Slovenian economic mirror November, 2015, No. 11, Vol. XXI Slovenian Economic Mirror ISSN 1318-3826 No. 11 / Vol. XXI / 2015 Publisher: IMAD, Ljubljana, Gregorčičeva 27 Responsible Person: Boštjan Vasle, MSc, Director Editor in Chief: Tina Nenadič, MSc Authors of Current Economic Trends (listed alphabetically): Jure Brložnik, Janez Dodič, Marjan Hafner, MSc, Matevž Hribernik, Slavica Jurančič, Mojca Koprivnikar Šušteršič, Tanja Kosi Antolič, PhD, 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: Matevž Hribernik (Excessive macroeconomic imbalances in the EU) 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: SURS 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.............................................................................................................................8 Labour market..................................................................................................................................................................13 Prices..................................................................................................................................................................................14 Balance of payments.......................................................................................................................................................16 Financial markets.............................................................................................................................................................17 Public finance....................................................................................................................................................................18 Boxes Box 1: Gross domestic product, Q3 2015.......................................................................................................................9 Box 2: Expenditure on household final consumption in 2014.........................................................................................11 Selected topics Excessive macroeconomic imbalances in the EU.......................................................................................................23 Statistical appendix.....................................................................................................................................................25 The Economic Mirror is prepared based on statistical data available by 4th December 2015. On 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, which includes the entire European classification of activities but also adds some national subclasses, came into force on the mentioned date. In the Slovenian Economic Mirror, all analyses are based on the SKD 2008, except when the previous SKD 2002 classification is explicitly referred to. More general information about the introduction of the new classification is available on the SURS website http://www.stat.si/eng/ skd_nace_2008.asp. All seasonally adjusted data in the Economic Mirror are calculations by IMAD. Slovenian Economic Mirror, November 2015 3 In the Spotlight In the spotlight In the third quarter, economic activity in the euro area rose further; the forecasts for 2016 by international institutions remained basically unchanged in the autumn. According to Eurostat's estimate, GDP increased slightly less than in previous quarters (0.3%, seasonally adjusted), being up 1.6% year-on-year. The IMF, the EC, the ECB and the OECD expect euro area GDP growth to range between 1.6% and 1.8% next year. The downside risks to growth increased, reflecting the less optimistic outlook for emerging market economies, the expected increase in key interest rates in the US and its impact on financial markets, commodity price developments, and higher geopolitical risks. On the upside, a positive contribution could come from a faster recovery of global economic growth and trade, and a greater-than-expected impact of EU and ECB measures on investment. In the third quarter, economic activity also increased further in Slovenia (0.4%, seasonally adjusted), GDP being up 2.5% year-on-year. The main driver of growth remained exports. The year-on-year growth continued to be propelled by private consumption, which is gradually rebounding as a result of rising disposable income and improvements on the labour market. Government consumption was also higher than in the same period last year. Conversely, construction investment declined again, contributing to a fall in value added in the construction sector. Value added growth in manufacturing remained high, reflecting the favourable export