deposits continue growing. Financial position of banks is therefore improving rapidly. The credit- deposit ratio which was 1,7 before the crisis  more than halved to 0.76 in September when net position of banks towards households and non-financial companies was second best in the euro zone!  There were only modest changes in the interest rates dynamics. 

In nine months of 2018 surplus in current account reached 2.8 billion € (slightly more than 8% of comparable GDP); it is the sum of surpluses on the accounts for goods and services and deficits on the accounts of primary and secondary incomes.

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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