Slovenian Economic Mirror J IMAD Economic Analyses/January 2008 No. 1, Vol. XIV Slovenian Economic Mirror presents current macroeconomic developments as well as selected economic, social and environmental issues. The publication consists of articles, which present the main economic indicators, assess the realisation of the spring and autumn forecasts, and monitor implementation of economic policies (earnings, public finance, prices, competitiveness, etc.). The periodical is published monthly, except in September. This issue of Slovenian Economic Mirror was prepared by: Marijana Bednaš, Luka Žakelj (In the Spotlight), Jure Brložnik (International Environment), Jože Markič (Balance of Payments), Miha Trošt (Price Trends & Policy), Marjan Hafner (Money Market - Household Savings, Money Market -Loans, Stock Exchange), Jasna Kondža (General Government Revenue), Tomaž Kraigher (Labour Market), Saša Kovačič (Earnings), Katarina Ivas (Manufacturing), Jure Povšnar (Transport, Energy Sector), Tanja Čelebič (Scholarships in Tertiary Education), Mateja Kovač, Katarina Ivas (Milk and Dairy Products), Barbara Ferk (Disposable Income of Households and NPISH according to Non-financial Sector Accounts, 2000-2006), Jana Javornik Skrbinšek (Human Development Index - HDI). Director: Boštjan Vasle. Editor in Chief: Luka Žakelj. Translator: Tina Potrato. Language Editing: Translation and Interpretation Division of the Secretariat-General of the Government of the RS. Technical Editor: Ema Bertina Kopitar. Statistical Appendix, Data Preparation & Graphs: Bibijana Cirman Naglič, Marjeta Žigman. Distribution: Katja Ferfolja. Printed by: Tiskarna Štrok. Concept & Design: Sandi Radovan, Studio DVA. Circulation: 500 copies. Institute of Macroeconomic Analysis and Development Gregorčičeva 27, 1000 Ljubljana (+386 1) 478 10 12 fax: 478 10 70 Editor in chief: luka.zakeli@gov.si Translator: tina.potrato@gov.si Distribution: publicistika.umar@gov.si SEM can be found on the Internet at http://www.gov.si/aindex/. Publication is included in Ebsco Publishing Database and Internet Securities Database. © Institute of Macroeconomic Analysis and Development, 1995-2008. The contents of this publication may be reproduced in whole or in part provided that the source is acknowledged. Contents Slovenian Economic Mirror IMAD No. 1/2008 p. 2 In the Spotlight The appreciable drop in unemployment in 2007 did not exert any upward pressures on wages that would result in additional inflation growth p. 3 International Environment The first IMF forecasts for this year project a greater slowdown in economic growth in the EMU and USA than expected in the autumn p. 4 Balance of Payments The widening in the current account deficit in the first eleven months of 2007 largely caused by increases in the trade deficit and deficit in factor incomes p. 5 Price Trends & Policy Food and oil prices were the main contributors to last year's high inflation p. 6 Money Market -Household Savings The November drop in household bank savings linked to the privatisation of a state-owned bank p. 7 Money Market - Loans Household borrowing picked up considerably in November p. 8 Stock Exchange In 2007 the SBI20 index posted the highest growth in ten years; prospects for 2008 are less promising p. 9 General Government Revenue Tax reform slowed down the real growth of general government revenue in 2007 p. 10 Labour Market Employment growth eased off seasonally in November p. 11 Earnings A high November increase in earnings due to special year-end payments p. 12 Manufacturing Lower growth of production and employment in November p. 13 Transport Road freight transport resumed vigorous growth in the third quarter of 2007 p. 14 Energy Sector Net electricity imports increased in 2007 p. 15 SELECTED TOPICS Scholarships in Tertiary Education The number of sponsorship recipients declined from 2005 to 2006 p. 19 Milk and Dairy Products The large increase in the final prices of milk and dairy products may reflect the low efficiency of the Slovenian dairy industry p. 20-21 Disposable Income of Households and NPISH according to Non-financial Sector Accounts, 2000-2006 The average disposable income of Slovenian residents in 2006 equalled 62.2% of the average disposable income of EU residents p. 22 Human Development Index -HDI The Slovenian HDI increased last year due to higher life expectancy and GDP per capita; Slovenia kept the 27th place among 177 countries p. 23 Data: (pp. A 1-A 12), Main indicators (p. A 13), International Comparisons (pp. A 14-15), Graphs (pp. A 16-17). Selected indicators of current economic developments, change in % Latest Data Compared to the previous month same period of previous year latest data pre-latest data pre-pre latest data Industrial production (value based) XI -4.0 7.6 8.2 7.8 Manufacturing XI -4.6 8.9 9.5 9.1 Electricity, gas and water supply XI 1.5 -9.9 -9.5 -9.3 Value of construction put in place, real terms XI -13.9 21.9 23.6 26.0 Exports of goods (nominal terms)1 XI -4.1 17.0 17.7 17.8 Imports of goods (nominal terms)1 XI -4.1 18.8 20.2 20.2 Real effective exchange rate2 XI 0.6 2.2 2.0 1.8 Gross wage per employee, real terms XI 13.4 2.4 2.4 2.5 Total household savings in banks3, nominal terms XI -2.4 7.7 11.4 11.5 General government revenue, real terms XII 5.8 4.0 4.5 4.5 Number of persons in paid employment XI 0.3 3.5 3.5 3.5 Number of registered unemployed XII 0.1 -16.9 -17.2 -17.6 Number of job vacancies XII -24.2 6.6 7.9 7.6 Month current previous pre-previous Registered unemployment rate XI 7.3 7.4 7.2 Month current cumulative annual4 Consumer prices XII 0.4 5.6 5.6 Producer prices (domestic market) XII 0.1 6.3 6.3 Sources of data: SORS, BS, ESS, estimates and calculations by IMAD. Notes: 1balance of payments' statistics; 2euro's exchange rate for Slovenia measured by relative consumer prices; the calculation of the effective exchange rate includes the currencies/prices of Slovenia's 17 trading partners (Austria, Belgium, Germany, Italy, France, Netherlands, Spain, Denmark, United Kingdom, Sweden, Czech Republic, Hungary, Poland, Slovakia, USA, Switzerland, Japan); weights are the shares of individual trading partners in Slovenian exports and imports of goods within manufacturing (5-8 SITC) in 2001-2003; exports are double weighted; 3the year-on-year growth rate is defined as the ratio between the stock at the end of the current month and the stock in the same month of the previous year; 4total in the last 12 months. In the Spotlight Slovenian Economic Mirror IMAD No. 1/2008 p. 3 The latest IMF forecasts indicate that the slowdown of economic growth in the EMU and the United States will be somewhat stronger this year than projected in the autumn. While GDP growth in the United States in 2007 slightly exceeded the autumn expectations of the IMF and the European Commission (and was consistent with the OECD forecasts), the IMF's latest forecast, released at the end of January, projects a stronger deceleration in 2008 than anticipated in October, largely due to increased risks related to repercussions of the financial crisis. The IMF has made downward revisions to its forecasts for both the United States (from 1.9% to 1.5%) and the EMU (from 2.1% to 1.6%). The policy reactions to the changed economic environment (greater downward risks to GDP growth, escalation of inflationary pressures) in the United States have focused on preventing any further cooling of the economy, while policy makers in the EMU have given priority to price stability, since developments in the second half of 2007 show that euro area economies were more resistant to shocks due to their sounder macroeconomic foundations and the favourable structure of economic growth in 2007, which was largely underpinned by investments and the positive effects of labour market reforms. Thus, the Fed cut its key interest rate substantially in January (by 1.25 p.p. to 3.0%) despite the rising inflation, whereas the ECB did not change its interest rate in the face of escalating prices (see p. 4). Developments on international financial markets also affected the domestic