trends, and value added growth in the majority of service activities was higher than in the previous quarter. Despite the moderation in most sectors, confidence indicators stay at their high levels at the end of the year. The labour market continues to recover; in the third quarter, the growth of average gross earnings came to a halt. Growing vigorously since the middle of the year in manufacturing, the number of employed rose further in the third quarter (0.5%, seasonally adjusted). In the first nine months, it was up year-on-year in most private sector activities. Registered unemployment continued to decline in November (seasonally adjusted), 107,412 persons being registered as unemployed at the end of the month, which is 6.9% less than one year before. With the rising proportion of low-wage earners, the growth of gross earnings per employee in the private sector declines: it amounted to 0.3% year-on-year in the first nine months of 2015. Public sector earnings were up 1.0% in the same period, owing to the contribution of last year's payment of suspended promotion raises in the general government sector and further growth of earnings in public corporations. Consumer prices remained lower year-on-year in November. The fall was once again attributable mainly to lower energy prices and a deeper decline in prices of durable goods. Prices of food (unprocessed food in particular) remained higher year-on-year. Services prices recorded higher growth than in previous months owing to the base effect (the reduction of supplementary insurance premiums in November last year). Core inflation remains lower than on average in the euro area. The overall deleveraging of non-banking sectors at domestic banks increased slightly in the first ten months. In the first three quarters, corporate and NFI loans (excluding the transfer of claims to the BAMC) decreased by around a fifth more than in the same period of 2014. Government deleveraging was also higher, but household loans expanded, primarily on the back of rising housing loans. Enterprises and NFIs were also deleveraging abroad. As to the sources of finance, banks recorded an outflow of foreign sources in the first nine months, and a significantly smaller increase in deposits by domestic non-banking sectors in the first ten months. General government deficit (EUR 773 m) in the first three quarters was EUR 258 m lower than in the same period last year. The year-on-year decline is linked to improvements in economic activity and on the labour market and government measures, which together helped increase revenue and stem expenditure. In the first nine months, general government revenue was up 2.2% year-on-year, while general government expenditure was similar to that in the same period last year. current economic trends 7 Slovenian Economic Mirror, November 2015 Current Economic Trends International environment In the third quarter, the euro area's economy continued to recover. According to Eurostat's estimate, GDP increased slightly less than in previous quarters (0.3%, seasonally adjusted) and was up 1.6% year-on-year. The recovery was recorded in all Slovenia's main trading partners in the euro area, the increase in activity being mostly in line with the EC's expectations. In Germany and France, positive contributions to GDP growth mainly came from rising private consumption, as in previous quarters. Growth remained high in some EU Member States that are not euro area members (the Czech Republic, Hungary, Poland and the United Kingdom). Confidence and economic sentiment indicators for the euro area and the EU improved slightly again in the third quarter (ESI, PMI, Ifo), while the corresponding indicators for the global economy continue to deteriorate. GDP growth slowed in the US and China, while GDP declined further in Russia. The volume of global trade increased somewhat after three quarters of decline. Figure 1: Quarterly growth rates in selected euro area countries ■ Q4 14 BQ1 15 BQ2 15 BQ3 15 -Q3 15 EC forecast 0.8 O 0.1 Source: Eurostat, EC Forecast (May 2015) In autumn, international institutions did not significantly change their euro area growth forecasts, however, downside risks to growth increased. The autumn forecasts for the euro area by the IMF, the EC, the ECB and the OECD are similar, projecting GDP growth to range between 1.6% and 1.8% in 2016. With a further improvement in labour market conditions and a favourable impact of lower commodity prices on disposable income, GDP growth will be underpinned by rising private consumption and a gradual rebound in investment. However, the