.^'IMAD O fü Q) £ u E o > O Ü) O u 0) o cu .Q E cu > o Slovenian Economic Mirror ISSN 1318-3826 No. 11 / Vol. XVI / 2010 Publisher: IMAD, Ljubljana, Gregorčičeva 27 Director: Boštjan Vasle, MSc Editor in Chief: Jure Brložnik, MA Slovenian Economic Mirror was prepared by: Matevž Hribernik, (International environment); Jure Brložnik, Janez Kušar, Jože Markič, PhD, Tina Nenadič, MSc, Mojca Koprivnikar Šušteršič (Economic developments in Slovenia); Tomaž Kraigher, Mojca Lindič, MSc, Ana T. Selan, MSc (Labour market); Slavica Jurančič, Miha Trošt (Prices); Jože Markič, PhD (Balance of payments); Marjan Hafner (Financial markets); Jasna Kondža, Dragica Šuc, MSc (Public finance); Matevž Hribernik (The doing business 2011 report by the World Bank); Jana Javornik Skrbinšek, PhD (The UN human development report 2010), Maja Kersnik Bergant (Poverty and material deprivation of the population); Mateja Kovač, MSc (Food self-sufficiency and security) Editorial Board: Lidija Apohal Vučkovič, Marijana Bednaš, MSc, Lejla Fajič, 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: d.o.o. Circulation: 90 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 activity in Slovenia..........................................................................................................................................9 Labour market..................................................................................................................................................................14 Prices..................................................................................................................................................................................17 Balance of payments.......................................................................................................................................................19 Financial markets.............................................................................................................................................................21 Public finance....................................................................................................................................................................23 Boxes Box 1: Economic growth in the third quarter of 2010.................................................................................................9 Box 2: Labour force survey - the third quarter of 2010............................................................................................15 Selected topics..............................................................................................................................................................27 The doing business 2011 report by the World Bank.................................................................................................29 The UN human development report 2010..................................................................................................................30 Poverty and material deprivation of the population...............................................................................................32 Food self-sufficiency and security.................................................................................................................................34 Statistical appendix.....................................................................................................................................................37 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 SORS website http://www.stat.si/eng/ skd nace 2008.asp. All seasonally adjusted data in the Economic Mirror are calculations by IMAD. In the spotlight Economic growth in the euro area slowed in the third quarter as expected; according to the autumn forecasts by the EC and OECD, recovery will continue in the next two years, but growth will be slower than this year at least in 2011. After GDP increased by 1.0% in the euro area in the second quarter, its growth slowed as expected in the third quarter (0.4%). GDP was 1.9% higher relative to the same period last year. Besides on exports, the recovery now also relies on domestic demand, but there are significant differences between individual Member States. In their autumn forecasts, the EC and OECD expect these movements to continue in the following two years. In addition to further growth in exports, which will otherwise be slower due to the moderation in global trade growth, the EC and OECD anticipate a further gradual pick-up in investment in machinery and equipment and private consumption. As a key reason that the recovery will be slower than in previous recessions, both institutions cite structural weaknesses, persistence of uncertain conditions on financial markets and fiscal consolidation, which is also associated with the risk that economic growth may be even lower than expected. Economic growth slowed as expected also in Slovenia in the third quarter. Despite the slowdown, exports remain the key factor of growth, as domestic demand has yet to recover and continues to hamper economic recovery. GDP increased by 0.3% compared with the previous quarter and was 1.7% higher y-o-y. Growth in the first nine months as a whole (0.9%) is consistent with our Autumn Forecast, while the difference between the pace of recovery of domestic and foreign demand increased further in the third quarter and was higher than what we had expected in the autumn. In line with slower growth in Slovenia's main trading partners, exports recorded lower y-o-y growth (10.5%) in the third quarter than in the second, but growth in imports (4.8%) slowed even more, so that the contribution of net exports to GDP growth (3.4 p.p.) was much larger than in the second quarter. Within domestic demand, the least favourable movements were recorded for gross fixed capital formation, which declined 9.3% y-o-y, largely due to a y-o-y decline in construction investment, which fell to the lowest value since the beginning of the crisis. Investment in machinery and equipment was only slightly higher than last year. According to our estimation, the situation on financial markets is becoming an increasingly important factor limiting the recovery of this investment sector. Household consumption (-0.4%) remained lower y-o-y for the fourth quarter in a row while growth in government consumption slowed (0.1%). The number of persons in formal employment continued to decline in the third quarter and the number of registered unemployed persons increased further in October due to a significant impact of seasonal factors. The number of persons in formal employment increased in September, largely on account of seasonal employment in education, but seasonally adjusted data show a further decline. In the third quarter as a whole, the number of employed persons declined by 0.4% according to seasonally adjusted data and was 2.2% lower than in the same period last year. The number of employed persons was also lower y-o-y according to the labour force survey (-3.0%) and the national accounts statistics (-1.5%). According to the labour force survey the unemployment rate declined to 7.0% in the third quarter (the decline is also reflected in seasonally adjusted data). The significant increase in the number of registered unemployed persons in October (to 102,683) is largely a result of seasonal impacts (the inflow of first-time job seekers after the expiry of their pupil/student status), but the seasonally adjusted data also show an increase in the number of the unemployed, which totalled 103,831 at the end of November. The average gross wage in the private and public sectors stagnated in September. In the first nine months of this year, it recorded equal growth as last year, which was solely the result of wage growth in the private sector. In the first nine months, the private sector recorded higher wage growth (5.4%) than last year, also due to the increase in the minimum wage, while amid the restrictive wage policy measures, the average wage in the public sector was at a similar level as last year (-0.1%), after high growth rates last year and in 2008. Consumer prices increased by 0.3% in November, while y-o-y inflation slowed to 1.4% due to the base effect. Amid the usual seasonal fluctuations, inflation is crucially impacted by the base effect in the last quarter, while the more moderate core inflation dynamics still reflect the long-term factors of inflation, which are related to weak economic growth. Y-o-y inflation in the euro area was 1.9% in November (HICP). The current account balance was in surplus in the third quarter as a whole (EUR 93.1 m). The y-o-y change in the balance of current transactions in the third quarter of this year, which recorded a deficit in the amount of EUR 234.9 m in the same period last year, was mainly due to a lower deficit in merchandise trade, but also a higher surplus in services trade. The balances of factor incomes and current transfers also improved. In the first nine months of this year, the deficit in current transactions totalled EUR 54.7 m (in the same period of last year EUR 475.1 m). Lending activity of domestic banks was modest also in October. Net flows of credit to the domestic nonbanking sectors were at the lowest level this year (EUR 45.5 m). The bulk of net flows results from general government borrowing, which was one of the highest this year (EUR 55.3 m). Household borrowing was below this year's average and