Slovenian economic mirror No. 5, Vol. XXII, 2016 Slovenian Economic Mirror ISSN 1318-3826 No. 5 / Vol. XXII / 2016 Publisher: IMAD, Ljubljana, Gregorčičeva 27 Responsible Person: Boštjan Vasle, MSc, Director Editor in Chief: Matevž Hribernik Authors of Current Economic Trends (listed alphabetically): Urška Brodar, MSc, Jure Brložnik, Janez Dodič, Lejla Fajic, Marjan Hafner, MSc, Katarina Ivas, MSc, Slavica Jurančič, Mojca Koprivnikar Šušteršič, Janez Kušar, Jože Markič, PhD, Helena Mervic, Tina Nenadič, MSc, Mitja Perko, MSc, Jure Povšnar, Ana T. Selan, MSc, Dragica Šuc, MSc, Ana Vidrih, MSc. Authors of Selected Topics: Urška Brodar (The United Kingdom's referendum decision to leave the EU) Mojca Koprivnikar Šušteršič (Tourist arrivals and overnight stays in 2015) Matevž Hribernik (Slovenia's competitiveness according to IMD 2016) Editorial Board: Marijana Bednaš, MSc, Aleš Delakorda, MSc, Lejla Fajic, Alenka Kajzer, PhD, Rotija Kmet Zupančič, MSc, Janez Kušar, Boštjan Vasle, MSc Translator: Marija Kavčič Data Preparation and Graphs: Bibijana Cirman Naglič, Marjeta Žigman Concept and Design: Katja Korinšek, Pristop DTP: Bibijana Cirman Naglič Print: Demat d.o.o. Circulation: 80 copies © The contents of this publication may be reproduced in whole or in part provided that the source is acknowledged. Contents In the spotlight................................................................................................................................................................3 Current economic trends..............................................................................................................................................5 International environment...............................................................................................................................................7 Economic developments in Slovenia.............................................................................................................................9 Labour market..................................................................................................................................................................13 Prices..................................................................................................................................................................................15 Balance of payments.......................................................................................................................................................18 Financial markets.............................................................................................................................................................19 Public finance....................................................................................................................................................................20 Selected topics The United Kingdom's referendum decision to leave the EU..................................................................................25 Tourist arrivals and overnight stays in 2015...............................................................................................................25 Slovenia's competitiveness according to IMD 2016..................................................................................................26 Statistical appendix.....................................................................................................................................................29 The Economic Mirror is prepared based on statistical data available by 7th July 2016. On 1 January 2008, the new classification of activities of business entities NACE Rev. 2, which replaced NACE Rev. 1.1, came into force in all EU Member States. In the Republic of Slovenia the national version of the standard classification, SKD 2008, took effect. It includes the entire European classification of activities but also adds some national subclasses. All analyses in the Slovenian Economic Mirror are based on SKD 2008, except when the previous classification, SKD 2002, is explicitly referred to. For more information on the introduction of the new classification see the SURS website http://www.stat.si/eng/skd_nace_2008.asp. All current comparisons (at the monthly, quarterly levels) in the Slovenian Economic Mirror are made on the basis of seasonally adjusted data, while year-on-year comparisons are based on original data. Unless otherwise indicated, all seasonally adjusted data for Slovenia are calculations by IMAD. Slovenian Economic Mirror, No. 5/2016 3 In the Spotlight In the spotlight Short-term indicators of economic activity and confidence indicate that GDP growth in the euro area continued in the second quarter but is expected to be lower than in previous quarters. In manufacturing, activity