risks to the growth outlook are higher than during the summer months. They are related to the less optimistic outlook for the global economy, in particular emerging market economies, the expected increase in interest rates in the US and its impact on financial markets, and commodity price developments. Geopolitical risks also increased again. GDP growth could however also be higher than assumed, in the event of a faster recovery in global growth and trade and a larger-than-expected impact of the EU's and ECB's measures on investment. Table 1: Comparison of GDP growth forecasts by international institutions for 2015 and 2016 2015 2016 IMF Oct15 EK Nov 15 OECD Nov 15 CONS Nov 15 IMF Oct15 EK Nov 15 OECD Nov 15 CONS Nov 15 EU 1.9 1.9 N/A 1.9 1.9 2.0 N/A 1.9 EMU 1.5 1.6 1.5 1.5 1.6 1.8 1.8 1.7 DE 1.5 1.7 1.5 1.7 1.6 1.9 1.8 1.7 FR 1.2 1.1 1.1 1.1 1.5 1.4 1.3 1.5 IT 0.8 0.9 0.8 0.8 1.3 1.5 1.4 1.3 AT 0.8 0.6 0.8 0.8 1.6 1.5 1.3 1.5 HR 0.8 1.1 N/A 1.0 1.0 1.4 N/A 1.3 RU -3.8 -3.7 -4.0 -4.0 -0.6 -0.5 -0.4 -0.2 US 2.8 2.8 2.5 2.6 2.6 2.6 2.4 2.4 Source: IMF World Economic Outlook (October 2015), European Economic Autumn Forecast 2015 (November 2015), OECD Economic Outlook (November 2015), Consensus Forecasts (November 2015). Note: N/A - not available. In November, the situation on international government bond markets remained stable. The yields of 10-year government bonds declined for most euro area countries. The yield to maturity of the Slovenian euro bond recorded its six-month low (1.56%). Figure 2: 10-year government bond yields -Slovenia -Portugal -Spain -Italy ----Ireland ----Germany ----Austria ■\«y/- v./-v.' '■v 0 ^^rNrsmm^r^r c3 c3 c3 c3 ro ^ ro^ ro^ ro^ Source: Bloomberg; calculations by IMAD. At December's meeting, the ECB lowered the interest rate on the deposit facility and extended the implementation of the asset purchase programme. It cut the interest rate on the deposit facility by 10 basis points to -0.30%. Furthermore, the programme of government and corporate bond purchases in the amount of EUR 60 bn per month, carried out since March 2016, was extended by six months, i.e. to the end of March 2017 or until inflation reaches the ECB's medium-term inflation rate goal, which is below, but close to 2%. 0.7 0.6 0.5 0.4 E 0.3 0.2 0.0 8 Slovenian Economic Mirror, November 2015 Current Economic Trends Figure 3: Prices of Brent crude oil and the USD/EUR exchange rate -Price in EUR (left axis) -Price in USD (left axis) -USD to EUR exchange rate (right axis) 120 110 100 90 5 80 6 3 70 S 260 D 50 40 30 Ln Ln Ln Ln Ln Ln 1.45 1.40 1.35 1.30 1.25 ! 1.20 1.15 1.10 1.05 1.00 Source: ECB, EIA; calculations by IMAD. Table 2: Indicators related to the international environment average change, in %* 2014 X 15 XI 15 XI 15/ X 15 XI 15/ XI 14 I-XI 15/ I-XI 14 Brent USD, per barrel 98.93 48.43 44.69 -7.7 -43.7 -47.5 Brent EUR, per barrel 74.58 43.88 42.84 -2.4 -33.5 -35.5 EUR/USD 1.329 1.124 1.074 -4.4 -13.9 -16.9 3-month EURIBOR, in % 0.209 -0.054 -0.088 -3.4 -16.9 -23.1 Source: EIA, ECB Euribor; calculations by IMAD. Note: * in Euribor change in basis points. Economic developments in Slovenia Real growth in merchandise exports strengthened in the third quarter, while imports remained more or less unchanged for the second quarter in a row (seasonally adjusted).1 The stronger growth of merchandise exports Table 3: Selected monthly indicators of economic activity in Slovenia in % 2014 IX 15/ VIII 15 IX 15/ IX 14 I-IX 15/ I-IX 14 Merchandise exports, real1 6.6 3.53 2.4 4.2 Merchandise imports, real1 3.6 -0.63 0.5 3.0 Services exports, nominal2 4.5 -1.93 7.0 7.4 Services imports, nominal2 7.5 -1.33 -2.2 0.8 Industrial production, real 2.2 0.53 6.24 5.14 -manufacturing 4.3 1.03 7.54 5.54 Construction -value of construction put in place, real 19.5 -5.23 -12.5 -8.6 Real turnover in retail trade 0.0 0.63 0.14 0.74 Nominal turnover in market services (without trade) 2.7 -0.43 3.34 3.14 Sources: BoS, Eurostat, SURS; calculations by IMAD. Notes: 'External trade statistics; deflated by IMAD, 2balance of payments statistics, Seasonally adjusted, 4working-day adjusted data. ' According to the National Accounts Statistics. than in the previous quarter was mainly the result of price factors. Their positive impact was even more visible in imports, which in real terms nevertheless remained similar to the second quarter. The lower year-on-year growth rates of exports and imports were in line with expectations, given the significantly stronger growth in the third quarter of 2014, in exports chiefly as a result of the beginning of the production of two new car models. Figure 4: Merchandise trade - real a a a a a Source: SURS. Real growth in services exports eased in the third quarter, while imports have stagnated for almost two years (seasonally adjusted).2 The main reason for the lower year-on-year growth of exports was weaker growth in travel and transport services, the sectors that nevertheless still contribute the most to total growth. Imports remained similar to those in the third quarter of 2014, the year-on-year decline in construction services being mainly offset Figure 5: Services trade - 1,400 real -Exports of services -Imports of services ■ 1,200 y 1,000 2 According to the National Accounts Statistics. 