corporate and NFI liquidity remained fairly tight despite modest foreign net borrowing. The net flow of domestic bank loans to domestic non-banking sectors reached EUR 1.1 bn in the first ten months and was more than one fifth higher than in the same period last year, mainly as a result of higher net household borrowing in the first half of the year. According to the consolidated balance of the MF, public finance revenues amounted to EUR 9.3 bn and public finance expenditure to EUR 10.7 bn in the first eight months of this year. The public finance deficit totalled EUR 1,475 m. All categories of expenditure were up y-o-y in the first eight months, except expenditure on capital transfers and payments into the EU budget. Interest payments once again recorded the highest growth. In the first ten months of the year, Slovenia received EUR 428 m from the EU budget, which is 41.2% of the foreseen receipts, while it paid EUR 350.7m into the EU budget and thus recorded a positive budgetary position in the amount of EUR 77 m. The income inequality indicators for 2009 prepared by SORS using data for 2008 still indicate a relatively favourable picture. The statistical data can be mainly explained by the fact that they do not pertain to the calendar year for which they were published. Data published for 2009 are calculated using administrative data (particularly personal income tax) for 2008 that was still a year of strong economic growth, low unemployment and high employment. The at-risk-of-poverty rate published for 2009 was thus lower than in 2008. The Gini coefficient and the quintile share ratio (S80/S20), which shows the ratio of total income received by the 20% of the population with the highest income to that received by the 20% of the population with the lowest income, also declined. However, the deterioration of the income situation has already started to show, despite the government assistance to the lowest-income population groups. Relative poverty thus deepened compared with 2008 and the at-risk-of-poverty rate of the most vulnerable social groups increased. The material deprivation rate, which pertains to 2009, remained at a similar level as in 2008, when it had increased significantly. Slovenia remains in a group of countries with very a very high level of human development and the values of the included indicators are also rising gradually. Slovenia was ranked at the same place as last year in terms of the human development index (29th) and was also placed relatively high in terms of other inequality indices, i.e. with regard to the distribution of the basic dimensions of well-being by country and gender. Regarding the included indicators, Slovenia was ranked lowest in terms of average years of schooling of the population aged 25 and over and political representation of women. ■ö £ Q) E o £ O u Q) £ Q) 3 U International environment Economic growth in the euro area slowed in the third quarter, as expected. According to Eurostat, GDP increased 0.4% in real terms in the euro area (1.0% in the second quarter) and 1.9% y-o-y. In most of Slovenia's main trading partners economic growth slowed relative to the previous quarter. Germany's economic growth eased noticeably in the third quarter (0.7%; in the second quarter 2.3%), but remains among the highest in the EU. Domestic demand has also become an important driver of growth, beside exports. The favourable situation on the German labour market, which in the third quarter recorded the largest number of jobs since the unification, positively impacts domestic demand, besides government consumption and consumption on investment in machinery and equipment, which also increased. The values of short-term indicators show that economic growth in the euro area slowed largely due to September's movements (manufacturing, construction). In the US, economic Figure 1: Structure of GDP growth in the euro area Private consumption ^■Government consumption Gross fixed capital formation liWii Changes in inventories and valuables ^^ Exports of goods and services Imports of goods and services -GDP real growth (right axis) growth accelerated somewhat in the third quarter (0.6%) and GDP increased 3.2% y-o-y; economic growth in China remains high despite a slight moderation (10.6% y-o-y). The economic recovery in the euro area is set to continue in the next two years, according to the autumn forecasts by the EC and the OECD. Both institutions revised upwards their GDP forecasts for this year and expect the recovery to continue steadily, yet at a slower pace than after previous recessions. The current recovery in the euro area is characterised by uneven prospects for individual Member States as a result of differences in production structure and in the geographical structure of exports, the degree of openness, vulnerability to financial sector problems and particularly the extent of internal and external imbalances. At the level of the euro area, the forecasts for this year were mainly upgraded due to a faster spread of recovery factors than foreseen in the spring. Amid the rapidly growing global trade flows, exports recovered faster than expected, which lead to a slight pick-up in investment in machinery and equipment, which was also positively impacted by high profits of enterprises and higher capacity utilisation. Signs of recovery can also Figure 2: Economic growth and forecast -EMU .....Forecast EMU ^ -Germany -----Forecast Germany 4 3 2 1 Source: Eurostat. a a a a a a Source: Eurostat, EC Autumn Forecasts (Nov. 2010). Table 1: Comparison of the forecasts for economic growth by international institutions and assumptions used in IMAD Autumn Forecast of Economic Trends 2010 2010 2011 2012 IMAD Sep 10 IMF Oct 10 CONS Nov 10 OECD Nov 10 EC Nov 10 IMAD Sep 10 IMF Oct 10 CONS Nov 10 OECD Nov 10 EC Nov 10 IMAD Sep 10 OECD Nov 10 EC Nov 10 EMU 1.4 1.7 1.7 1.7 1.7 1.3 1.5 1.4 1.7 1.5 1.6 2.0 1.8 Germany 2.5 3.3 3.4 3.5 3.7 1.7 2.0 2.1 2.5 2.2 1.7 2.2 2.0 Italy 0.9 1.0 1.1 1.0 1.1 1.0 1.0 1.0 1.3 1.1 1.1 1.6 1.4 Austria 1.2 1.6 1.7 2.0 2.0 1.5 1.6 1.5 2.0 1.7 1.5 2.0 2.1 France 1.4 1.6 1.6 1.6 1.6 1.4 1.6 1.5 1.6 1.6 1.9 2.0 1.8 United Kingdom 1.3 1.7 1.7 1.8 1.8 2.0 2.0 2.0 1.7 2.2 2.1 2.0 2.5 USA 2.9 2.6 2.7 2.7 2.7 2.8 2.3 2.4 2.2 2.1 3.3 3.1 2.5 Source: IMAD Autumn Forecast of Economic Trends (September 2010). MF World Economic Outlook (October 2010). Consesus Forecasts (November 2010). OECD Economic Outlook (November 2010). EC Forecast (November 2010). be seen in domestic consumption, which is expected to increase steadily over the next two years as a result of the stabilisation and, in certain countries, even a visible improvement on the labour market, low inflation, low interest rates and higher consumer confidence. According to the EC, GDP growth will slow in the first half of 2011 due to a slower recovery of trade flows, the expiry of temporary incentives and a positive contribution to growth by changes in inventories, and particularly due to the anticipated fiscal consolidation, but it will begin to pick up gradually in the latter half of 2011 when global economic growth is set to accelerate once again. GDP growth will however be lower than in previous recoveries due to certain structural weaknesses such as excessive exposure to the construction sector in a number of Member States, sluggish resumption of employment growth and structural unemployment, possible further problems related to the financial sector operations and high public finance deficit and debt. The lending conditions in the euro area tightened further in the third quarter, albeit less than in the second. According to the ECB survey, lending conditions deteriorated in the third quarter, but this time the number of banks that tightened their credit standards was only 4% higher than the number of banks that reported an easing (11% in the second quarter). According to the estimates of surveyed banks, loan demand from enterprises (small, medium-sized and large) increased for the first time in two years. Enterprises mainly raised loans to obtain working capital and to finance inventories. For the last quarter of this year, banks expect a similar tightening of the lending conditions for enterprises as in the third, while loan demand is set to pick up again. The lending conditions for housing and consumer loans, on the other hand, are not tightening any more. Banks expect lending conditions to improve in the last quarter of this year and demand is expected to rise notably as well. Figure 3: ECB survey on lending conditions Lend. conditions for enterprises in the past 3 months (left axis) -Lend. conditions for enterprises in the next 3 months (left axias) -Corporate loan demand in the next 3 months (right axis) In November, the financial markets were significantly impacted by the increased risk of the sovereign debt crisis in certain states of the euro area. Yield spreads between the 10-year government bonds of certain euro area countries (particularly Greece, Ireland, Portugal and Spain) and Germany therefore increased significantly again. The spreads of Irish government bonds hit record values and Ireland has already asked the EU for assistance in solving the crisis in its banking system and thus in the fiscal system as a whole. Figure 4: Yields on ten-year government bonds 10 1 I Ji I ^^ I JŠ I ^^ Source: Eurostat Interbank interest rates increased in November, but remained significantly below the long-term average. The average monthly value of the three-month EURIBOR amounted to 1.042%, which is 5 basis points more than in October and 33 basis points more than in the same period last year. The value of the three-month USD LIBOR (0.286%) remained at approximately the same level as in the previous month. Key interest rates of central banks also remained unchanged in November, as expected. After appreciating for four months, the euro lost value against the dollar in November. The average exchange rate of the dollar against the euro appreciated by 1.7% to USD 1.3661 to EUR 1 in November and was 8.4% higher y-o-y. The British pound sterling also appreciated somewhat against the euro (2.4%, to GBP 0.8551 to EUR 1), as did the Japanese yen (0.9%, to JPY 112.69 to EUR 1) and the Swiss franc (0.1%, to CHF 1.3442 to EUR 1). In November the stability and the value of the euro were significantly impacted by increased uncertainty regarding the sustainability of public finances in certain euro area countries. The price of Brent crude increased in November. The average price of Brent crude oil rose by 3.3% to USD 85.3 a barrel a a Source: ECB. 9 8 7 6 5 !