stock market - the SBI20 index dropped by almost 10% in January. Otherwise, its annual growth in 2007 was the highest in ten years. In the first eight months of 2007 alone, its value surged by 91.8%, only to plummet by almost 10% in the autumn, which coincided with developments on international capital markets, triggered by the international financial turmoil. The December pick-up on the stock market was chiefly linked to the privatisation of a state-owned bank (see p. 9), coupled with the liquidity intervention of the leading central banks to cushion the effects of the financial crisis. Households expressed great interest in the purchase of shares of the above-mentioned bank, which resulted in a lower volume of savings and increased household borrowing from banks (see pp. 7-8). The available figures on economic activity for the last few months of 2007 show signs of moderation, but are still at a fairly high level. The November figures suggest a deceleration in the growth of external trade, which generally follows the trends in the international environment (lower year-on-year growth of exports and imports compared to October; see p. 5); a moderation in activity is also indicated in manufacturing and construction. Following the vigorous October increase (12.8%), the year-on-year production growth in manufacturing slowed down again in November (to 3.8%). Particularly highly export-oriented industries continued to expand at high rates, among them especially the chemical and automobile industries. Towards the end of the year, the growth of employment and productivity also eased off. The average 11-month increase nevertheless reached a robust 8.9% (see p. 13). Activity in construction softened slightly from October, yet remained at a high level in the final quarter, according to the latest data. Employment was also fairly strong again (see also p. 11). Favourable trends in non-financial market services continued at the end of 2007. The growth of employment in hotels and restaurants as well as distributive trades accelerated further in the autumn months, while remaining at exceptionally high levels in real estate, renting and business services. Furthermore, the final quarter of 2007 saw continued fairly strong growth in the number of tourist overnight stays, which is also corroborated by data in the services balance (see also p. 5). The growth of employment moderated seasonally in November, while the decrease in the number of unemployed in 2007 was the largest thus far. The increase in the number of employees eased from 0.6% to 0.3% in November, while remaining high at the year-on-year level (3.7%). The number of vacancies and persons hired declined at the end of the year, largely for seasonal reasons, whereas their average annual growth slowed last year after the high growth rates recorded in 2004-2006. The unemployment-vacancy ratio again improved largely to the benefit of workers with low or secondary education, whose number also declined most significantly among the unemployed, both of which was related to the structure of economic growth. On average, the number of unemployed in 2007 was 16.9% lower than in 2006 (see p. 11). The high increase in November earnings was due to special year-end payments; at the same time we estimate that wage growth in 2007 did not exert any additional pressure on inflation. In the eleven months to November, the average gross wage increased by a nominal 5.9%. Despite the potentially higher volume of special payments in December, we do not expect any substantial divergence from the estimated nominal growth of the average gross wage (5.9%) and its lagging behind the projected growth of labour productivity (6.5%) in 2007 (see p. 12). The dynamics of general government revenue in 2007 were determined by the changed tax legislation and the relatively favourable macroeconomic environment. General government revenue increased by a real 4%, lagging behind the projected GDP growth (5.8%). Amid robust economic growth and the consequently favourable conditions on the labour market, the number of wage recipients is estimated to have increased by approximately 3% (2006: 1.4%), which tempered the decrease in revenue from personal income tax deriving from the changed tax legislation and the further phasing out of the payroll tax, and boosted the revenue from social security contributions. The nominal value of total general government revenue was strongly affected by the higher than projected inflation; as a result, the realisation of taxes and social security contributions in 2007 was higher than planned (see p. 10). Prices increased appreciably in 2007. The prices of domestic producers on the domestic market increased by 6.3%, strongly exceeding the increase in producer prices of the same producers on foreign markets (0.6%). A significant factor of the overall price increase on the domestic market was the February increase in the electricity price for companies (by 19.5%), linked to the conclusion of new contracts between suppliers and consumers. However, even if the increase in producer prices in the manufacturing sector were equal on both markets, the index value of these prices would still be higher on the domestic market due to its different structure. In our estimate, approximately 40% of the difference between domestic and foreign price increases may be explained by the different structure, while the rest can be attributed to the faster growth of prices on the domestic market. Meanwhile, consumer prices increased by 5.6% (see p. 6). International Environment Slovenian Economic Mirror IMAD No. 1/2008 p. 4 Real Growth of GDP (in %) 2007 2006 2007 2008* 2009* Q1 Q2 Q3 Q4 Euro area 3.6 2.5 2.5 N/A 2.8 2.6 1.8 2.0 Germany 3.6 2.5 2.5 N/A 2.9 2.5 1.8 1.9 USA 1.5 1.9 2.8 2.5 2.9 2.2 2.0 2.7 Source of data: US Bureau of Economic Analysis; Eurostat; German Federal Statistical Office. Note: 'Consensus Forecast (January 2008). The latest IMF forecasts for 2008 project a greater deceleration in GDP growth than expected in the autumn. In line with expectations, economic growth already slowed down somewhat last year (see table). This year, the IMF projects a deceleration in global growth from 4.9% to 4.1%, largely due to lower forecasts for the United States (from 2.2% to 1.5%), the euro area (2.6% to 1.6%) and Japan (1.9% to 1.5%). Otherwise, January was characterised by tumbling stock markets. In fear of recession, the U.S. Federal Reserve slashed its key interest rate by 1.25 p.p. in two subsequent cuts, leaving it at the current 3.0%. On the other hand, the ECB believes that the fundamentals of the euro area economy are still sound, while admitting that the risk of growth being lower than expected is rising. The ECB appears to be more concerned with inflation, which climbed to its highest level in 14 years in January (3.2%), and the central bank therefore left its key interest rate unchanged (at 4.0%) in January. The lower interest rates in the United States, coupled with the slower growth of the U.S. economy, are the main reasons for the continued appreciation of the euro against the dollar in January, when the USD/EUR exchange rate was 13.2% higher in year-on-year terms. The strong euro has had a negative effect on the price competitiveness of exports in the euro area; on the other hand, it has mitigated the escalating prices of oil and other commodities. Due to the specific oil price dynamics in 2007, the price of a barrel of Brent crude expressed in euros was more than 30% higher in the last two months of 2007 than in the year before (in dollars, approximately 55% higher). The available data show that economic growth in the euro area eased off at the end of 2007. The moderation is indicated by the slower growth of industrial production in the euro area, which totalled 2.7% in November, year on year (4.1% in October). While data on GDP growth in the euro area for the final quarter of 2007 have not been released yet, we do have the estimate of annual GDP growth in Germany, showing that growth slowed down towards the end of the year. Some signs of the negative