9 Slovenian Economic Mirror, November 2015 Current Economic Trends Box 1: Gross domestic product, Q3 2015 GDP increased further in the third quarter on account of higher exports; the recovery of domestic consumption came to a halt in the last two quarters owing to a renewed decline in construction investment. GDP rose by 0.4% (seasonally adjusted) relative to the previous quarter, and by 2.5% relative to the same period last year. In both comparisons, GDP growth was mainly driven by exports, which remain the key engine of economic recovery. Their year-on-year growth was lower owing to strong growth in the third quarter of 2014 when production of two new car models was launched. Export growth was also reflected in the continuation of the relatively strong growth of value added in manufacturing and hence the majority of knowledge-intensive services. On the other hand, the recovery of domestic consumption came to a halt in the last two quarters, the standstill being mainly linked to a renewed decline in construction investment and, in turn, a deeper fall in value added in construction. Conversely, investment in machinery and equipment increased, which is also consistent with the results of the SURS survey with regard to the increase in investment in manufacturing and the relatively high capacity utilisation. In our assessment, the improvement in this segment of investment consumption has been, for quite some time, suggested by good export performance, the deleveraging process and a gradual improvement in access to finance. Private consumption remained similar at the quarterly level, while it was up year-on-year. Its gradual recovery is estimated to mainly reflect growth in disposable income amid a further improvement in labour market conditions; increased readiness to buy is also indicated by the consumer confidence indicator, which climbed to one of the highest levels on record in the third quarter. Households continue to increase particularly spending on durable goods, the category that dropped the most during the crisis. The consumption of other goods and services, which account for the largest share of private consumption, also continues to recover gradually. Value added growth was also high in tourism-related activities, being still driven primarily by higher spending of foreign tourists. Amid renewed stronger growth in the third quarter than on average in the euro area, the lag of GDP behind the 2008 level, which was one of the largest in the EU in the first years of the crisis, still decreases relatively faster than in the EU overall. Figure 6: GDP level in Slovenia and its main trading partners Figure 7: Expenditure structure of GDP changes, Slovenia ■ Private consumption Gross fixed capital formation I Exports of goods and services - Real GDP growth (right axis) I Government consumption sChang.in inventories, valuables I Imports of goods and services 6 a a Source: SURS. 4 2 0 by growth in imports of other business services and charges for the use of intellectual property. In the third quarter, manufacturing output rose further in all industry groups according to technological intensity (seasonally adjusted). After stagnating for two years, this year production is also picking up in low-technology industries, where it was up 1.5% year-on-year in the first nine months of 2015 (except the textile industry). Production in medium-low and technologically more intensive industries was also higher than in the same period of 2014 (in both by around 7.0% on average). In the first nine months, production was down only in the chemical industry, where the decline deepened in the third quarter; growth in the manufacture of transport equipment also slowed considerably in the third quarter, as expected.3 According to data on business trends in manufacturing, since mid-year expectations of enterprises have been mostly improving. With higher expected demand, most enterprises also expect further growth in production and employment in the last quarter of the year. 3 After the increase in production activity in mid-2014 because of the beginning of the commercial production of new passenger cars, the high year-on-year growth in the manufacture of transport vehicles in the first half of the year was mainly due to the base effect. 