=S3 4 3 2 0 Figure 5: Prices of Brent crude oil and the USD/EUR exchange rate -----Price in USD (left axis) -Price in EUR (left axis) -Exchange rate of USD to EUR (right axis) 1.6 1.4 cc D LU 1.2 ci D 1.0 0.8 JO JO Source: ECB, EIA; calculations by IMAD. (in EUR, by 4.8%, to EUR 63.1 a barrel). Oil prices in USD were 11.3% and oil prices in EUR 21.2% higher y-o-y. With minor corrections to the forecast with regard to oil demand, the IEA and OPEC expect the average oil price to be higher in 2011 and 2012 than in the last two years, which is mainly related to the expected further gradual recovery of the global economy. Box 1: Economic growth in the third quarter of 2010 Economic activity in Slovenia Growth in merchandise trade1 slowed in the third quarter of this year, as expected. According to seasonally adjusted data, merchandise exports remained at the level of August in September, after growing for several months, while in the third quarter as a whole, their growth eased consistent with the movements in the international environment and in line with our projections in the Autumn Forecast (from 5.9% to 4.5%). As a result of the low-base effect, y-o-y growth was still somewhat higher in nominal terms (17.4%) than in the second quarter. Growth in exports to non-EU Member States increased y-o-y (13.3%), while growth in exports to EU countries remained high (19.3%). Broken down by industries, according to the available data for the first eight months of the year, the y-o-y increase in exports mainly stemmed from growing exports in the manufacture of electrical appliances, metals, motor vehicles, chemicals and chemical products and pharmaceutical raw materials and preparations. In September, merchandise imports picked up more notably than in previous months (seasonally adjusted by 1.9%). In the third quarter as a whole, merchandise imports also recorded lower growth than in the previous quarter (1.8% compared with 7.1%) and lower y-o-y growth (13.8% compared with 19.3% in the second quarter). Imports of intermediate products also increased the most in the third quarter, according to our estimates based on the movement of export flows and industrial production. In the first nine months of 2010, merchandise exports increased by 13.6% and imports by 12.9% y-o-y. 1 According to the external trade statistics. Despite somewhat slower growth, exports remain the key driver of economic growth also in the third quarter, as domestic demand has yet to recover and hinders the recovery of the economy. In the third quarter of the year, GDP increased less (0.3%) than in the second (1.0%), as expected. It was 1.7% higher in real terms than in the same quarter of last year and increased by 0.9% y-o-y in the first nine months, which is consistent with the expectations from the Autumn Forecast of Economic Trends. The difference between the pace of recovery of domestic and foreign demand increased further in the third quarter and is thus higher than what we had expected in the autumn. The economic situation in Slovenia's main trading partners in the EU is still favourable for exports, even though exports recorded lower y-o-y growth in the third quarter (10.5%) than in the second. This was consistent with lower economic growth in Slovenia's trading partners and the forecasts by international institutions predicting that growth will slow steadily due to slower growth in global trade, the expiry of the temporary incentives, a lower contribution of changes of inventories to growth and austerity measures for reducing public finance deficits and debt. On the other hand, a faster recovery is hampered by domestic factors, which is also partly reflected in slower y-o-y growth in imports in the third quarter (4.8%). Growth was, according to our estimates, mainly underpinned by strengthening imports of intermediate goods in the production of export-oriented manufacturing industries. Within domestic demand, the movements had been least favourable in the investment sector, and they even worsened in the third quarter. Gross fixed capital formation dropped 9.3% in real terms y-o-y (4.9% in the second quarter). This decline reflected a further y-o-y drop in construction investments, which in the third quarter reached the lowest value since the beginning of the crisis, while investment in machinery and equipment recorded slight growth. The situation on financial markets is becoming a more and more important factor limiting investment activity, according to our estimates. Household consumption is also lower (-0.4%) than in the same period last year, for the fourth quarter in a row, which, according to our estimates, reflects the tightened conditions on the labour market. Y-o-y growth in government consumption slowed in the third quarter (0.1%). Changes in inventories contributed 0.8 p.p. to y-o-y economic growth, which is less than in the second quarter. According to the available data, Slovenia's GDP lags significantly more behind the pre-crisis level of the third quarter of 2008 than GDP in its main trading partners. This is due to two reasons: Slovenia recorded the largest GDP decline in the EU in 2009, with the exception of the Baltic countries, while the current recovery is slower than in a number of other Member States. Box 1: Economic growth in the third quarter of 2010 - continue Figure 6: GDP in Slovenia and main trading partners 101 100 c? 99 98 m a 97 19. 94 <5 93 !S 92 91 90 ----Italy Slovenia c3 c3 Source: Eurostat. Figure 7: Contributions to growth of the expenditure side of GDP Private consumption Government consumption Gross fixed capital formation IXXK Changes in inventories and valuables Exports of goods and services Imports of goods and services -GDP real growth (right axis) ^^ 8 6 4 -8 -10 -12 O O Source: SORS. Figure 8: Merchandise trade -Merchandise exports (left axis) 20 15 10 5 0 -5 -10 -15 -20 -25 -30 GDP in EU (right axis) 4 a a a Source: SORS, Eurostat. Growth in exports of services picked up in the third quarter, while growth in services imports slowed once again. After dropping in August, exports of services increased by 1.1% in September, according to seasonally adjusted data. In the third quarter as a whole, their growth strengthened to 4.9% (2.7% in the second). Exports of services rose by 9.1% y-o-y in nominal terms, being mainly driven by exports of travel services. Exports of road and rail transport services also increased again y-o-y, which is related to the dynamics of merchandise trade. Exports of other services mainly grew on account of strengthening exports of various miscellaneous, professional, technical and communication services, while exports of construction services have been declining y-o-y since the first quarter of last year. Imports of services increased in September (seasonally adjusted by 0.8%), but in the third quarter as a whole their growth slowed (from 1.5% to 0.7%). At the y-o-y level, imports of services grew by 5.2%, largely due to imports of licences, patents and copyrights. In the first nine months of 2010, services exports increased by 5.4% and imports by 4.5% y-o-y. Figure 9: Trade in services -Exports of services 30 25 20 as iz 15 J^ 10 ^ 0 > -5 ■ Imports of services 52 cy cy cy Source: BS; calculations by IMAD. Table 2: Selected monthly indicators of economic activity in Slovenia Figure 10: Volume of industrial production in manufacturing according to technological intensity5 in % 2009 IX 10/ VIII 10 IX 10/ IX 09 I-IX 10/ I-IX 09 Exports1 -18.4 20.1 14.4 11.7 -goods -19.4 31.9 15.8 13.4 -services -14.7 -11.7 9.1 5.4 Imports1 -23.6 16.6 13.8 11.6 -goods -25.7 24.6 15.3 13.0 -services -10.2 -15.3 5.7 4.5 Industrial production -17.4 -2.12 5.23 5.93 -manufacturing -18.7 -2.52 3.93 6.43 Construction -value of construction put in place -21.0 -8.32 -18.43 -17.23 Real turnover in retail trade -10.5 1.92 3.53 -0.83 Hotels and restaurants - nominal turnover in hotels and restaurants -11.7 -1.42 2.23 1.93 Sources: BS, SORS; calculations by IMAD. Notes: 'balance of payments s ^seasonally adjusted, 3working-day adjusted data. Growth in the volume of production in manufacturing also slowed in the third quarter, which is in line with expectations. Despite September's decline, production picked up in the third quarter (2.5%, seasonally adjusted), albeit less than in the second (3.2%). Y-o-y