effects of the financial crisis are already visible, especially in sentiment indicators. In January the economic sentiment indicator of the European Commission fell for the eighth consecutive month to hit its lowest level since January 2006, while the business climate index dropped for the third month in a row to its lowest level since March 2006. A further sign of the effects of the financial turmoil was revealed in the January edition of the ECB Bank Lending Survey, which identifies a further deterioration in credit conditions. In the final quarter of 2007, the net number of banks that tightened their credit conditions for corporate loans increased from 31% in the third quarter to 41%, while the net number of banks that tightened their credit conditions for household loans increased from 12% to 21%. On a positive note, it is worth mentioning that the unemployment rate in the euro area remained unchanged in January (at 7.2%, historically the lowest level). GDP growth in the United States slowed appreciably in the last quarter of 2007 (from 4.9% to 0.6%), while hitting a five-year low at the annual level (2.2%). The Fed responded to the uncertain economic situation by an extensive cut in interest rates. In annualised q-o-q terms, private consumption growth declined towards the end of 2007 (from 2.8% to 2.0%), while investment dropped (-10.2 p.p.) as housing investment plummeted further and reduced overall growth by 1.3 p.p. Economic growth was also lower due to the smaller contribution of net exports (from 1.4 to 0.4 p.p.) and a drop in inventories, which reduced overall growth by 1.3 p.p. The growth of private consumption, which is crucial for future economic growth, is being jeopardised by further deterioration of the housing market (all three key indicators of future activity were approximately 25% lower than in 2006 in annual terms; prices dropped by 8.4% in the year to November), the credit crisis and the escalating prices of energy and food. Due to the latter, inflation hit its highest level in 17 years in 2007 (4.1%), while core inflation climbed by 0.7 p.p. in the final quarter of 2007 to total 2.7%. However, the steps taken by the Fed suggest that the U.S. central bank regards inflation as a lesser risk than a major slowdown in GDP growth. Accordingly, the Fed cut its key interest rate by as much as 225 basis points from the onset of the crisis in August 2007 to the end of January (see graph). Graph 1: Key interes rate of the ECB and Fed, and the USD/EUR exchange rate Graph 2: Inflation in the United States and Germany, and the IMF food price index 7 6 5 % 4 3 2 1 US CPI US (Food) - Germany HICP ■ Germany (Food) - IMF food price index 2005=100, (right axis) Sources of data: ECB, FED. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2007 Sources of data: Eurostat, IMF, US Bureau of Labor Statistics. 6 4 5 4 % 3 2 D 8 Balance of Payments Slovenian Economic Mirror IMAD No. 1/2008 p. 5 Balance of payments, I-XI 2007, EUR m Inflows Outflows Balance1 Balance, I-XI 2006 Current account 23,830.7 25,100.0 -1,269.2 -595.4 Trade balance (FOB) 18,323.8 19,642.9 -1,319.1 -870.4 Services 3,748.5 2,801.0 947.5 819.2 Factor services 950.4 1,572.4 -622.1 -359.6 Unrequited transfers 807.9 1,083.6 -275.6 -184.5 Capital and financial account 10,915.7 -9,374.3 1,541.4 542.8 Capital account 232.9 -254.8 -21.9 -54.8 Capital transfers 232.1 -251.5 -19.4 -52.2 Non-produced, non-financial assets 0.8 -3.3 -2.5 -2.7 Financial account 10,682.8 -9,119.5 1,563.3 597.6 Direct investment 838.7 -990.8 -152.0 -294.9 Portfolio investment 980.2 -3,317.8 -2,337.6 -1,014.8 Financial derivatives 0.0 -22.8 -22.8 -16.6 Other long-term capital investment 8,796.4 -4,788.1 4,008.3 1,018.7 Assets 15.0 -4,740.2 -4,725.2 -1,612.4 Liabilities 8,781.4 -47.9 8,733.5 2,631.1 International reserves (BS) 67.5 0.0 67.5 905.1 Statistical error 0.0 -272.2 -272.2 52.6 Source of data: 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. The growth of trade in goods remained at a high level in the first eleven months of 2007, yet the trade deficit widened as imports grew more than exports. Exports of goods increased by a nominal 16.5%, year on year (by 17.0% to EU countries and by 15.2% to non-EU countries). Slovenia's exports to EU countries have been growing steadily since Slovenia became an EU member and now account for more than 70% of total goods exports. The share of exports to the countries of former Yugoslavia is declining, as Slovenian firms increase their direct investment in production on these markets. Goods imports posted an 18.0% year-on-year nominal increase (14.7% from EU countries and 31.7% from non-EU countries). Imports from non-EU countries were higher than those from EU countries for the third consecutive year. Possible reasons for such dynamics include the fact that imports from countries in South Eastern Europe are subject to almost no import quotas and customs duties, as well as the higher prices of oil, natural gas and metals. The trade deficit widened year on year, mostly due to the smaller surplus in trade with non-EU countries (down EUR 289.3 m to EUR 1,207.7 m), and partly due to the slightly higher deficit in trade with EU countries (up EUR 159.4 m to EUR 2,526.8 m). The higher surplus in services trade was largely underpinned by an increase in the net exports of travel. In the first eleven months of 2007, exports of services increased by a nominal 18.8%, year on year. This increase was chiefly based on the growing exports of certain services based on knowledge and higher value added (merchanting, various business, professional and technical services, and financial services). Although the export competitiveness of other services is improving, their share in Slovenian exports is still low (28.6%) in comparison with the EU average (59.0% in 2006). Despite the strong growth of goods exports recorded in 2007, the share of transport services contracted. The share of travel services in services export declined as well. Imports of services increased by a nominal 20.0% in the period analysed, year on year. Particularly high year-on-year growth was recorded in imports of construction and assembly services (154.7%) performed by nonresidents, linked to vigorous investment in construction. Within knowledge-based services, imports of leasing and financial services posted the largest increase. The year-on-year increase in the services balance surplus totalling EUR 128.4 m was largely derived from the favourable developments in trade in travel services, since exports of travel services posted a much higher increase (13.6%) than their imports (4.3%) The current account deficit widened by EUR 673.9 m, year on year (to EUR 1,269.2 m), but it remains within sustainable limits. The dynamics of trade in goods and services is in line with the IMAD Autumn Forecast. After totalling EUR 371.6 m in the first eleven months of 2007, and taking into account the expected higher deficit characteristic of December, the deficit in goods and services trade is expected to remain within the projected range (the forecast for 2007 is EUR 573 m). At the same time, we estimate that the current account deficit for 2007 will exceed the Autumn Forecast figure (EUR 1,165 m) due to a higher deficit in factor incomes and a deficit in the national budget vis-à-vis the EU budget. Net capital inflow continued to increase in the latter part of the year. International financial transactions (excluding international reserves) posted a net capital inflow of EUR 1,495.8 m in the first eleven months of 2007 (while a net capital outflow of EUR 307.5 m was recorded in the same period of 2006). The higher net capital inflow was largely the result of the higher short-term net liabilities of the BS to the Eurosystem, particularly in the first four months. The main reason for the increase in commercial banks' borrowing was loans taken out in April and November last year. Deposits of non-residents picked up particularly in October and November. Graph: Regional structure of trade in goods, in % 100 95 90 85 80 75 70 65 60 100 95 90 85 80 75 70 65 60 □ EU non-member countries ■ US □ Russian federation HCountries of former Yugoslavia □ EU Member States 2007 Jan.