10 Slovenian Economic Mirror, November 2015 Current Economic Trends Figure 8: Production volume in manufacturing according to technological intensity of industries » Low-tech -Medium-low-tech ------Medium-high- and high-tech -Manufacturing, total Figure 10: Production volume in manufacturing according to technological intensity of industries ■ Industries with employment growth ■ Industries with employment decline -Change in the number, total a a a Source: SURS; calculations by IMAD. 95 90 85 80 75 iu 70 65 60 Figure 9: Indicators of expected business trends in manufacturing -Expected production -Expected prices ----Expected employment ----Expected exports — — Expected total demand —♦— Confidence indicator 30 25 20 15 10 -15 -20 Source: SURS; calculations by IMAD. Employment in manufacturing, which improved further in the third quarter (seasonally adjusted), was up 1.2% (around 2,000 persons) year-on-year in the first nine months. It rose most in medium-low-technology industries, particularly the metal and rubber industries. It remained lower year-on-year in the manufacture of other non-metallic mineral products. It was also up in most low-technology industries and industries of higher technology intensity (with the exception of the textile industry, the manufacture of ICT equipment, and the manufacture of other machinery and equipment). In the third quarter, the value of construction put in place dropped considerably, seasonally adjusted. The decline was mainly due to the segment of civil-engineering works, where the value of construction put in place fell by 12.9% (seasonally adjusted) and was 15.8% lower year-on-year. The value of construction put in place also declined for non-residential buildings. The value for residential buildings rose slightly, but remained close to the lowest levels in the last few years. The stock of contracts and the value of new contracts in construction dropped further. In the third quarter, the stock of contracts fell in all three construction segments. The value of new contracts also dropped, being the lowest since 2000. Figure 11: Value of construction put in place Construction ----Residential buildings -Non-residential buildings ----Civil-engineering works a a a a Source: SURS; calculations by IMAD. 5 0 11 Slovenian Economic Mirror, November 2015 Current Economic Trends Box 2: Expenditure on household final consumption in 2014 With growth in disposable income and improved consumer confidence in 2014, households increased expenditure on durable goods and some services, which they had found easier to give up during the crisis. After a significant drop in 2012 and 2013,1 primarily owing to a decline in disposable income, household final consumption expenditure rose by 0.5% in real terms in 2014. Growth was mainly underpinned by expenditure on clothing and footwear, which rose by more than a tenth after the slump in 2013. Expenditure on durable goods, the component that fell the most in the 2008-2013 period (-21.7%), increased as well, by 6.8%. Purchases of furniture, home furnishings, audio, video and photographic equipment and vehicles increased in particular. Having declined since 2008, the share of durable goods in the composition of consumption rose, but was still notably smaller than in 2008 (7.6% compared with 11.1%). The share of expenditure devoted to arts, entertainment and recreation, which rose last year after declining until 2013 (-16.5%), also remained smaller than in 2008 (8.6%, compared with 10.2% in 2008). Table 4: Overview of the composition of expenditure, Slovenia and the EU household final consumption Slovenia EU-28 2008 2014 2008 2014 Food and non-alcoholic beverages 14.7 15.0 12.4 12.4 Alcoholic beverages, tobacco and narcotics 4.9 5.6 3.9 4.1 Clothing and footwear 5.4 5.2 5.2 5.0 Housing, water, electricity, gas and other fuels 18.5 18.6 22.5 24.4 Furnishings, household equipment maintenance 5.7 5.3 5.8 5.4 Health 3.5 4.0 3.5 3.9 Transport 15.6 16.2 13.3 12.8 Communications 3.2 3.3 2.8 2.5 Recreation and culture 10.2 8.6 9.2 8.6 Education 1.2 1.3 1.0 1.2 Restaurants and hotels 7.1 7.0 8.2 8.2 Miscellaneous goods and services 9.9 9.9 12.2 11.4 Durable goods 11.1 7.6 N/A N/A Semi-durable goods 8.6 8.5 N/A N/A Non-durable goods 37.4 