growth was also more modest (8.5%), due to the base effect.2 In the third quarter, y-o-y growth eased most notably in the manufacture of transport vehicles, largely due to the expiry of subsidies for the purchase of new passenger cars and light commercial vehicles in certain EU Member States. In other technology-intensive industries, growth mainly declined y-o-y.3 Growth in high-technology industries was higher than in low-technology ones, even though it eased. Given the low production levels in the previous year and in the first half of 2010, low-technology industries recorded higher y-o-y growth in production volume in the third quarter this year. Most of them had positive growth, except the most labour-intensive textile and furniture industries, which lag most notably behind the average production volume in 2008. At the end of the first nine months, low-technology industries (which are recovering at the slowest pace) and medium-low-technology industries lagged by around one fifth behind the 2008 level, and medium-high and high-technology industries (where the recovery is fastest) by approximately one tenth (most notably the manufacture of other machinery and equipment, by more than one quarter4). ■ High- and medium-high-technology-intensive industries ■ Medium-low-technology-intensive industries Low-technology-intensive industries §B100 95 ^ 90 jz 85 80 75 70 ES cy cy cy Source: SORS; calculations by IMAD. a Also in the EU as a whole, in the third quarter, production growth was stronger in high-technology industries, among which it declined the most in the manufacture of transport equipment. Production in high-technology industries increased around one tenth y-o-y. Significantly lower growth was recorded in the manufacture of transport vehicles, which had enjoyed one of the highest growth rates as recently as in the first half of the year. The manufacture of transport equipment in the EU-27 recorded lower production growth than in Slovenia in the first half of the year, but also a smaller decline in the third quarter. In the EU-27 average, this industry has yet to achieve the 2008 level, while in Slovenia, this is the only industry (besides the manufacture of electrical equipment) with higher production than in 2008.6 Growth in low-technology industries remained low. In the EU as a whole these industries lag much less behind the 2008 average than in Slovenia. The production in Slovenia lags behind the EU average in all industries except two, and the increase in the overall lag is mainly due to the textile and furniture industries, but also the manufacture of other non-metal mineral products, other manufacturing industries and repair and installation of machinery and equipment. 2 In the second quarter of 2009, production volume had been at the lowest level since the beginning of the crisis in most industries, but it strengthened in the third quarter. 3 With the exception of other machinery and equipment, which recorded very low production volumes last year and in the first half of this year. 4 A similar lag was recorded for the manufacture of ICT equipment and the manufacture of other transport equipment, which account for less than 3% of production volume in manufacturing. 5 Calculated using SORS weights for 2009 and 2010, respectively. The pharmaceutical industry is not included in the calculation due to data confidentiality. 6 At the EU level, only the pharmaceutical industry recorded higher production than in 2008 (data on the pharmaceutical production in Slovenia are confidential). Figure 11: Production volume in manufacturing in Slovenia and the EU-277 110 100 90 ■ EU-27, working-day adjusted data ■Slovenia, original data 1 80 -S 70 60 50 C ^ t^ E Si ^ s — (W (C SJ -Is ^ t- SJ EE L TO .4- E S Source: SORS, Eurostat; calculations by IMAD. Note: Arranged by the extent of Slovenia's lag behind the EU-27. Table 3: Employment in the manufacturing industries In the third quarter of 2010, the number of employed people declined by 8,632 relative to the same period last year. Once again it dropped most notably in the least technologically intensive industries (by 6,167), where the decline in employment is easing at the slowest pace. The greatest contribution to the overall drop came from the textile industry (3,625), which lost the greatest number of jobs (in addition to the paper and printing industries). In medium-low-technology and high-technology industries the number of employed persons dropped about 2% y-o-y in the third quarter. In these industries, employment declined most notably in the manufacture of non-metal mineral products and ICT equipment (by 10.6%), while it was higher y-o-y in the rubber industry, in the repair and installation of machinery and equipment and in the high-technology pharmaceutical industry, the manufacture of electrical appliances and in the manufacture of motor vehicles (by 1,025 persons; together with the leather industry, by 1,087 persons). Activity in construction declined in the third quarter, falling to a new low since the beginning of the crisis. After dropping considerably again in September, the value of construction put in place declined by 5.3% in the third quarter as a whole, according to seasonally adjusted data. Construction activity has thus been falling continuously for two years, during which time the value of construction put in place has dropped by 39.6%. In this period the greatest decline was recorded in residential construction, 8 though the value of construction works also dropped Number of employed persons, in '000 Y-o-y growth rates, % 2009 Q1 10 Q2 10 Q3 10 2009/ 2008 Q3 10/ Q3 09 I-IX 10/ I-IX 09 Food-processing ind. 15.5 15.2 15.1 15.1 -6.5 -2.5 -3.4 Textile ind. 13.7 11.0 10.7 10.1 -26.5 -26.4 -26.9 Leather ind. 3.5 3.3 3.3 3.5 -23.1 1.8 -4.9 Wood-processing ind. 9.6 9.1 9.0 8.9 -15.0 -5.6 -7.5 Paper ind., printing 10.0 9.3 9.2 9.0 -8.1 -9.6 -8.9 Chemical and pharmaceutical ind. 11.9 11.8 11.8 11.7 -2.4 -1.0 -1.4 Manufact. of rubber and plastic products 13.2 13.1 13.1 13.1 -6.5 1.1 -0.8 Manuf. of other non-metallic mineral products 8.6 8.1 8.2 8.1 -13.9 -5.4 -7.2 Basic metals and metal products 39.6 37.5 37.4 37.5 -8.0 -3.5 -6.5 Manuf. of ICT, el. equipment 27.0 26.3 26.1 25.8 -9.0 -2.3 -4.0 Manuf. of other machinery and equipment 14.8 13.8 13.8 13.7 -9.7 -3.4 -7.7 Transport equipment 13.7 13.4 13.6 13.5 -10.5 1.0 -2.8 Manufact. of furniture and other manufacturing 12.9 12.3 12.2 12.0 -8.2 -5.7 -7.2 Repair, installation of machinery and equipment 5.8 5.7 5.8 6.0 -8.7 5.7 -0.3 MANUFACTURING, total 199.8 190.0 189.4 188.1 -10.5 -4.4 -6.6 High- and medium-high-technology industries 67.4 65.4 65.4 64.8 -9.6 -1.6 -4.1 Medium-low-technology industries 67.2 64.4 64.5 64.8 -9.2 -2.1 -5.0 Low-technology industries 65.2 60.2 59.5 58.6 -11.6 -9.5 -10.8 Source: SORS; calculations by IMAD. 7 The manufacture of coke and petroleum products is not shown due to its small share in the total activity, while the pharmaceutical industry is not included due to data confidentiality. 8 In interpreting the figure on the value of residential construction put in place, it should be noted that it does not include smaller enterprises, which are mainly engaged in construction of residential buildings, by our estimates. Figure 12: Value of construction put in place — Construction - total -----Residential buildings — Non-residential buildings -----Civil engineering works 180 170 160 C^- 150 Jl 140 130 ^^ 120 110 ^^ 100 J^ 90 80 o ii 70 60 a a a Source: SORS; calculations by I MAD. more than one third in the construction of non-residential buildings and civil engineering. The decline in residential construction is related to the stock of unsold flats and the tightened financial situation, which additionally affects business operations of indebted enterprises. In civil-engineering, activity declined due to the completion of the most intensive phase of motorway construction and the tightened public finance situation. In non-residential construction, where activity had peaked in the first quarter of 2008, the value of construction put in place dropped most notably in late 2008 and early 2009 and stagnated until the end of 2009. It strengthened at the beginning of this year, only to decline once again in the second and in the third quarters. Issued building permits indicate a further contraction of activity in the construction of buildings. After relatively Figure 13: Total floor area planned by building permits ■ Non-residential buildings ■ Residential buildings favourable data for the second quarter, the total floor area of buildings planned by issued building permits was 17.4% lower in the third quarter than a year earlier. The total floor area planned by building permits thus more than halved relative to the third quarter of 2007, when the number of issued building permits was highest. In the third quarter, turnover continued to grow at a moderate pace in the sale of motor vehicles, while turnover in distributive trades remained at a similar level as in the previous quarter and turnover in wholesale declined (seasonally adjusted). The third quarter saw further moderate growth in the sale and repair of motor vehicles, where turnover has been increasing since the second quarter of last year. Nominal turnover in wholesale trade declined, but is, amid a relatively large increase in the second quarter, still higher than at the end of last year and the beginning of this year, when it was