rose slightly in April; in retail trade and construction it has been stagnant for several months. After deteriorating in the first quarter, the values of confidence indicators did not change significantly in the second quarter and remained close to the highest levels seen in the last few years. Labour market conditions are improving and favourably affect private consumption, which will also remain the main driver of GDP growth this year according to the forecasts by international institutions. Oil and commodity prices are rising, but are still notably lower than in previous years. The United Kingdom's referendum decision to leave the EU brings a great deal of uncertainties about the economic and political situation in Europe. According to international institutions, a protracted process of withdrawal would have negative implications for both the EU and the United Kingdom. The effects on Slovenia's economy would be mostly indirect, through the expected decline in economic growth in Slovenia's main trading partners, which would contribute to lower demand for Slovenia's goods and services. At the beginning of the second quarter, most short-term indicators of economic activity in Slovenia increased further. With favourable movements in cost competitiveness and foreign demand, merchandise exports and manufacturing production continued to expand. After several months of decline, activity also rose in construction but remained low. The improvement in labour market conditions and the strengthening of private consumption contributed to further turnover growth in some segments of trade and in tourism-related services. In most other market services, turnover has not increased in the last months. The economic sentiment indicator also indicates a gradual strengthening of activity in most sectors in the following months. The labour market situation remains favourable. In April the number of employed persons continued to rise. Further growth was recorded for most private sector activities, particularly manufacturing, distributive trades, accommodation and food service activities, and transportation. The prospects for employment growth also remain favourable in most activities. In June the number of registered unemployed declined further, owing to a stronger outflow into employment and a smaller inflow into unemployment. At the end of the month 99,795 persons were registered as unemployed, which is 9.5% less than in the same period of 2015. After a long period of increase, the growth of average gross earnings per employee came to a halt in April, but in the first four months, the private and the public sector nevertheless recorded the largest year-on-year increases in five years. Consumer prices rose year-on-year in June for the first time in one and a half years. Higher prices were recorded particularly for services; the negative contribution of energy prices was also smaller. Core inflation, which has come closer to the core inflation in the euro area in the last few months, thus strengthened further. Prices of semi-durable goods and, for the first time this year, food were higher year-on-year, while prices of durable goods were lower. The competitiveness of the tradable sector improved further in the first quarter, especially in manufacturing, the sector that is the most exposed to foreign competition. The improvement was a consequence of strong productivity growth, which enabled wage growth and a concurrent improvement in the competitive position of the tradable sector. At the level of the entire economy, unit labour costs otherwise stopped falling because of their growth in the non-tradable sector. Owing to a decline in relative consumer prices, the price competitiveness of the economy remained favourable despite the appreciation of the euro. The decline in the volume of loans to domestic non-banking sector continues to slow. The fall in loans to enterprises and NFIs has stabilised in recent months while the volume of household loans is rising. The net deleveraging of enterprises and NFIs abroad has also moderated notably, as they increased the volume of short-term credits. The share of non-performing claims has declined further and stood at 8.0% at the end of April. Among sources of finance, banks continued to repay their foreign liabilities while non-banking sectors increased deposits. The maturity structure of deposits continues to deteriorate, as growth is mainly recorded for overnight deposits. In the first four months the general government deficit on a cash basis was smaller year-on-year. Revenues otherwise decreased slightly year-on-year, mainly as a result of the lower inflows from the EU budget, while the improvement in the economic situation showed in higher revenues from social contributions, personal income tax and VAT. Expenditures declined even more year-on-year, primarily owing to a decline in investment related to the delay in EU funds absorption at the beginning of the new financial perspective of the EU. 4 Slovenian Economic Mirror, No. 5/2016 In the Spotlight The PMI indicates growth in manufacturing in most main trading partners. 