-Oct. Source of data: SORS, calculations by IMAD. Price Trends and Policy Slovenian Economic Mirror IMAD No. 1/2008 p. 6 2006 2007 Price indices XII 2006/ $ (I 06—XII 06)/ XII 2007/ XII 2007/ $ (I 07—XII 07)/ XII 2005 $ (I 05-XII 05) XI 2007 XII 2006 $ (I 06-XII 06) Consumer prices (CPI) 102.8 102.5 100.4 105.6 103.6 Goods 102.1 102.0 100.2 106.0 103.2 Fuel and energy 103.9 108.2 100.0 109.8 103.1 Other 101.7 100.5 100.2 105.2 103.2 Services 104.3 103.4 100.8 104.8 104.5 Consumer prices (HICP) 103.0 102.5 99.6 105.7 103.8 Administered prices' 102.1 105.8 99.9 107.2 102.6 Energy 103.7 108.0 99.9 109.6 102.7 Other 97.9 100.2 100.0 101.5 102.4 Core inflation: - trimmean 102.7 102.8 100.1 103.2 102.3 - excluding food & energy 102.0 101.2 100.3 104.0 102.7 Consumer prices in the EMU 101.9 102.2 100.4 103.1 102.1 Producer prices of domestic manufacturers: - domestic market 102.8 102.3 100.1 106.3 105.4 - EMU 106.3 102.6 100.2 100.9 105.0 Sources of data: CPI, HICP, IPI: SORS; administered prices and core inflation: IMAD estimate; MUICP in the EU: Eurostat (provisional data) and IMAD recalculation. Note: figures are not directly comparable between years due to the annual changes of the administered prices index. Consumer prices in Slovenia increased by 5.6% in 2007, twice as much as the year before. The acceleration in domestic inflation (from 2.8% in 2006 to 5.6%) was largely caused by faster growth in the prices of food and liquid fuels for transport and heating (see graph), and partly by the rounding up of prices upon the euro changeover at the beginning of 2007. A somewhat smaller acceleration in price growth was also recorded in the EMU, where it was likewise fuelled by the escalating prices of oil, other primary commodities and food on global markets. Last year the euro appreciation against the dollar cushioned the effect of rising oil prices on inflation in both Slovenia and other EMU countries. The external price shock from oil prices passed through to domestic inflation to a greater extent than in the EMU because liquid fuels for transport and heating have a greater weighting in the Slovenian consumer price index. The high prices of other commodities and food may reflect the inefficiency of the domestic food-processing industry (see also pp. 20-21), which failed to make the necessary adjustments prior to EU accession, when it was protected by high customs duties. Another possible explanation is the lack of competition and high concentration in the food trade segment, where the four largest companies almost completely control the market (90% in 2006). According to our estimate, the accelerated food price growth is also one of the key reasons for the significant increase in consumers inflationary expectations at the end of 2007. The December increase in consumer prices totalled 0.4%. Among other items, food prices increased again (1.7%) and contributed 0.3 p.p. to the December inflation. On the other hand, the prices of clothing and footwear fell as expected due to winter sales, which reduced the monthly inflation rate by 0.2 p.p. Domestic producer prices on the Slovenian market also increased appreciably in 2007. They climbed by 6.3% (by 4.9% in manufacturing), strongly exceeding the increase in the producer prices of the same manufacturers on foreign markets (0.6%). A significant factor in the overall price increase on the domestic market was the price increase in electricity for industrial consumers (19.5%), which was linked to the conclusion of new annual contracts between companies and electricity distributors. This was the main contributing factor to the high overall annual increase in producer prices on the domestic market, which totalled more than 5% in February (up from 3.5% in January). In addition to higher electricity prices, 2007 also saw several price surges in the manufacturing sector, notably in the manufacture of food, beverages and animal feeds (up 10.1%), leather and leather products (17.7%), and pulp and paper (10.1%). Except for the manufacture of food, beverages and animal feeds (up 8.2%), metal products (4.8%), and electrical machinery and equipment (3.9%), domestic companies were not able to pull off any major price increases on foreign markets, where they even cut many prices. However, even if the increase in manufacturing producer prices were equal on both markets, the index value of these prices would still be higher on the domestic market due to its different structure. In our estimate, approximately 40% of the difference between domestic and foreign price increases may be explained by the different structure, while the rest can be attributed to the faster growth of prices on the domestic market. Graph: Breakdown of the acceleration in inflation into sub-groups in 2007 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 Jan 07 Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Oct 07 Nov 07 Source of data: SORS, calculations by IMAD. Dec 07 Money Market - Household Savings Slovenian Economic Mirror IMAD No. 1/2008 p. 7 Household savings in banks and in mutual funds managed by domestic administrators EUR m, nominal Nominal growth rates, in % 31. XII 2006* 30. XI 2007 30. XI 2007/ 31. X 2007 30. XI 2007/ 31. XII 2006* 30. XI 2007/ 30. XI 2006* Total savings in banks 11,451.3 11,952.4 -2.4 4.4 7.7 Domestic currency savings 7,181.3 11,570.5 -2.3 N/A N/A Overnight deposits1 3,730.9 4,939.9 -5.1 N/A N/A Short-term deposits 2,558.1 4,698.4 -0.2 N/A N/A Long-term deposits 677.2 1,231.5 -0.1 N/A N/A Deposits redeemable at notice 215.0 700.8 0.0 N/A N/A Foreign currency savings 4,270.0 382.0 -3.5 N/A N/A Overnight deposits1 1,794.3 149.7 -2.5 N/A N/A Short-term deposits 1,877.1 167.5 -4.8 N/A N/A Long-term deposits 474.4 41.5 -4.8 N/A N/A Deposits redeemable at notice 124.2 23.2 2.9 N/A N/A Mutual funds 1,967.3 2,808.0 -5.4 42.7 48.2 Source of data: Monthly Bulletin of the BS, SMA (Securities Market Agency); calculations by IMAD. Notes: demand deposits; *due to the transfer of euro loans to domestic currency loans, data from previous years are not comparable with data for 2007, and calculations of growth rates are therefore meaningless. In November the volume of household savings in banks was significantly reduced by the launch of privatisation of one of the banks. Thus, the volume of savings witnessed the largest monthly drop since comparable data have been available. Of all types of household bank deposits, only foreign currency deposits redeemable at notice picked up. In November, household deposits in banks posted a net outflow of EUR 290.1 m, which equals approximately 40% of small investors' total orders for bank shares. The net flows of household deposits totalled EUR 501.2 m in the first eleven months of 2007, just over one tenth more than in the comparable period of 2006. The year-on-year growth of household deposits declined appreciably in November due to high net outflows, but it nevertheless topped the 2006 rate by one percentage point. Year-on-year growth is estimated to have rebounded considerably in December, when not only Christmas bonuses but also overpayments related to the purchase of shares, worth almost EUR 600 m, were paid into household bank accounts. We further estimate that households chose to keep a fraction of the money which they obtained through sales of mutual fund points and securities in order to buy shares in the form of bank deposits due to the unfavourable developments on capital markets. The November drop in assets managed by domestic mutual funds was much sharper than that in bank deposits. By the end of November, mutual funds thus managed EUR 159.1 m less than the month before. A mere one tenth thereof (EUR 17.9 m) was due to net outflows, while the rest was linked to the declining value of mutual fund points due to negative trends on domestic and foreign capital markets. Investors in stock mutual funds extensively opted for payouts. These funds recorded a net outflow of EUR 21.9 m. Apart from