lowest. Turnover in retail trade remained roughly at the second-quarter level, being fairly stable since the middle of 2009, with minor oscillations. Within retail trade, the third quarter of this year saw no major changes in the sale of food products, beverages and tobacco products, where turnover has remained close to the 2005 average over the last year and a half, neither in the sale of non-food products, where turnover has persisted at the lowest level for five quarters. Turnover in the sale of automotive fuels is more volatile. It started to increase at the end of last year with renewed growth in the volume of road freight transport. Turnover in the sale of automotive fuels otherwise declined in the third quarter, but was, amid a relatively great increase in the previous three quarters still higher than in the third quarter of 2009, when it had been lowest. Compared with the same period last year, the third quarter saw higher turnover in retail trade (2.4%), wholesale trade (4.8%) and in the sale and repair of motor vehicles (10.8%). Figure 14: Turnover in trade sectors -Retail trade -----Automotive fuel -----Wholesale, retail trade and repair of motor vehicles and motorcyc. holesale a a a Source: SORS; calculations by IMAD. a a a Source: SORS; calculations by IMAD. Figure 15: Nominal turnover in accommodation and food service activities 135 130 125 120 115 i..........i- A 7 f / / E; cj cj cj c^ Source: SORS; calculations by IMAD. Growth in nominal turnover in accommodation and food service activities, which had started at the beginning of this year, continued in the third quarter. After the 2009 decline, which was the most pronounced in the first quarter, turnover in accommodation and food service activities increases this year, but still lags behind the level of 2008. Turnover growth in accommodation and food service activities in the third quarter (1.7%, seasonally adjusted) was related to a higher number of foreign tourists in Slovenia, according to our estimate. The number of their overnight stays increased by 3.2% y-o-y. Turnover in accommodation and food service activities was 4.1% higher in nominal terms. The seasonally adjusted value of the sentiment indicator remained unchanged in November and has maintained a Figure 16: Business trends -Economic sentiment -Retail trade -Service act. il I similar level since May 2010. November saw lower values of confidence indicators in manufacturing, retail trade and construction, while the values of the confidence indicator in services and consumer confidence indicator improved. Labour market The number of persons in formal employment increased seasonally in September, but remained 2.1% lower y-o-y. Excluding seasonal factors, the number of employed persons declined further in September (-0.1%, seasonally adjusted). Compared with the previous month, employment increased the most in education (by 1,816), which is typical for September due to the beginning of the school year. Relative to August, the number of employed persons dropped most notably in construction. In the third quarter as a whole, the number of formally employed persons declined again (-0.4%, seasonally adjusted) and was 2.2% lower y-o-y. Compared with the previous quarter, it fell particularly in manufacturing, construction, distributive trades, agriculture and education, while it increased in certain services (particularly in professional, scientific and technical activities, other miscellaneous business activities and financial and insurance activities). Figure 17: Persons in employment by activity9 3 -1 -3 IQ3 0^04 0^01 1^02 1^03 10 Agriculture Industry Construction Market Public services services Source: SORS; calculations by IMAD. The number of foreign workers continues to fall. The number of work permits for foreigners and the number of foreign workers according to the Statistical Register of Employment (SRE) declined mainly as a result of lower employment in the construction sector. Overall 31,576 Source: SORS. 9 SORS estimates the number of self-employed farmers based on data from the Labour Force Survey for the previous quarter. The number of formally employed persons in agriculture thus oscillates every three months. It thus declined by 5,802 (15.4%) between December 2009 and January 2010 and increased again by 2,741 or 8.6% between March and April 2010. Such strong oscillations are difficult to explain and are most likely attributable to a statistical error. -4 work permits were issued this year by the beginning of October, 27.5% less than in the comparable period last year. The number of foreign workers totalled 59,994 in September, which is a 5.6% lower figure than last year. The number of workers from the EU increased, but the increase was smaller than the decline in the number of workers from other countries. Figure 18: Work permits for foreigners and foreign workers according to the SRE ^■Foreign workers according to the SRE -Work permits for foreigners Figure 19: Selected labour market indicators, seasonally adjusted Formally employed, seas. adjusted, left axis Employed according to the LFS, seas. adjusted, left axis -Registered unemployed, seas. adjusted, right axis -Unemployed according to the LFS, seas. adjusted, right axis a a a Source: SORS, ESS; calculations by IMAD. The number of registered unemployed persons increased significantly in October, largely due to seasonal factors. At the end of the month 102,683 persons were registered as unemployed, 4,775 more than in September and 8,092 more than in October last year (8.6%). Data excluding the seasonal impacts also show a further increase in Box2: Labour force survey - the third quarter of 2010 According to the labour force survey, the number of employed persons declined in the third quarter, seasonally adjusted. The number of unemployed persons also dropped. Due to a strong seasonal impact, the number of employed persons remained unchanged relative to the previous quarter, but seasonally adjusted data show a 1.3% decline. Employment remained 30,000 persons or 3.0% lower y-o-y. Compared with the previous quarter, survey unemployment declined by 1,000 persons or 2.4%, seasonally adjusted, but was still 7,000 persons or 10.6% higher than in the same quarter last year. The survey unemployment rate also dropped, to 7.0%, which is 0.1 p.p. less than in the previous two quarters and 0.8 p.p. more than in the third quarter of last year. That the survey unemployment rate declined relative to the previous quarter is also indicated by seasonally adjusted data. The number of employed men increased significantly in the third quarter of this year and the number of employed women declined. The unemployment rate thus only declined for men (for the first time in two years), while the survey unemployment rate for women increased. o o o Source: SORS, ESS; calculations by IMAD. unemployment (0.4%, seasonally adjusted). Also this year, October's increase in the number of unemployed persons mainly reflects a seasonal inflow of first-time job seekers who finished school (6,343 persons or 7.9% more than in October last year). Unemployment was also higher owing to a higher number of persons who lost work (7,102 or 6.5% more than in September), particularly those who lost temporary jobs or became unemployed for business reasons. Altogether 4,849 unemployed persons landed work (fewer than in September, for seasonal reasons, but 11.2% more y-o-y). Among other unemployed persons that were deleted from the register, the number of those included in formal education programmes to get a higher level of formal education or new qualifications increased Figure20: Survey unemployment rates TOTAL---------Men----Women O O O O Source: SORS; calculations by IMAD. 8 7 c 6 i 5 4 3 Table 4: Labour market indicators in % 2009/ 2008 IX 10/ VIII 10 IX 10/ IX 09 I-IX 10/ I-IX 09 Labour force 0.2 0.1 -0.9 -0.9 Persons in formal employment -2.4 0.3 -2.1 -2.8 - Employed in enterprises and organisations and by those self-employed -2.5 0.3 -1.3 -2.2 Registered unemployed 36.6 -1.1 10.8 18.7 Average nominal gross wage 3.4 -0.1 3.6 4.1 - private sector 1.8 -0.1 4.6 5.4 - public sector 6.5 -0.2 0.6 -0.1 2009 IX 09 VIII 10 IX 10 Rate of registered unemployment, in % 9.1 9.4 10.6 10.5 Average nominal gross wage (in EUR) 1,438.96 1,433.93 1,487.20 1,485.58 Private sector (in EUR) 1,338.77 1,334.94 1,398.14 1,396.49 Public sector (in EUR) 1,749.82 1,735.15 1,749.06 1,745.49 Figure 21: Gross wage per employee -Total -----Private sector -Public sector 1,800 Sources: ESS, SORS; calculations by IMAD. in particular, as is typical for autumn months. The number of people participating in this programme was 2.1% higher than last year. The average gross wage per employee stagnated in September; its y-o-y growth in the first nine months (4.1%) was equal to last year's and resulted only from wage growth in the private sector. In September, the average gross wage in the private and public sectors remained at Table 5: Persons in formal employment by activity 1,100 E5 §§ c^ c^ c5 c^ Source: SORS; calculations by IMAD. approximately the same level as in the previous month. In the first nine months of 2010 the private sector recorded much higher y-o-y growth (5.4%) than last year, largely owing to the contribution of the basic gross wage, which had risen markedly upon the increase in the minimum wage in March. One of the factors behind this year's growth is the impact of structural shifts in