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

Labor costs have no visible effects on prices

Gospodarska gibanja 499

In July, domestic and export demand declined, while year-on-year growth remained high and export demand strengthened in August again. Given the still weak domestic demand, the stable dynamics of export demand remains the key to sustainable growth, as the contribution of investment spending and consumption remains small. Spending on durable goods has reached a relative size of adequate spending in the euro area, but the relative level has remained lower than before the crisis.

The intervention of fiscal and monetary policy makers directly supports the dichotomous nature of demand, which makes the economy excessively vulnerable to fluctuations in the global economy. The dichotomy of demand is also documented by large differences in the deviation of the actual from the potential economic activity between the sectors of the economy. While, for example, the dynamics of added value in the industry was similar to that of the euro area and began to systematically overtake it, the dynamics in the services sectors began to revive only last year, the lag in in construction began to  slow down only 8 years after the onset of the crisis, and financial sector is in the worst situation despite high capital adequacy of banks and low indebtedness of companies and population. The BS and the European Commission hamper short-term economic growth and prevent the creation of more sustainable economic growth and a faster balancing of public finances. The expected demand dynamics continues to intensify. Long-term average values are exceeded in all segments but there are also large differences in expectations across sectors.

Extremely large non-EU imports in August created a deficit in trade, which is incidental; the trend of surplus continued but is expected to be lower than last year. Trade in the EU is increasing both on the export side and on the import side; partly due to the increases of export and import prices. After previous deteriorations the terms of trade in Slovenia improved in August.

After two years of modest growth in world trade, its growth has doubled this year. The boom is reflected in the growth of industrial production, construction, and retail trade, and in the reduced unemployment in the EU. Business optimism and growth in orders in manufacturing, construction and retail trade are not expected to slow down in key EU partners. As in the EU, business optimism is also increasing in Slovenia.

Industrial production rose rapidly in August, it was higher than last year and above the 2008 level, i.e. before the economic crisis. This was mainly due to growth in the production of equipment. Construction activity was down in August, but due to previous growth it was higher than a year ago. Though in the eight months it was much above the comparable last year, it was very low. For now, no return to the pre-crisis level can be expected. With the extraordinary growth of tourist services, created especially by foreign guests, their level has already exceeded the pre-crisis level. In the second quarter, almost a tenth of more cargo more was carried on roads, while the railways accounted for 28 percent more cargo than in the same period last year; passenger traffic at airports also increased considerably. The real turnover of retail trade from January to August was more than a tenth larger than the comparable of the previous year. 

Prices continue to subside; this time the prices of goods have increased, while the prices of services have fallen. The noticeable changes were primarily seasonal. In October, the harmonized index of prices increased less than the cost of living index. A slight increase in the prices of industrial producers was similar across all production groups, while the longer-term dynamics remained higher for raw materials and consumer goods. While the cost of living continues to subside, real estate prices have been rising steadily for a year and a half, but have remained lower than before the crisis. Expected prices show a similar picture as actual prices do, the expected changes are small. Prices of raw materials have increased in the last month, and in the longer term, commodity prices are moving upwards.

The mass of labor costs is increasing without visible effects on prices. Both the current and the long-term dynamics vary considerably between the activities; in the public sector, wages increased considerably less than in the private sector. The unit labor costs in the business sector are moving a little faster than in the euro area, and they continue to noticeably lag behind the euro area in the public sector, although they are growing faster. In the whole economy, labor costs per unit of added value fell rapidly by the end of 2013; since then they have stagnated at a level that is very similar to the euro area. Labor costs are therefore not prone to increase prices, as their share in value added stagnates or even decreases.

General government revenue declined in September, while longer-term dynamics remains very strong. In the first three quarters of this year, general government revenue exceeded the relevant revenue in 2016 by around 660 million euros. Revenues from personal income tax and corporate income tax declined in September, while social contributions increased. Value added tax was significantly lowered; such a drop is likely to result from very affluent summer months values. Excise duties increased in September, but more long-term dynamics was negative in both August and September.

Loans to the population continue to grow vigorously while loans to businesses stand. The level of loans to companies in Slovenia continues to be one quarter lower than at the end of 2014 (after transfer of loans to DUTB), while in the euro area it is higher than at the end of 2014. Household loans also grew in August and their dynamics is systematically stronger than in the euro area. Total corporate and household deposits also rose in August, and their longer-term dynamics increased. Both household and corporate deposits are growing faster than in the euro area.

The main instruments of the ECB such as key interest rates and the purchase of securities under the APP program remain unchanged. Interbank interest rates up to one year are still negative. The interest rates on corporate and household deposits have not changed. Deposit rates in Slovenia are still lower than in the euro area, both short-term and long-term.

Favorable balance of payments developments continued in August. In eight months, the surplus in the current balance of payments was generated by surpluses in the trade of goods and services, in particular transport and tourism, but they were narrowed by deficits in the primary income account (payments of profits) and in the transfer account, where payments to the Brussels treasury exceeded inflows from it. Movements in the financial account are calmer than last year. Gross external debt fell by 1.3 billion € in July, and net debt by 0.9 billion €, so that it is below a quarter of annual GDP. The yield on ten-year government bonds fell to below 1 percent in mid-October.

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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