this, only index mutual funds also registered an outflow (EUR 0.1 m), while other funds posted net inflows in November, which were higher than the month before and lagged just slightly behind the average of the first eleven months in 2007. Owing to high net inflows in the first ten months of the year, total net inflows in the eleven months to November amounted to EUR 404.3 m and were still three times higher than in the comparable period of 2006. Graph: Net flows of household deposits in banks and mutual funds 400 350 300 250 200 150 100 50 0 -50 -100 -150 -200 -250 -300 □ Deposits □ Mutual funds UM h Q ".J Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov 06 06 06 06 06 06 06 06 06 06 06 06 07 07 07 07 07 07 07 07 07 07 07 Source of data: BS, Securities Market Agency; calculations by IMAD. Money Market - Loans Slovenian Economic Mirror IMAD No. 1/2008 p. 8 Nominal amounts, in EUR m Nominal loan growth, in % Domestic bank loans 31. XII 2006* 30. XI 2007 30. XI 2007/ 30. XI 2007/ 30. XI 2007/ 31.X2007 31. XII 2006* 30. XI 2006 Loans total 20,193.3 26,515.9 2.9 31.3 34.2 Domestic currency loans 7,457.5 24,674.9 2.6 N/A N/A Enterprises and NFI 4,066.8 18,333.1 2.8 N/A N/A Households 2,896.4 5,833.9 2.6 N/A N/A Government 494.3 507.9 -2.1 N/A N/A Foreign currency loans 12,735.8 1,841.0 6.1 N/A N/A Enterprises and NFI 10,091.3 830.1 3.9 N/A N/A Households 2,484.3 995.7 8.4 N/A N/A Government 160.1 1 5.2 -11.7 N/A N/A Household loans by purpose 5,380.7 6,829.6 3.4 26.9 28.1 Consumer credits 2,286.6 2,797.0 4.2 22.3 23.3 Lending for house purchase 1,955.8 2,624.3 2.9 34.2 37.3 Other lending 1,138.3 1,408.3 2.7 23.7 22.2 Source of data: BS Bulletin, calculations by IMAD. Notes: NFI - non-monetary financial institutions; *due to the transfer of euro loans to domestic currency loans, data from previous years are not comparable with data for 2007, and calculations of growth rates are therefore meaningless. Despite the gradual increase in interest rates, the November volume of borrowing by domestic nonbanking sectors from domestic banks was the highest thus far. This was due to a large monthly increase in household borrowing, which reached the highest figure since comparable data have been available. Corporate borrowing also strengthened somewhat in comparison with the previous months. After minor borrowing in October, the government in November again recorded net repayment of loans taken out in domestic banks. The November total monthly net flows amounted to EUR 742.3 m, whereas in the first eleven months of the year, domestic banks recorded net lending in the amount of EUR 6,322.7 m, which is a good two thirds more than in the comparable period of 2006. Year-on-year growth of loans in Slovenia has been increasing since March 2007, whereas in the EMU it has remained at approximately 10.5% for one year. However, due to the low base, Slovenia has been slow to approach the loan levels relative to GDP achieved by other EMU countries. Enterprises and NFI likewise continue to borrow extensively from domestic banks. Following the moderation over the last three months, November saw a particular increase in investment loans, whose net flows reached EUR 208.1 m, the second highest value in 2007 (in July EUR 237.4 m). On the other hand, enterprises took out noticeably fewer loans for other purposes. The volume of these loans increased by a mere 1.6%, or one third of the average monthly rate in the eleven months. It was precisely these loans that enjoyed the highest growth rate in the first eleven months of 2007. They surged by 67.8%, but their contribution to overall growth was nevertheless fairly modest, since their share in total loans is just 5.7%. The growth of working capital loans and investment loans hovered around 35% in this period. In the first eleven months of 2007, enterprises recorded net borrowing from domestic banks totalling EUR 5,005.2 m, almost 90% more than in the comparable period of 2006. There are no significant differences between domestic lending terms and those abroad. The published domestic interest rates in the eleven months to November were, on average, 0.6 p.p. higher than in the EMU. In this period, enterprises posted net borrowing from foreign banks in an amount of EUR 489.4 m, close to one quarter less than in the same period of 2006. The growth of household loans picked up considerably in November. The new loans appear to have been used in large part for the purchase of new securities. This vigorous growth is chiefly attributable to stronger borrowing in the form of consumer loans, which reached EUR 112.5 m and accounted for more than one half of the total monthly net flows of household loans, exceeding the previously highest level by a factor of two. Although loans for the purchase of securities are not classified as consumer loans, we estimate that the loans given for the purchase of bank shares were included among consumer loans, based on the high value of their net flows and the fact that households repaid a large share of these loans within one month (see also p. 9). Compared with the previous few months, the monthly growth of the other two groups of household loans also picked up somewhat, but did not diverge significantly from the monthly average. Due to the strong growth of consumer loans, November also saw a substantial increase in the overall year-on-year growth rate of household loans, which reached its highest level since comparable data have been available. In the first eleven months of 2007, households posted net borrowing from domestic banks totalling EUR 1,448.8 m, almost 40% more than in the comparable period of 2006. Graph: Monthly net flows of household loans 250 200 150 100 50 0 -50 □Other lending ^Lending for house purchase □ Consumer credits m CD CD CD CD CD CD CD CD CD CD CD CD 1"- h- 1"- 1"- 1"- h- 1"- 1"- 1"- 1"- 1"- O O o O O O O O O O O O o o O O o o O O O o o C n tč S >. C •=2 a> Q. O O > O C JD ro ž >. C •=2 a> o. o 0 > ro aj LL < CO S —3 < 0) CO O z 0) Q ro (D LL < ro S —3 —3 < 0) CO o z Source of data: SORS, calculations by IMAD. Stock Exchange Slovenian Economic Mirror IMAD No. 1/2008 p. 9 Turnover and market capitalisation on the Ljubljana Stock Exchange Turnover, I-XII 2007 Market capitalisation, 31. XII 2007 EUR m Growth rates (%), I-XII 2007/I-XII 2006 EUR m Growth rates (%), 31. XII 07/31. XII 06 Total 3,829.9 7.0 26,858.0 41.7 Official market Total 2,932.2 125.7 21,958.0 41.4 Shares 2,789.5 129.2 16,881.0 72.3 Bonds 88.0 10.4 4,915.0 -12.5 Mutual funds 54.7 - 162.0 - Semi-official market Total 496.2 -2.6 4,900.0 43.1 Shares 275.4 17.4 2,858.0 66.4 Bonds 97.2 -10.9 1,020.0 0.7 Shares of investment funds 123.5 -25.4 1,022.0 47.4 MMTS (Market Maker Trading Segment Total 401.4 -77.3 - - Bonds 268.6 -73.9 - - Short-term securities 132.9 -82.0 - - Source of data: LSE, calculations by IMAD. Notes: figures do not always add up due to rounding; 1data are available from September 2005 onwards. In 2007 the value of the SBI20 index surged by 78.1%, the largest increase in ten years, while expectations for 2008 are less optimistic. This strong growth was propelled by the high demand for securities based on the offering of financial derivatives tied to the shares of the Ljubljana Stock Exchange, increased interest in management buyouts and the good business results of the listed companies. In the first eight months of 2007 alone, the value of the SBI20 index surged by 91.8%, while it decreased by close to 10% from September to November, which also coincided with developments on international capital markets linked to the international financial turmoil. The government provided new impetus in December by launching the first phase of privatisation for one of the banks it owns. In addition, growth was partly underpinned by liquidity injections of some major central banks to mitigate the consequences of the financial crisis. The Ljubljana Stock Exchange started 2008 on a negative note. The value of the SBI20 dropped by almost one tenth in January, largely as a result of developments on international financial markets, and partly