employment, which declined in September due to the base effect and thus also contributed to lower y-o-y growth in the average Number in '000 Change in number 2009 IX 09 VIII 10 IX 10 2009/ 2008 IX 10/ VIII 10 IX 10/ IX 09 A Agriculture, forestry and fishing 37.9 37.9 34.0 34.0 -1,802 -45 -3,963 B Mining and quarrying 3.3 3.3 3.0 3.0 -269 -9 -292 C Manufacturing 199.8 195.9 187.7 188.1 -22,539 463 -7,725 D Electricity, gas, steam and air conditioning supply 7.9 8.0 8.0 8.0 226 10 10 E Water supply sewerage, waste management and remediation activities 9.0 9.1 9.3 9.3 200 -18 143 F Constrution 86.8 86.5 78.6 78.2 -1,169 -388 -8,297 G Wholesale and retail trade, repair of motor vehicles and motorcycles 114.6 113.8 111.5 111.3 -1,161 -199 -2,548 H Transportation and storage 49.8 49.2 47.8 47.8 -1,417 -74 -1,454 I Accommodation and food service activities 34.0 34.1 33.2 33.1 210 -93 -1,000 J Information and communication 22.5 22.4 22.5 22.6 609 112 249 K Financial and insurance activities 24.5 24.2 24.4 24.5 236 22 210 L Real estate activities 4.4 4.4 4.3 4.4 195 34 -6 M Professional, scientific and technical activities 44.8 45.3 47.1 47.4 1,960 331 2,162 N Administrative and support service activities 25.6 25.7 26.6 26.7 -444 127 1,062 O Public administration and defence, compulsory social security 51.5 51.8 52.1 52.1 555 -5 313 P Education 61.7 62.0 62.3 64.1 1,679 1,816 2,027 Q Human health and social work activities 52.1 52.2 53.4 53.4 1,087 19 1,244 R Arts, entertainment and recreation 14.1 14.1 14.2 14.2 249 72 158 S Other service activities 13.3 13.4 13.5 13.5 474 49 137 T Activities of households as employers, undiferentiated goods - and services -producing activities of households for own use 0.5 0.6 0.6 0.6 35 10 17 Table 6: Wages by activities Gross wage per employee, in EUR Growth rates, % 2009 IX 2010 2009/ 2008 IX 10/ VIII 10 IX 10/ IX 09 I-IX 10/ I-IX 09 A Agriculture, forestry and fishing 1,198.03 1,279.80 -0.2 0.6 6.6 5.3 B Mining and quarrying 1,831.20 1,841,76 0.9 0.4 3.1 3.3 C Manufacturing 1,203.38 1,298.52 0.8 -1.3 7.0 9.6 D Electricity, gas, steam and air conditioning supply 2,020.95 1,988.83 3.8 -1.9 2.7 3.5 E Water supply sewerage, waste management and remediation activities 1,413.04 1,400.85 2.0 0.4 1.5 2.6 F Constrution 1,160.16 1,226.67 1.0 0.2 3.8 4.2 G Wholesale and retail trade, repair of motor vehicles and motorcycles 1,277.51 1,322.75 1.9 1.2 4.3 3.7 H Transportation and storage 1,393.16 1,468.44 0.7 5.3 2.3 1.6 I Accommodation and food service activities 1,032.97 1,067.68 1.6 -1.0 5.5 3.8 J Information and communication 2,038.65 2.050.81 1.4 -0.1 3.1 2.3 K Financial and insurance activities 2,122.72 2.054.40 -0.7 0.4 1.5 2.3 L Real estate activities 1,435.09 1,433.31 1.9 0.3 1.5 3.6 M Professional, scientific and technical activities 1,737.98 1,733.07 2.1 -2.0 1.3 1.9 N Administrative and support service activities 914.93 944.95 1.8 -1.6 4.6 3.8 O Public administration and defence, compulsory social security 1,788.30 1,792.09 5.9 0.3 0.3 -0.9 P Education 1,719.27 1,733.54 3.6 1.1 1.2 0.6 Q Human health and social work activities 1,752.78 1,715.30 12.0 -2.1 0.0 -0.4 R Arts, entertainment and recreation 1,723.15 1,723.53 3.9 -0.9 1.5 1.1 S Other service activities 1,340.92 1,379.39 1.3 -1.1 4.5 4.5 Source: SORS; calculations by IMAD. private sector wage in September. In the public sector, in September, the average gross wage declined more notably in health and social work, which can be partly attributed to seasonal movements and to a certain extent to lower payments for overtime work due to the strike.10 Given the restrictive wage policy measures, the average gross wage in the public sector remained at roughly the same level in the first nine months (-0.1%) as in the same period last year when growth was exceptionally high (8.6%). Prices Consumer prices increased by 0.3% in November, while y-o-y inflation slowed to 1.4% due to the base effect (from 1.9% in October). In the first eleven months, consumer prices increased by 1.8% (last year by 2.3%), recording relatively slow growth due to weak economic activity. According to the preliminary data by Eurostat, November's inflation in the euro area remained at the same level y-o-y as in October, 1.9% (HICP). This year's inflation has been crucially impacted by energy prices. In the first ten months, consumer prices increased by 1.5%. The bulk of the increase came from higher energy prices, 1.3 p.p., within that 0.5 p.p. came from higher excise duties.11 Increases in euro prices of other Figure 22: Measured and core inflation (HICP) 10 -HICP -Slovenia HICP core inflation -Slovenia - HICP -euro area HICP core inflation -euro area S 4 I'l f K y-'i V\A The medical personnel in this sector was on strike in part of September, refusing to work overtime. 11 The total impact of higher taxes totals between 0.8 p.p. and 0.9 p.p. this year. Excised duties on tobacco and alcohol also increased, in addition to excise duties on energy. Source: Eurostat. commodities (22.9%) and food (20.7%) on global markets have so far not been passed through to domestic prices in production (0.8%) and retail trade, despite a distinct upward trend of prices of imported food (12.3% in the first nine months). Retail prices of food increased 1.4% in Slovenia this year and prices of non-processed food 2.4%, largely on account of 9.3% growth in prices of fresh vegetables. The same goes for inflation in the entire euro area. According to the ECB, the relatively insignificant pass-through of higher international food and other commodity prices to domestic prices is, among other 8 6 2 0 things, related to weak consumer demand, which has so far limited the spillover of higher input costs to retail prices. Figure 23:Prices of food and food products 35 30 25 20 ^15 10 ^ 5 0 -5 -10 -15 -20 -1 PPI in Slovenia -food products 2 PPI imports -food products -HICP -processed food HICP -non-processed food -IMF -food Source: ECB, Eurostat, IMF, SORS; calculations by IMAD. The movement of core inflation12 remains moderate and indicates the absence of major long-term inflationary pressures. In the last twelve months, core inflation measures have been moving at a relatively low level y-o-y with a mild trend of growth (between 0% and 1%) and still reflect weak economic activity and relatively weak consumer demand, according to our estimation. Y-o-y growth in producer prices on the domestic market remains around 3%. In October it was 3.1%. Its level and dynamics were most notably impacted by y-o-y price growth in the manufacture of metals and metal products (12.3%), which is under the influence of international factors. Price movements in other manufacturing industries remain heterogeneous. Relatively high y-o-y growth rates are still recorded in the manufacture of textiles and clothing, chemicals and pharmaceutical products. For the second consecutive month, a mild strengthening of the otherwise low y-o-y growth can be seen in the manufacture of food products, which is also attributable to price pressures from the international environment, where food prices have increased by 20.7% this year. Price competitiveness continued to improve in the third quarter, largely under the impact of the depreciation of the euro. The decline in the real effective exchange rate, Table 7: Breakdown of HICP into sub-groups - the first ten months of 2010 Evro area Slovenia Cum. % Weight % Contribution in p.p. Cum % Weight % Contribution in p.p. Total HICP 1.5 100.0 1.5 1.8 100.0 1.8 Goods 2.0 58.0 1.2 2.6 66.2 1.7 Processed food, alcohol and tobacco 1.0 11.9 0.1 3.6 14.8 0.5 Non-processed food 1.9 7.3 0.1 2.9 6.9 0.2 Non-energy industrial goods 0.7 29.3 0.2 -0.9 30.7 -0.3 Durables 0.4 9.5 0.0 -3.7 11.5 -0.4 Non-durables 0.9 8.3 0.1 0.5 8.8 0.0 Semi-durables 1.4 11.5 0.2 2.2 10.3 0.2 Energy 7.6 9.6 0.7 9.9 13.9 1.4 Electricity for households 2.7 2.4 0.1 5.9 2.6 0.2 Natural gas 7.4 1.5 0.1 16.7 0.8 0.1 Liquid fuels for heating 17.2 0.8 0.1 21.5 1.5 0.3 Solid fuels 0.9 0.1 0.0 -1.5 1.0 0.0 District heating -0.2 0.5 0.0 14.6 0.8 0.1 Fuels and lubricants 9.4 4.2 0.4 9.5 7.2 0.7 Services 0.8 42.0 0.3 0.0 33.8 0.0 Services - dwellings 1.3 10.2 0.1 4.8 2.7 0.1 Services - transport 1.5 6.6 0.1 1.6 5.2 0.1 Services - communications -0.7 3.3 0.0 2.4 3.4 0.1 Services - recreation, repairs, personal care 0.0 14.9 0.0 -3.2 14.3 -0.5 Services - other services 1.4 7.1 0.1 2.1 8.1 0.2 HICP excluding energy and non-processed food 0.7 83.1 0.6 0.1 79.3 0.1 Source: Eurostat; calculations by IMAD. Note: ECB classification 12 Excluding seasonal and one-off factors. Figure 24: Industrial producer prices -PPI (domestic market) --------- Manufacture of furniture, and other manufacturing -----Mfr. of basic metals, fabricated metal prod., exc. mach. and equip. ---Mfr. of food products; beverages and tobacco products ---------Mfr. of chemicals and chemical prod., and basic pharm. products 18 deflated by the HICP,13 otherwise slowed in the third quarter due to the appreciation of the euro against the US dollar (from -0.7% in the second quarter to -0.2% in the third). The y-o-y decline continued at an accelerated pace (from -1.2% in the second quarter to -1.4% in the third) due to a more pronounced y-o-y depreciation of the euro against the USD, CHF, JPY and GBP. The y-o-y improvement of Slovenia's price competitiveness is among the smallest in the euro area, which is partly attributable to the structure of Slovenia's foreign trade14 and partly to higher growth in relative prices. Figure 25: Real effective exchange rates of euro area members deflated by HICP A Q1-Q3 10 1 0 -1 -2 -3 o iä -4 (D -5 -6 -7 Source: ECB; calculations by IMAD. 13 According to the ECB, with regard to 35 trading partners. 