58 iS 53 o 50 E o 48 E 43 Source: Markit Economics. Note: PMI readings above 50 signal an increase in production, while readings below 50 indicate a decrease. Exports remain the main driver of GDP growth in Slovenia. ■- 4 ■ Jan-Apr 2016 Goods exports Industrial Value of Turnover in production in construction put retail trade manufacturing in place Source: SURS. Competitiveness in the export-oriented part of the economy improved further. -Manufacturing EU -Manufacturing Slovenia 114 TO fO § 112 fO ! 110 > O ¡= 108 (Ö § 106 ÎT 104 O O £ 102 o ™ 100 v "D iE 98 a a a a a a Source: Eurostat; calculations by IMAD. The economic situation and confidence in further recover continue to have a favourable impact on the labour market. -Employed according to SRE (left axis) -Registered unemployed (right axis) Source: SURS, ESS; calculations by IMAD The situation in the banking system also improved; the stock and the share of non-performing claims declined further. Enterprises Non-residents Households Other -Share of non-performing claims (right axis) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 14 10 The main factor in the decline in general government revenue is the year-on-year decrease in inflows from the EU budget. ■ Revenues from taxes and social contributions Other revenues ■ Receipts from the EU budget • Total revenues 250 200 150 100 50 0 -50 -100 -150 -200 -250 -300 - Q1 Q2 2015 Q3 Q4 Jan.-Apr. 2016 Source: BoS. Source: MF, Bulletin of Government Finance; calculations by IMAD 55 45 96 8 6 4 2 0 0 current economic trends Slovenian Economic Mirror, No. 5/2016 7 Current Economic Trends International environment Figure 1: Short-term indicators of economic activity in the euro area - Industrial production in manufacturing Construction output ■ Turnover in retail trade -ESI (right axis) 110 SS 100 90 £ 105 £ 95 Short-term indicators of economic activity and confidence indicate that GDP growth in the euro area continued in the second quarter, but is expected to be slightly lower than in previous quarters. In manufacturing, activity rose slightly in April; in retail trade and construction it has been stagnant for several months. After two months of slight growth, the value of the Economic Sentiment Indicator (ESI)1 did not change significantly in June and remained close to the highest levels in the last few years. The manufacturing PMI indicates growth in most main trading partners. (NrNroro^^Lninio Source: SURS;calculations by IMAD. = 80 90 70 85 Figure 2: Unemployment rates in euro area countries 28 ♦ ♦ April 2016 April 2015 « April 2013 Source: Eurostat. Note: The countries are arranged by unemployment rate in April 2016. Labour market conditions in the euro area continue to improve. In April the unemployment rate (10.2%) was around 2 percentage points lower than three years before when it had reached its high. With a further improvement on the euro area labour market, private consumption will remain the main driver of economic growth, according to the forecasts by the EC and ECB. Figure 3: ECB interest rates and Euribor -Key interest rate -Marginal lending facility ----Marginal deposit facility ...........EURIBOR 3m ----EURIBOR 6m 2.0 2.0 -0.5 ........;................I................I................}...............{................;................}................;■■■■— -0.5 The ECB left its interest rates unchanged in June and started to implement additional measures to ensure long-term price stability. Interbank interest rates dropped further owing to the beginning of the corporate sector asset purchase programme and the implementation of a new series of targeted longer-term refinancing operations (TLTRO II). Source: ECB, EMMI; calculations by IMAD. 1 The survey was conducted before the UK's decision to leave the EU. -1.0 -1.0 Slovenian Economic Mirror, No. 5/2016 Current Economic Trends 8 Figure 4:Oil and non-energy commodity prices Oil ------Non-energy commodities Metals ------Food Source: IMF, IEA; calculations by IMAD. In June oil and non-energy prices increased further. The price of Brent crude oil has been rising since January, when it reached the lowest level since 2004. In June it recorded the highest levels this year (around USD 50 per barrel). Dollar prices of non-energy commodities also continue to rise. Table 1: Indicators related to the international environment average change, in %* 2015 V 16 VI 16 VI 16/V 16 VI 16/VI 15 I-VI 16/I-VI 15 Brent USD, per barrel 52.35 46.74 48.25 3.2 -21.5 -31.5 Brent EUR, per barrel 48.33 42.69 44.94 5.3 -20.7 -31.6 EUR/USD 1.110 1.131 1.123 -0.7 0.1 -0.2 3-month EURIBOR, in % -0.020 -0.257 -0.267 1.0 25.3 -0.2 Source: EIA, ECB, EMMI Euribor; calculations by IMAD. Note: * in Euribor change in basis points. Slovenian Economic Mirror, No. 5/2016 9 Current Economic Trends Economic developments in Slovenia Figure 5: Short-term indicators of economic activity in Slovenia -Merchandise exports -Industrial produciton in manufacturing f ¡5 I 130 120 110 100 90 80 70 60 50 40 30 ----Value of construction put in place ----Turnover in retail trade Si s s s s s s s s s s Source: SURS; calculations by IMAD. At the beginning of the second quarter, most short-term indicators of economic activity in Slovenia increased further. With favourable movements in cost competitiveness and foreign demand, merchandise exports and production volume in manufacturing continued to expand. After several months of decline, activity also rose in construction but remained low. The improvement in labour market conditions and the strengthening of private consumption contributed to further turnover growth in some segments of trade and in tourism-related services. In most other market services, turnover has not increased in the last months. The economic sentiment indicator also indicates a gradual strengthening of activity in most sectors in the next months. Table2: Selected monthly indicators of economic activity in Slovenia In % 2015 IV 16/III 16 IV 16/IV 15 I-IV 16/I-IV 15 Merchandise exports, real1 4.4 2.63 9.7 6.6 Merchandise imports, real1 3.5 3.23 1.5 1.7 Services exports, nominal2 7.5 1.33 3.7 7.6 Services imports, nominal2 2.6 0.73 2.5 5.5 Industrial production, real 5.6 0.43 5.34 5.54 -manufacturing 6.0 0.83 7.14 7.14 Construction -value of construction put in place, real -25.2 5.43 -31.1 -31.2 Real turnover in retail trade 1.1 0.93 1.94 0.94 Nominal turnover in market services (without trade) 4.3 -0.13 2.74 3.44 Sources: BoS, Eurostat, SURS; calculations by IMAD. Notes: 'External trade statistics; deflated by IMAD, 2balance of payments statistics, Seasonally adjusted, 4working-day adjusted data. Figure 6: Merchandise trade - real Merchandise exports -Merchandise imports 120 115 110 105 , 100 '■ 95 90 85 80 r\ A"7 r A f ' V V ^rNrNmm^r^rioLo Source: ECB, EMMI; calculations by IMAD. Real merchandise exports and imports continued to rise in April.-2 We estimate that this year's strong export growth stems from exports of most product groups, particularly vehicles and miscellaneous manufactured articles.3 Growth in merchandise imports was still mainly due to higher exports of consumer goods. 2 The estimate of real merchandise exports was made on the basis of nominal exports according to the external trade statistics and industrial producer prices on the foreign market, while real imports were estimated based on nominal imports according to the external trade statistics and the index of import prices. Detailed data on the structure of merchandise trade for February 2016 are not available yet. 3 Estimated based on the available data for the first three months of 2016. These are exports of SITC sections 78 and 8 (road vehicles) and 8 (miscellaneous manufactured articles). 10 Slovenian Economic Mirror, No. 5/2016 Current Economic Trends Figure 7:Trade in services - nominal -Exports of services -Imports of services / Growth in nominal exports of services continued in April, while growth in imports slowed.4 The year-on-year growth of exports in the first four months was mainly underpinned by stronger spending of foreign tourists in Slovenia and higher exports of transport and construction services. The year-on-year growth of imports arose primarily from higher imports of technical, trade-related business services. Source: BoS; calculatons by IMAD. Figure 8: Production volume in manufacturing industries according to technology intensity -Merchandise exports -Merchandise imports 85 80 A J " \/ V Production volume in manufacturing increased further in April. It was up in more technology-intensive industries and, slightly, in low-technology industries. In medium-low-technology industries, where production increased the most at the beginning of the year, growth came to a halt, which we estimate was mainly due to the decline in the metal industry, the largest industry in this group. In the first four months, production in the metal industry was nevertheless 15.6% higher year-on-year (in April 12.6% higher) and, together with the more technology-intensive manufacture of ICT and electrical equipment (18.8% growth), made the largest contribution to the year-on-year production increase in manufacturing. Source: SURS; calculatons by IMAD. 115 95 90 Figure 9: Value of construction put in place -Total ----Residential buildings -Non-residential buildings ----Civil-engineering works 70 60 50 rs CT x 2 ■ÄS 30 20 10 Construction activity has decreased significantly in the last year. In April the value of construction put in place rose at the monthly level but remained low. Owing to lower government investment, the value of construction put in place in civil-engineering declined considerably. Since mid-2015 only the construction of residential buildings had been rising, but remained close to last years' lows. Source: SURS; calculations by IMAD. 4 According to the balance of payments statistics. 