due to uncertainty regarding further privatisation. The growth of market capitalisation of securities on the Ljubljana Stock Exchange remained at the level of the previous year in 2007. The market capitalisation of shares (excluding investment funds) grew by 71.4%, which is just 0.5 p.p. less than in 2006. The contribution of listing the bank shares that the government previously sold to interested investors on the stock market totalled 8.5 p.p. Thus, the value of shares on the Ljubljana Stock Exchange reached as much as 59.5% of the estimated value of GDP in 2007. In 2008, index growth could be based more on a greater offering of shares (listing of new shares) than an increase in the value of already listed shares. In comparison with 2006, only the market capitalisation of investment fund shares posted a bigger increase last year (47.7%, or 41.4 p.p. more than in 2006). Following the remarkable slowdown in the growth of the market capitalisation of bonds (from 31.1% to 9.6%) in 2006, the latter declined by more than one tenth in 2007, which happened for the first time since 1996. This drop is largely attributable to the smaller volume of market capitalisation of government bonds, since the government made an early partial repayment of its bonds by way of issuing new bonds on the government bond market of EMU countries (EUROMTS). The decline was also partly linked to the drop in the value of bonds listed on the Ljubljana Stock Exchange, as the value of the BIO bond index fell by 2.1% in 2007. In 2007 turnover on the Ljubljana Stock Exchange eased for the second consecutive year. For the reasons mentioned above, turnover in bonds declined and fell more than two thirds short of the 2006 value. As a result of the favourable trends in the first eight months of the year, turnover in shares (excluding investment funds) rose substantially, exceeding the 2006 level by a factor of 2.1. Thus, the share turnover ratio (ratio of the turnover to the market capitalisation of shares) rebounded somewhat in 2007. It totalled 0.16, the highest figure in five years, yet still lagged far behind the levels characteristic of more developed capital markets (0.50 and higher). In 2007 the differences in the dynamics of the main capital markets widened considerably. The value of the main index on the Tokyo Stock Exchange dropped by more than one tenth, while the DAX30 index (Frankfurt Stock Exchange) appreciated by 22.3%, which is a fair increase for developed capital markets. These dynamics did not even out until the second half of the year, when the year-on-year growth of all indices began to tumble with the onset of the international financial crisis (the MSCI dropped by 5.1% over the last four months). New disclosures of bank losses and the expected deceleration of economic growth in the United States and the EU came as further shocks to international capital markets in January (see p. 4), when the value of all main stock indices dropped by one tenth on average. Graph: Structure of market capitalisation on the Ljubljana Stock Exchange 100% 80% 60% 40% 20% 0% 1995 2000 2001 2002 2003 2004 2005 2006 2007 Source of data: LSE; calculations by IMAD. □ Bonds □ Shares (excluding investment funds) □ Investment funds ■ Mutual funds* Note: * there are three mutual funds listed on the Ljubljana Stock Exchange, which account for just about 5% of the total value of mutual funds assets managed by domestic administrators. General Government Revenue Slovenian Economic Mirror IMAD No. 1/2008 p. 10 Growth index, nominal Structure, I—XII I—XII 2007, in thousand EUR XII 2007/ XI 2007 XII 2007/ $ 2006 I—XII 2007/ I—XII 2006 2007 2006 12,921,171 106.2 125.1 107.7 100.0 100.0 1,113,243 112.3 106.5 118.1 8.6 7.9 1,804,427 134.1 144.7 100.6 14.0 14.9 391,541 137.6 125.7 87.1 3.0 3.7 4,272,980 83.7 111.6 108.9 33.1 32.7 2,906,674 81.1 112.7 107.0 22.5 22.6 1,118,864 100.0 107.1 112.5 8.7 8.3 116,889 133.9 285.9 228.4 0.9 0.4 4,536,448 118.2 133.2 108.7 35.1 34.8 685,643 89.3 113.5 103.3 5.3 5.5 General government revenue Total general government revenue Corporate income tax Personal income tax Payroll tax Domestic taxes on goods & services Value added tax Excise duties1 Customs duties, other import taxes Social security contributions Other revenue Source of data: AP, PPA, B-2 Report 2007 (gross deposits); methodology and calculations by IMAD. Note: 1the figure is adjusted for excise duty payment periods. The dynamics of general government revenue in 2007 were determined by the amended tax legislation and the relatively favourable macroeconomic environment. At the year-on-year level, general government revenue increased by a real 4% and lagged behind projected GDP growth (5.8%). The lagging of the increase in general government revenue behind economic growth is attributable to the effects of the tax reform enacted in 2007. Revenue from personal income tax decreased due to the new Personal Income Tax Act (see SEM 4/2007:12), while revenue from payroll tax declined as a result of the further reduction of rates for this tax. Corporate income tax was reformed as well, but the effect of its lower burden will not be perceived until 2008. Taxes on property were newly regulated as part of the tax reform. The taxation of inheritance, gifts and vessels was regulated by separate laws. The acts regulating value added tax and real estate sales tax were amended, which did not significantly affect the volume of general government revenue. Furthermore, the new legislation imposed excise duties on electricity and introduced a new tonnage tax. Throughout the year, the impact of global oil prices on domestic inflation was cushioned by adjustments to the level of excise duties on petroleum products. Excise duties on cigarettes were raised again and finally harmonised with the European directive, which boosted the growth of revenue from excise duties. The tax reform, aimed at increasing competitiveness and creating a stimulating tax environment, lessened the tax burden for businesses and households. In the given tax system, higher inflation affected the dynamics of the nominal tax and contribution bases. These bases (income, gross wage fund, value of turnover, value of imports) increased faster than projected in 2007. Therefore, the realisation of taxes and social security contributions in 2007 was also higher than planned in the supplementary budget and financial plans of other general government accounts. In 2007 inflows from corporate income tax posted the fastest increase of all taxes, totalling 14%. The growth of revenue from this tax was underpinned by the good business results achieved in 2006. It was only slowed down slightly by the final annual tax assessments, which were lower than in 2006 due to the amended law. The monthly advance payments that were paid in 2007 were determined on the basis of the old law and the tax calculation for 2006, whereas the tax assessment pursuant to the new Corporate Income Tax Act will be made this year on the basis of annual accounts for 2007. Revenue from excise duties also increased at a faster pace than overall tax revenue (by 8.6% in real terms). The largest increases in this group were recorded in revenues from excise duties on cigarettes (9.7%) and mineral oils (8.8%), whereas revenue from excise duties on alcohol and alcoholic beverages increased only by 2%. Revenue from social security contributions followed the dynamics in the gross wage fund. With unchanged contribution rates, it increased by a real 4.9% in 2007. The real growth of revenue from value added tax was fairly modest in 2007 (3.3%). It followed the subdued growth of domestic household and government consumption. Only value added tax on imports posted stronger growth (7.2%). Revenue from personal income tax declined by a real 2.9% from the previous year, while revenue from payroll tax dropped by 15.9% in real terms. In 2007 the payroll tax burden was lessened by an average of 0.85% of the gross wage fund. Graph: Taxes and social security contributions as a share of GDP, in % of GDP 40 35 30 25 20 15 10 5 0 kxxxxl _ kxxxxi 2000 