14 Given the above-average share of Slovenia's merchandise trade with euro area countries, the decline of the exchange rate of the euro has a smaller effect on the movement of our effective exchange rate (and vice versa). Balance of payments The current account balance was in surplus again in September (EUR 38.9 m) and in the third quarter as a whole (EUR 93.1 m). The y-o-y change in the balance of current transactions in the third quarter, which ran a deficit of EUR 234.9 m in the same period last year, mainly resulted from a lower deficit in merchandise trade, but also a higher surplus in services trade. The balances of factor incomes and current transfers also improved. In the first nine months of the year, the deficit in current transactions totalled EUR 54.7 m (in the same period of last year EUR 475.1 m). Figure 26: Components of the current account balance Trade balance ^■Factor incomes -Current account 600 ■ Services balance ■ Current transfers a a a Source: BS; calculations by IMAD. The surplus in trade in goods and services strengthened again in the third quarter due to favourable movements in both trade in services and trade in goods. It also increased y-o-y. The third quarter saw the lowest deficit in merchandise trade this year (-EUR 113.5 m). With faster volume growth of exports than imports, the nominal deficit in merchandise trade was also impacted by terms of trade, which deteriorated y-o-y (-3.5%).15 The surplus in services trade strengthened to EUR 360.3 m in the third quarter and was again higher y-o-y. The y-o-y increase was largely due to a higher surplus in travel and road transport services. The deficit in the group of other services did not increase much y-o-y. The deficit in the factor income balance remained lower y-o-y in the third quarter this year, while the balance of current transfers recorded a surplus this year after last year's deficit. The deficit in factor incomes (-EUR 162.3 m) narrowed y-o-y chiefly due to a smaller deficit in capital income, while the surplus in labour income widened y-o-y. The lower deficit of the capital income balance 15 Based on the index of export producer prices on the foreign market and the index of import prices, which are used as a source of data in the national accounts statistics. Source: SORS. Table 8: Balance of payments I-IX 10, EUR m Inflows Outflows Balance1 Balance, I-IX 09 Current account 18,361.6 18,416.4 -54.7 -475.1 - Trade balance (FOB) 13,545.1 13,970.3 -425.2 -412.8 - Services 3,414.4 2,502.6 911.7 845.8 - Income 661.1 1,114.6 -453.4 -670.5 Current transfers 741.0 828.9 -87.9 -237.5 Capital and financial account 3,456.6 -3,170.9 285.8 47.7 - Capital account 230.0 -167.5 62.6 32.4 - Capital transfers 228.9 -164.1 64.7 37.9 - Non-produced, non-financial assets 1.2 -3.3 -2.1 -5.6 - Financial account 3,226.6 -3,003.4 223.2 15.3 - Direct investment 199.4 -104.6 94.8 -458.1 - Portfolio investment 2,179.0 -645.8 1,533.3 4,.317.8 - Financial derivates 8.2 -96.0 -87.8 -0.2 - Other investment 839.9 -2,186.5 -1,346.5 -3,991.4 - Assets 505.8 -436.2 69.5 -467.4 - Liabilities 334.2 -1,750.2 -1,416.1 -3,524.0 - Reserve assets 0.0 29.5 29.5 147.1 Net errors and omissions 0.0 -231.0 -231.0 427.4 Sources: BS. Note: 'a minus sign (-) in the balance indicates a surplus of imports over exports in the current account and a rise in assets in the capital and financial account and the central bank's international reserves.. resulted from lower net outflows of equity from direct investment and net interest payments on foreign loans. Net interest payments on loans are lower y-o-y, as commercial banks have repaid EUR 4.0 bn worth of foreign loans since the beginning of the financial crisis. Due to higher indebtedness, Slovenia's interest payments to the rest of the world on portfolio investment again exceeded interest receipts. Total net interest payments to the rest of the world were at approximately the same level as in the same period last year, though they increased compared with the second quarter of this year. The net inflow of income from labour was higher, mainly due to a lower outflow of foreign workers' income abroad. The surplus in the balance of current transfers in the third quarter was largely a consequence of the surplus in the government sector, which had recorded a deficit last year. After the net inflow in the second quarter of this year (EUR 297.5 m), external financial transactions16 posted a net outflow in the amount of EUR 91.3 m in the third (a net inflow of EUR 146.2 m in the same period last year). The BS and the government sector recorded a net outflow, which was higher than the net capital inflow to the private sector. In the third quarter, direct investment recorded a net inflow again (EUR 59.2 m), after the net outflow in the period from the second quarter of last year to the first quarter this year. Inflows from portfolio investment had already been lower than last year in the first half of this year, while in the third quarter portfolio investment recorded net outflows (-EUR 68.6 m). This was largely a consequence of investment in foreign debt securities by the rest of the private sector and sales of government sector debt securities by foreigners. Other investment saw a net outflow of EUR 81.2 m in the third quarter of this year; liabilities recorded an outflow of EUR 478.6 m and claims an inflow of EUR 397.4 m. On the side of external claims, the greatest net outflow was recorded by short-term household deposits abroad and the greatest net inflow by currency and deposits of domestic banks. We estimate that domestic commercial banks thus repaid some of their foreign loans. Regarding liabilities, the greatest net outflow was recorded by the BS due to a decline in its Figure 27: Financial transactions of the balance of payments by instrument ^■Direct investment Portfolio investment Financial derivatives Other investment — Net financial flow 2500 6 Excluding international monetary reserves and statistical errors. a a a Source: BS; calculations by IMAD. liabilities against the TARGET 2 position in the amount of EUR 324.0 m, largely as a consequence of the maturity of assets obtained by long-term financing operations from the ECB. Domestic commercial banks also continued to repay loans. This year net external debt and gross external debt are increasing at a much slower pace than in 2009. At the end of September 2010, net external debt totalled EUR 11.5 bn, increasing by EUR 0.8 bn or 2.0 p.p. to 32.2% of estimated GDP compared with the end of 2009. Slovenia's gross external debt amounted to EUR 41.9 bn (117.0% of GDP), which is EUR 1.6 bn more than in December 2009. The increase in gross external debt was mainly due to the government sector and partly to debt financing between affiliated entities. Gross external claims in debt instruments totalled EUR 30.4 bn (84.9% of GDP), EUR 0.8 bn more than in December last year. Claims by other sectors (where enterprises prevail) increased the most, while commercial banks reduced significantly their claims on the rest of the world by withdrawing currency and deposits. Figure 28: External debt Gross external claims in debt instruments Gross external debt — Net external debt 45,000 a a a Source: BS; calculations by IMAD. Financial markets The lending activity of domestic banks eased again in October. Net flows of loans to domestic non-banking sectors totalled EUR 45.5 m, the lowest figure this year. The bulk of net flows are attributable to general government borrowing, which was at one of the highest levels this year (EUR 55.3 m). Household borrowing was below this year's average for the second month in a row and corporate and NFI liquidity remained tight despite modest foreign net borrowing. The net flow of domestic bank loans to domestic non-banking sectors recorded EUR 1.1 bn in the first ten months. It was more than one fifth higher than in the same period last year and mainly resulted from higher net household borrowing in the first half of the year. Liquidity of the banking sector also remained fairly low. In October, banks once again recorded net outflows of foreign deposits, as well as government and household deposits, in a total amount of around EUR 650 m, while on the side of assets banks were mainly reducing their deposits with the Eurosystem and foreign banks. Figure 29: Net flows and growth of domestic bank loans to domestic non-banking sectors I Households (left axis) I Government (left axis) -Enterprises&NFI (right axis) I Enterprises&NFI (left axis) Households (right axis) Total (right axis) 0 -10 -20 Source: BS; calculations by IMAD. Lending activity in the euro area picked up somewhat in October, largely due to stronger general government net borrowing in Ireland (EUR 73.1 bn), which accounted for nearly 95% of total general government net borrowing in the euro area in October. After relatively strong corporate and NFI net borrowing in the first half of the year, the situation worsened significantly in the second half of the year, but was still better than in the comparable period last year. In October, enterprises and NFIs thus net repaid their loans for the fourth month in a row, this time in the amount of EUR 42.0 bn, which was