40 0 Slovenian Economic Mirror, No. 5/2016 11 Current Economic Trends Figure 10: Turnover in retail trade segments ----The sale of automotive fuels -The sale of food products -The sale of non-food products 95 85 U! LTt VO Source: SURS; calculations by IMAD. In April, distributive trades recorded further growth in the sale of vehicles and other durable and semi-durable nonfood products. These segments also saw strong year-on-year turnover growth in the first four months of the year. The largest increase in turnover (of almost a quarter) was recorded for the sale of motor vehicles, owing to increased sales of new passenger and goods motor vehicles.5 The sales of telecommunication and computer equipment and household appliances were also higher, by around one-tenth. Nominal turnover in wholesale trade, having stagnated since summer 2015, was similar to that one year earlier. Turnover in the sale of automotive fuels and the sale of food remained lower year-on-year. 90 80 Figure 11: Transactions in new and existing residential property -Transactions in existing flats -Transactions in new flats 120 100 200 S 180 ----Transactions in existing houses ----Transactions in new houses 40 ........r / / ...............................I............................. \ \ V \ \ \ ......................... v X / y / / / ■^■'■^■V.......... Residential property sales were up year-on-year again in the first quarter. The sales of existing residential properties6 (houses and flats), which were otherwise seasonally lower than in the last quarter of 2015, were almost one-third higher. The number of transactions in newly built residential properties remained low (and slightly lower than in the same period of 2015). a a a Source: SURS; calculations by IMAD. 80 60 Figure 12: Prices of new and existing dwellings -Prices of existing flats -Prices of new flats ----Prices of existing houses ----Prices of new houses O O O O O O Source: SURS; calculations by IMAD. Residential property prices rose in the first quarter and were up year-on-year. Prices of all dwelling types were higher than in the last quarter of 2015, except for new flats. These declined with the sale of flats from the bankruptcy estate, but remained up year-on-year. The largest year-on-year increase was observed for existing flats in Ljubljana (up 5.9%). Prices of houses remained lower year-on-year despite growth in the last two quarters. 5 After three years of growth, the sales to legal entities have been declining year-on-year since March, while the sales to natural persons, which strengthened only last year, continue this year. After last year's strong growth, the number of first registrations of new goods motor vehicles and goods trailing vehicles also increased further (by around one-third). 6 These account for more than 90% of all transactions. Slovenian Economic Mirror, No. 5/2016 12 Current Economic Trends Figure 13: Nominal turnover in market services (other than trade) Total - Transport and storage (H) ----Communication activities (J) ----Professional-technical activities (M) -Administration and support service activities (N) ----Accommodation and food service activities (I) 11S 110 10S v :g 5100 v ° 95 90 8S 80 7S Amid turnover growth on foreign markets, nominal turnover in market services stagnates this year. The stagnation is mainly due to information-communication, transportation and professional-technical services. According to our estimate, turnover growth on foreign markets continued, particularly in computer services,7 while it slowed in transportation. Turnover on the domestic market declined, which was also reflected in slower turnover growth in legal-accounting and management-consultancy services.8 The strong turnover growth in employment services,9 which mostly provide workers to the manufacturing sector, increased further. The favourable developments in accommodation and food service activities continued, boosted by increased spending of domestic and foreign tourists. Source: SURS; calculations by IMAD. Figure 14: Selected indicators of household consumption -Computer and telecomm. devices, books, sports equipment, toys ----Textile, clothing and footwear ----Furniture, househ. appl., construction mater., audio&video record. Source: SURS; calculations by IMAD. In April household consumption continued to rise. With