2001 2002 2003 2004 2005 2006 2007 Sources of data: PPA -B-2 Report 2007 (gross deposits), SORS; calculations by IMAD. □Other revenues □ Social security contributions ■ Custom duties, import taxes □ Sales taxes, VAT, excise duties o Personal income tax □ Corporate income tax % Labour Market Slovenian Economic Mirror IMAD No. 1/2008 p. 11 Thousands of people Growth, in % Selected labour market indicators I-XII XI XII XI XI 2007/ I-XI 2007/ $ 2006/ 2006 2006 2006 2007 X 2007 I-XI 2006 $ 2005 A Registered labour force (A=B+C) 910.7 915.5 911.3 935.8 0.2 1.5 0.6 Persons in formal employment* 824.8 836.7 833.0 867.4 0.3 3.5 1.4 in enterprises and organisations 675.1 684.3 681.7 707.7 0.4 3.1 1.3 by those self-employed 66.5 68.6 67.5 72.0 0.3 5.1 1.7 self-employed and farmers 83.3 83.8 83.8 87.7 0.2 5.7 2.1 Registered unemployed 85.8 78.8 78.3 68.4 -1.6 -17.2 -6.6 women 47.0 43.3 42.6 37.1 -2.2 -17.0 -4.9 aged over 40 39.7 37.6 37.7 36.0 -0.4 -6.7 -0.9 unemployed more than 1 year 41.9 39.9 39.7 35.0 -0.7 -12.9 -3.6 Rate of reg. unemployment (C/A), in % 9.4 8.6 8.6 7.3 - - - D male 8.9 7.0 7.1 6.0 - - - female 12.0 10.6 10.5 9.0 - - - Job vacancies 19.0 16.9 15.9 18.7 7.6 7.9 12.3 for a fixed term, in % 75.3 78.0 76.4 75.2 - - - Number of persons hired 13.0 12.5 9.1 13.6 1.8 2.4 13.8 lower education 3.9 3.5 2.6 4.0 4.7 5.4 19.4 secondary education 7.1 7.2 5.2 7.8 0.6 1.3 13.8 tertiary education 2.0 1.8 1.3 1.8 0.6 0.3 4.3 Sources of data: SORS, ESS, calculations by IMAD. Note: 'persons in employment according to administrative sources. Employment growth witnessed a seasonal moderation in November. The number of employed persons increased by 0.3% from October, while year-on-year growth remained strong at 3.7%. The number of employees also continued to increase according to seasonally adjusted data. After October's seasonal increase, the number of registered unemployed declined in November, which pushed the registered unemployment rate down to 7.3%. In December, registered unemployment increased by 56 persons to 68,411, i.e. 9,892 or 12.6% less than in December 2006. The largest increases in employment in November were recorded in trade, business services and construction. From October, the number of employees in trade and business services increased by 0.8% (by 857 and 594 persons, respectively), and by 0.7% (541 persons) in construction. Financial intermediation similarly enjoyed robust growth (0.6%), while transport and manufacturing also posted large absolute increases (more than 200 persons). The December increase in the number of unemployed largely reflected the significant drop in the number of registered unemployed who found work. A total of 5,005 persons registered as unemployed, 14.4% fewer than in November and 24.1% fewer than in December 2006. The number of persons who were struck off the unemployment register for reasons other than employment declined by a similar percentage. Meanwhile, only 2,543 unemployed persons found work, 38.0% fewer than in November and 26.9% fewer than in December 2006. The number of vacancies and persons hired dropped sharply in December. There were 14,180 of the former and 9,688 of the latter, down 24.2% (28.7%) from November and 10.6% (6.1%) from the year before. The decline in vacancies and persons hired in both November and December was largely due to seasonal factors. Annual growth in the number of vacancies and persons hired eased considerably in 2007. Following the high annual growth rates in 2004-2006, which generally exceeded a respective 15% and 10%, in 2007 the average monthly number of vacancies and persons hired increased by a mere 6.6% (to 20,244) and 2.6% (to 13,333). In 2007 the unemployment-vacancy ratio again improved, chiefly to the benefit of less educated workers. Ever since 2003, the number of vacancies has been increasing, while the number of registered unemployed has been declining. However, demand for workers with a lower or secondary education has been growing faster than the number of available jobs for higher-educated people. On the other hand, the number of unemployed is also falling most rapidly among people with a lower or secondary education. In 2007, there were thus only 3.5 unemployed persons per one vacancy (down from 4.5 in 2006 and 8.9 in 2002). This ratio fell from 5.9 in 2006 to 4.4 in 2007 for jobs requiring lower education, from 4.3 to 3.3 for vacancies requiring secondary education, and from 2.6 to 2.5 (back to the 2005 level) for jobs available for higher educated workers (see graph). Graph: Unemployment-vacancy ratio, 2000-2007 Total without professional education -with vocational or secondary education with higher education 2000 2001 2002 2003 Source of data: SORS, 2004 2005 calculations by IMAD. 2006 2007 Earnings Slovenian Economic Mirror IMAD No. 1/2008 p. 12 Gross wage per employee, growth index Wages in In nominal terms In real terms1 EUR XI 2007 XI 07/ X 07 XI 07/ XI 06 I-XI 07/ I-XI 06 XI 07/ X 07 XI 07/ XI 06 I-XI 07/ I-XI 06 Gross wage per employee, total 1,491.65 114.4 107.1 105.9 113.4 101.3 102.4 Private sector (activities A-K) 1,467.82 118.6 108.4 106.8 117.5 102.5 103.3 A Agriculture 1,322.67 119.2 115.2 108.1 118.1 108.9 104.6 B Fisheries 1,336.88 108.6 113.0 107.3 107.6 106.9 103.8 C Mining and quarrying 2,138.50 131.3 110.2 105.7 130.1 104.2 102.2 D Manufacturing 1,335.13 116.0 109.2 106.7 114.9 103.3 103.2 E Electricity, gas, and water supply 2,552.76 151.2 111.2 106.0 149.8 105.2 102.5 F Construction 1,216.71 111.5 107.4 106.6 110.5 101.6 103.1 G Distributive trades 1,332.38 113.3 108.3 107.7 112.3 102.5 104.1 H Hotels and restaurants 1,041.63 108.8 110.5 105.7 107.8 104.6 102.2 I Transport, storage & communications 1,626.81 118.1 102.6 105.3 117.1 97.1 101.9 J Financial intermediation 3,015.29 152.9 108.0 107.8 151.5 102.2 104.3 K Real estate, renting, business services 1,583.20 114.8 109.8 107.0 113.8 103.9 103.4 Public services (activities L-O) 1,563.28 104.2 103.9 104.1 103.3 98.3 100.6 L Public administration 1,568.54 101.0 106.5 104.9 100.1 100.7 101.5 M Education 1,584.61 101.6 102.6 104.1 100.7 97.1 100.7 N Health and social work 1,452.59 103.4 102.0 103.2 102.5 96.5 99.8 O Other social and personal services 1,733.18 122.0 105.1 103.7 120.9 99.4 100.3 Source of data: SORS and IMAD calculations for the private sector and public services. Note: deflated by the consumer price index. In November the gross wage per employee increased by a 14.4% in nominal terms and by 13.4% in real terms, as consumer prices increased by 0.9%. The large increase in earnings was linked to the disbursement of performance bonuses (13th month payments and Christmas bonuses). Without these extra payments, the November gross wage would have been only 0.5% higher than in October. According to the SORS, 23% of all employees received these payments. Although this is more than in November 2006 (18.8%), it is possible that these payments included part of the payments that were last year made in December. In the private sector, the gross wage per employee increased by a nominal 18.6% and by a real 17.5%. In the industry and construction group (C, D, E, F), gross earnings increased by 17.5 %. The largest share of workers who received extra payments was recorded in the electricity, gas and water supply sector (81.5%). Production services (G, H, I) posted the smallest increase in gross earnings (14.3%); within the group, the largest increase was in the transport, storage and communications sector, which had the highest share of workers who received extra payments in this group (56.1%). Business services (J, K) recorded the highest increase in gross earnings (by 27.1%). This growth was largely based on the exceptional increase in gross salaries in financial intermediation, where 72.6% of employees received 13th month payments. 