the highest figure this year. In the first ten months, net repayments of corporate and NFI loans amounted to EUR 2.7 bn (compared with less than EUR 100 bn in the same period of last year). Banks in the euro area extended a net EUR 313.8 bn in loans to non-banking sectors in the first ten months, while they had recorded net repayments totalling EUR 35.1 bn in the comparable period last year. Household borrowing was fairly low in Slovenia in October for the second consecutive month. Monthly net flows amounted to EUR 30.7 m and were still mainly attributable to net flows of housing loans (EUR 25.0 m), which nevertheless reached less than one third of this year's monthly average and were at the lowest level since March 2009. Households continue to record net repayments of consumer loans, while borrowing for other purposes increased somewhat over the last three months. In the first ten months, households borrowed a net EUR 736 m from domestic banks, 57.5% more than in 20 10 Table 9: Financial market indicators Domestic bank loans to non- Nominal amounts, EUR bn Nominal loan growth, % banking sector and household 31. XII 09 31. X 10 31. X 10/ 31.X10/ 31.X10/ savings 30. IX 10 30. XII 09 31. X 09 Loans total 32,444.95 33,539.47 0.1 3.4 3.4 Enterprises and NFI 23,161.09 23,291.75 -0.2 0.6 -0.1 Government 870.95 1,098.41 5.3 26.1 28.6 Households 8,412.91 9,149.31 0.3 8.8 10.3 Consumer credits 2,899.95 2,809.67 -0.3 -3.1 -3.2 Lending for house purchase 3,927.13 4,696.94 0.5 19.6 23.3 Other lending 1,585.84 1,642.70 0.9 3.6 3.8 Bank deposits total 14,313.07 14,654.80 -0.2 2.4 3.9 Overnight deposits 5,655.00 6,076.31 -1.3 7.5 9.4 Short-term deposits 5,116.28 4,547.48 -0.1 -11.1 -14.5 Long-term deposits 2,874.95 4,020.40 1.2 39.8 52.9 Deposits redeemable at notice 666.84 10.62 -9.3 -98.4 -98.2 Mutual funds 1,856.30 1,975.39 1.7 6.4 9.1 Sources: Monthly Bulletin of the BS, SMA (Securities Market Agency); calculations by IMAD. the comparable period last year. This increase is mainly a result of stronger net borrowing in the first half of the year. In October, enterprises and NFIs recorded net repayment of loans taken out with domestic banks for the second time in the last three months and their net outflows amounted to EUR 40.4 bn. This time it was only enterprises that net repaid loans, while NFIs recorded net borrowing (EUR 8.8 m) for the first time in the last nine months. Enterprises and NFI thus borrowed a net EUR 130.7 m from domestic banks in the first ten months of this year, nearly one fifth less than in the comparable period last year. Corporate and NFI borrowing from domestic banks eased significantly in recent months, but enterprises and NFIs started to increase their borrowing abroad. In September, net flows Figure 30: Net corporate and NFI borrowing abroad and differences in interest rates Loans (left axis) -Difference between domestic and foreign interest rates (right axis) 200 340 150 100 ; 50 ^ 0 D Ü -50 -100 -150 -200 310 280 250 220 190 160 130 100 of foreign loans were positive for the second month in a row, though somewhat more modest (EUR 21.9 m). In September, corporate net borrowing was only recorded in long-term loans, while short-term loans were repaid in a net amount for the fifth month in a row. Net repayments of foreign corporate and NFI loans thus amounted to EUR 206.0 m in the first three quarters of 2010. In the comparable period last year corporate and net borrowing abroad exceeded EUR 260 m. Despite September's net borrowing at home and abroad, enterprises and NFIs together recorded net repayments of close to EUR 35 m to domestic and foreign banks in the first nine months of this year, while they had borrowed over EUR 500 m in the same period of last year. The financing of the banking sector abroad increased somewhat in September. Banks otherwise made net Figure 31: Net bank borrowing abroad ■ Deposits ■ Short-term ■ Long-term 600 Source: BS; calculations by IMAD. Source: BS. repayments of short-term and long-term loans in the total amount of EUR 31.3 m, but at the same time recorded net inflows of foreign deposits, which were the highest this year (EUR 202.8 m). Despite September's strong net inflows from abroad, banks net repaid foreign loans and deposits in the amount of EUR 947.4 m in the first nine months of this year, which is only slightly more than one third of what was recorded in the same period last year. Weak lending activity also reflects the deteriorating quality of banks' total assets. Banks must therefore create additional impairments. Impairments amounted to EUR 58.9 m in October, which is almost one fifth above this year's monthly average. In the first ten months of this year, provisions and impairments exceeded EUR 500 m and were nearly 60% higher than a year before. We can expect banks to increase impairments further by the end of the year, as it was in the last two months that impairments soared in the previous two years. Figure 32: Creation of additional impairments and provisions in Slovenia's banking system Source: BS; calculations by IMAD. Household and government deposits recorded a net outflow also in October. Household net outflows (EUR 32.9 m) remained at approximately the same level as in September. Net inflows were again only recorded for long-term deposits, which were slightly above September's level (nearly EUR 50 m), but nevertheless lagged significantly behind what was recorded in the first half of this year. Net inflows of household deposits to banks thus continue to slow. In the first ten months they amounted to EUR 341.7 m, which is nearly one fifth less than in the comparable period last year and the lowest level in the last five years. This decline is also a consequence of negative movements on the labour market, according to our estimation. Outflows of government deposits strengthened in October compared with the previous month and totalled EUR 223.6 m. Net outflows were posted by all types of deposits. The greatest outflow (close to EUR 100 m) was recorded for short-term deposits, which shrank by EUR 1.1 bn. The total net outflows amounted to just over EUR 800 m, while in the same period last year Slovenia recorded inflows in the amount of EUR 2.6 bn. Figure 33: Net inflows of household and government deposits to banks and y-o-y change in stock ^^ Households (left axis) Government deposits (left axis) -Deposits, total (right axis) -Households (right axis) ■ Government deposits (right axis) 160 120 -40 Source: BS; calculations by IMAD. Public finance In the first ten months of 2010, revenue from taxes and social security contributions17 dropped by 1.7% relative to the same period last year, with payments amounting to EUR 10.7 bn. In the first ten months, only revenues from value added tax (VAT), excise duties and social security contributions increased y-o-y, while revenues from all other taxes and contributions declined. Inflows of value added tax (VAT) rose by 2.5% in this period. At the beginning of the year, VAT inflows shrank due to shorter deadlines for tax refunds. The recorded growth was also due to the effect of a very low base, given that VAT inflows had dropped most notably due to lower economic activity in the comparable period of last year. Revenue from social security contributions was 0.9% higher in the first ten months of this year compared with the same period last year; revenue from excise duties18 was 0.4% higher. The latter mainly increased as a result of revenue from excise duties on tobacco and tobacco products (2.0 p.p.) and alcohol (0.5 p.p.), while the total growth of revenue from excise duties declined by 2.1 p.p. due to wer revenue from excise duties on energy. The quantity of products sold declined y-o-y in this period, which was, according to our estimations, partly due to higher excise duties.19 In the first ten months, the largest y-o-y 17 Based on the Report on Payments of All Public Revenues, January-October 2010, Public Payments Administration. 18 The figure for excise duties is corrected for the timing of excise duty payments. 19 Among these products, the quantity of sold alcohol and alcohol products declined the most (6.1%), the quantity of sold tobacco and tobacco products (3.1%) and the quantity of main mineral oils (2.6%). 80 I 40 0 -120 decline was recorded for revenue from corporate income tax (-40.4%), which declined as a result of refunds based on tax assessments taking into account business results for 2009, tax relief and a lower tax rate. The new monthly prepayments are much lower than last year's: they have been determined according to business results for 2009, but tax payers are also able to request a reduction on the basis of deteriorated business performance in the current year. The statutory tax rate is 1 percentage point lower (20.0%). Revenue from personal income tax declined 3.4% y-o-y: revenue from tax on income from employment was slightly higher (0.7%), but revenues from other personal income tax sub-categories were significantly lower (-17.1%), particularly revenues from taxes on income from entrepreneurial profits and income from capital gains. Tax refunds based on final personal income tax assessments for 2009 were also much higher y-o-y in the first ten months (EUR 107 m; EUR 89 m a year before). Figure 34: Taxes and social security contributions ---------Taxes on income and profit -----Social security contributions -Domestic taxes on goods and services -----Other taxes .. -Total D o CU ro 3