further growth in disposable income, the higher consumption showed particularly in higher sales of passenger cars and durable goods related to residential construction and home furnishings. Purchases of sporting and recreational goods and of clothing and footwear also increased further. With a higher number of domestic tourist overnight stays,10 expenditure on tourism-related services was also up. Figure 15: Business trends Economic sentiment ----Retail trade Construction -Manufacturing Service activ. ----Consumers* Source: SURS; calculations by IMAD. Note: *Because of methodological changes, since Jan 2016 data on consumer confidence are not comparable with previous data. Economic sentiment remains above its long-term average. In the first half of the year, confidence deteriorated only in retail trade, but remained above the long-term average, as in other sectors. 7 J 62 - Computer programming, consultancy and related activities (SKD 2008). 8 M69 - Legal and accounting activities; M70.2 - Management consultancy activities (SKD 2008). 9 N78 - Employment activities (SKD 2008). 10 In April, the number of domestic tourist overnight stays was up 8.5 % year-on-year. Slovenian Economic Mirror, No. 5/2016 13 Current Economic Trends Labour market Figure 16: Employed persons by activity -Manufacturing (C) -Construction (F) ----Market services (G-N) ---Public services (O-Q) Source: SURS; calculations by IMAD. Amid higher confidence in the economy, the number of employed persons11 continued to increase in April. The confidence in economic recovery is also reflected in higher expectations regarding employment in the next months. Further growth in the number of employed persons was recorded in most private sector activities, again particularly in manufacturing,12 distributive trades, accommodation and food service activities and transportation. In public service activities, their number was higher year-on-year in the first four months, particularly in the sectors of health and education (in pre-primary and primary education). Table 3: Indicators of labour market trends change, in % 2015 IV 16/III 16 IV 16/IV 15 I-IV 16/I-IV 15 Persons in formal employment2 0.9 0.21 1.4 0.8 Registered unemployed -6.1 -1.61 -8.2 -6.2 Average nominal gross wage 0.7 0.01 1.4 2.1 - private sector 0.5 -0.71 1.3 1.9 - public sector 1.2 -0.21 2.0 2.6 -of which general government 1.0 -0.21 3.5 4.0 of which public corporations 1.5 -0.71 -1.4 -0.5 2015 IV 15 III 16 IV 16 Rate of registered unemployment (in %), seasonally adjusted 12.3 12.4 11.6 11.4 Sources: ESS. SURS; calculations by IMAD. Note: 'seasonally adjusted, 2 Persons in paid employment, self-employed persons and farmers. Figure 17: Employed according to SRE and registered unemployed -Employed according to SRE (left axis) -Registered unemployed (right axis) In June the number of registered unemployed continued to decline. The main reason was the outflow from unemployment into employment, which strengthened slightly in the months to June. The outflow in the first half of the year was also larger year-on-year. The inflow into the unemployment register was smaller, largely owing to a smaller inflow of those who lost work and first-time jobseekers. At the end of June, the number of unemployed was 9.5% lower year-on-year, 99,795 persons being registered as unemployed. fNfNroro^^uiLrt^o Source: ECB, EMMI; calculations by IMAD. 11 According to the Statistical Register of Employment; these are persons in paid employment and self-employed persons except farmers. 12 Most employment services workers were assigned to manufacturing, according to our estimate. Year-on-year growth in the number of employment services workers is otherwise slowing, which could be a consequence of increased direct hiring in other sectors. Slovenian Economic Mirror, No. 5/2016 14 Current Economic Trends Figure 18: Average gross earnings per employee -Gross earnings per empoloyee ----Private sector ¡i? -Public sector In the first four months, both sectors recorded the largestyear-on-year growth of earnings in five years. After strengthening for a long period, the growth of average gross earnings per employee came to a halt in April. Private sector earnings dropped slightly, after rising notably in the last two quarters under the impact of good business performance in the previous year. Earnings in the public sector also fell somewhat, but remained similar to December when they rose owing to public servants' promotions. Source: SURS; calculations by IMAD. Slovenian Economic Mirror, No. 5/2016 15 Current Economic Trends Prices Figure 19: Inflation in Slovenia and in the euro area 4.0 3.5 3.0 r 2 5 20 0 o 1.5 re 1 0 c 0.5 0.0 C1J > -0.5 -1.0 -1.5 -Slovenia HICP ----Slovenia HICP - core inflation -Euro area HICP ----Euro area HICP - core inflation ■■■-r.....-IM V il ¥f\