41.9 N/A N/A Services 43.0 42.0 N/A N/A Source: Eurostat, calculations by IMAD. Note: N/A (not available). In the EU, household final consumption expenditure rose by 1.3% on average in 2014 (in real terms), the composition of expenditure being similar to that in Slovenia. EU households also allocate the largest part of their expenditure on housing, transport and non-alcoholic beverages (around 50%, in total). As in Slovenia, they devote a smaller share of their expenditure than in 2008 to durable goods (such as furniture, household equipment) and leisure-time activities (culture and recreation). Figure 12: Movements of disposable income and final consumption expenditure, Slovenia Figure 13: Movements of household final consumption expenditure, Slovenia 20 15 10 5 c 2 0 s 2 -5 "r5 GC-10 -15 -20 12013/2008 12014/2013 T" J.L o r5.JP Source: Eurostat; calculations by IMAD. Note: Household final consumption expenditure deflated by the private consumption deflator. 1 Only expenditure on health, education and communications was up in this period. 12 Slovenian Economic Mirror, November 2015 Current Economic Trends In the third quarter, turnover in retail and wholesale trade stagnated, while turnover in the sale of motor vehicles continued to increase (seasonally adjusted). Car sales to legal and natural persons increased further.4 In retail trade, which has stagnated since mid-2014, turnover strengthened only in the sale of non-food products. The sales of clothing and footwear and the sales of pharmaceutical and cosmetic products rose again, as did, after the interruption in the second quarter, the sales of household, audio, video, computer and Figure 14: Turnover in trade subsectors Retail trade, real ----Sale, repair of motor vehicles, real -Wholesale trade, nom. a a a a Source: SURS; calculations by IMAD. Figure 15: Turnover in retail trade The sale of automotive fuels - The sale of food, beverages and tobacco products ----The sale of non-food products 105 95 85 75 a a a a Source: SURS; calculations by IMAD. 4 In the third quarter, turnover growth slowed to 0.8%, seasonally adjusted; year-on-year growth stood at 12.4%. The sales of cars used by natural persons were up 13.1% year-on-year (within that, the sales via leasing rose by almost a quarter); the sales of cars used by legal entities were 6.6% higher. telecommunication equipment, books, and toys. After increasing in the previous two quarters, nominal turnover in wholesale trade stagnated, but remained highest since 2008. In year-on-year terms, turnover was up in all main subsectors, owing to growth in private consumption and domestic production activity. Nominal turnover in market services increased further in the third quarter (seasonally adjusted). Turnover growth in transport services reflects the strengthening of manufacturing production. Exports of these services increase as well, in recent months particularly in road transport. This year, turnover is also rising in computer programming and consultancy activities, and in legal and accounting and management consultancy activities, where the number of employees is increasing too. With a rising number of people employed via employment placement agencies, employment services continue to post high turnover growth. Turnover in accommodation and food service activities stagnates at a high level, after recording strong growth rates in 2014 and in early 2015. In telecommunication services turnover rose in the third quarter, after a long period of contraction, while activity in architectural and engineering services remains low. Figure 16: 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) a a a Source: SURS; calculations by IMAD. Economic sentiment, which since mid-2015 has been hovering at the highest levels since the onset of the crisis, worsened slightly in November. The decline was mainly due to consumer confidence dropping for the second month in a row. Confidence in other sectors, which has been mostly improving in recent months, remained almost unchanged in November. In all sectors but construction, confidence reached the highest levels since the beginning of the crisis. 115 110 95 ra 90 85 80 115 95 90 85 80 90 75 80 Slovenian Economic Mirror, November 2015 Current Economic Trends 13 Figure 17: Business trends Economic sentiment ----Retail trade -----Construction -Manufacturing » Service activ. ---Consumers m m ^r ^r i^i i^i ^ "5 ^ "5 Source: SURS; calculations by IMAD. Figure 18: Employed according to SRE and registered unemployed -Employed according to SRE (left axis) -Registered unemployed (right axis) £ 780 770 o 760