10.6% of employees in this industry already received these payments in October. The gross wage in public services (L to O) increased by 4.2% in nominal and 3.3% in real terms in November. There are no year-end extra payments in this sector. The only exception is other community, social and personal services (activity O), where the private sector predominates. The November wage increase in health and social care is due to individual performance bonuses paid at the end of the year. In the first eleven months of 2007, the gross wage per employee reached 5.9% year-on-year nominal growth. The wage increase in the private sector totalled 6.8%, while the increase in earnings in public services (4.1%) was lower due to only partial indexation of wages to inflation. In December we expect a decrease in earnings due to the high November payments, since extra payments are paid on a smaller scale in December. However, even if the actual dynamics are slightly different than the estimate, they can no longer significantly diverge from the estimated 5.9% nominal increase in gross wages, which is slightly lower than the projected 6.5% nominal growth in labour productivity. Therefore, the growth in average gross earnings did not cause any additional inflationary pressures in 2007. In January 2008 there were negotiations in both the public and private sectors for an additional wage adjustment due to the higher than projected inflation in 2007. Partners in the public sector agreed on a 3.4% wage increase to cover the difference between the 5.6% inflation in 2007. However, they also negotiated a delay in the dynamics of realising the new wage system in 2008, which will slow down the projected wage growth in this sector this year. Furthermore, they negotiated a safeguard clause to preserve the macroeconomic balance in 2009 and 2010. Partners in the private sector also signed an "Agreement on the Extraordinary Wage Adjustment for 2007 due to Unexpectedly High Inflation in 2007". The agreement should be laid down specifically in a separate collective agreement, which has yet to be concluded due to contentious interpretations of the will of the parties to the signed agreement. Manufacturing Slovenian Economic Mirror IMAD No. 1/2008 p. 13 Growth rates, in % Selected economic indicators XI 2007/ X 2007 XI 2007/ XI 2006 I—XI 2007/ I—XI 2006 I—XII 2006/ I—XII 2005 Production value1 -4.7 3.8 8.9 6.5 - highly export-oriented industries2 -5.1 19.0 17.2 8.0 - mainly export-oriented industries3 -4.7 0.3 7.1 8.9 - mainly domestic market-oriented industries4 -3.5 -6.0 2.7 0.8 Average number of employees 0.4 0.7 1.0 -1.7 Labour productivity -4.8 3.4 7.9 8.3 Level of inventories5 1.0 9.8 8.6 2.1 Turnover5 -4.7 4.9 8.3 5.2 New orders5 -8.9 3.7 10.7 6.7 Industrial producer prices (domestic market) 0.5 5.3 4.2 2.3 - producer prices/inflation -0.4 -0.4 0.8 -0.2 Source of data: SORS; calculations by IMAD. Notes: Veal growth calculated on the basis of data on production value - SORS' recalculation with the IPI (provisional data); Manufacturing industries (DG, DK, DM) which have, according to data on Slovenian commercial companies from the AJPES, earned over 70% of their average net revenue from sales on foreign markets in the last three years on average; Manufacturing industries (DB, DC, DD, DH, DJ, DL, DN) which have earned 50-70% of their average net revenue from sales on foreign markets in the last three years on average; "manufacturing industries (DA, DE, DF, DI) which have earned less than 50% of their average net revenue from sales on foreign markets _in the last three years; 5real growth._ After the large increase in October, industrial production slowed down again in November. According to provisional data from the SORS, industrial production in manufacturing increased by 3.8% in comparison with November 2006. Almost all industries posted growth rates below the average rate for 2007, while the chemical (DG) and automobile industries (DM) again recorded a higher production activity. The softening in production activity in manufacturing was expected and in line with the slowdown in international demand observed in the last few months of 2007. Even so, the average 11-month growth remains vigorous at 8.9%. The growth of employment and productivity is slowing. In November, the manufacturing sector employed 236 (0.1%) more workers than in October, yet the seasonally adjusted monthly increase in the number of employees was negative. Lower or negative seasonally adjusted growth rates have been recorded ever since mid-2007. The growth of productivity similarly declined over this period and was probably lower than the year before at the end of 2007. Although production activity was higher than in 2006, it was achieved with a greater number of workers (a positive increase in the number of employees was recorded for the first time since 2001). In terms of productivity, developments were most favourable in the chemical industry and least favourable in the leather industry. A breakdown by sub-industry for the first eleven months of 2007 shows the largest increase in productivity in the chemical industry (DG), where production surged by a real 21.8%, while the number of employees decreased by 1.7%. Above-average increases in productivity, albeit with a higher number of employees, were also recorded in the rubber industry (DH) and the manufacture of machinery (DK), while somewhat smaller increases were observed in the wood (DD), automobile (DM) and metal (DJ) industries, which posted the highest increases in the number of employees. On the other hand, the leather industry (DC), where the number of employees fell significantly, witnessed negative growth of productivity. Business optimism remained unchanged in January, yet fell short of last year's average. The seasonally adjusted value of the confidence indicator in manufacturing remained unchanged from December, i.e. below the average figure for 2007 but above the long-term average. The quarterly survey on the limiting factors to production shows deterioration at the beginning of 2008 in comparison with the average 2007 results in companies' evaluations of domestic and foreign demand and the uncertainty of the economic situation (nonetheless, all these indicators still top the long-term average). The shortage of skilled labour remains the main limiting factor to production. The softening of production activity is also evidenced by data on capacity utilisation, which hit its lowest level in the last five quarters according to seasonally adjusted figures. Graph: Year-on-year increases in production, the number of employees and productivity in manufacturing in the first eleven months of 2007, in % ■ Total production Total number of employees Total p Source of data: SORS, calculations by IMAD. 25 20 15 10 5 0 -5 -10 -15 -20 -25 MJ, d Industrial production □Productiv ity ♦ Number of emoployees ♦ ♦ ♦ a DG DF DH DK D DL DI DD DA DE DB DM DJ DN DC Source of data: SORS; calculations by IMAD. Note: abbreviations are listed cn p. 20. Transport Slovenian Economic Mirror IMAD No. 1/2008 p. 14 ected transport indicators Absolute data Growth, % Q III 2006 Q III 2007 Q III 2007/ Q III 2006 I-XII 2006/ I-XII 2005 Railways, in million passenger km 190 204 7.5 2.4 Roads,1 in million passenger km 181 167 -7.3 0.3 Urban, in thousand passengers 14,563 14,413 -1.0 -3.4 Air, in million passengers km 411 459 11.7 2.3 Airport, in thousand passengers 481 535 11.1 9.0 Railways, in million tonne km 817 865 5.8 3.9 Roads, in million tonne km 2,778 3,617 30.2 9.8 Maritime, in million tonne km 12,618 12,050 -4.5 -6.4 Harbour, in thousand tonnes 3,555 3,406 -4.2 22.5 Passenger transport Freight transport Source of data: SORS. Notes: excluding private transport of passengers by taxi, bus and car. Within passenger transport, bus transport declined also in the third quarter of 2007, while air transport and airport traffic grew less than in the second quarter, yet still posted two-digit figures. In year-on-year terms, the volume of intercity and urban bus transport dropped more in the third quarter than in the first two quarters, whereas the decrease in the number of city bus passengers was smaller than in the first half of the year. The growth of railway passenger transport picked up considerably, while the volume of air transport and airport traffic still increased by a respective 11.7% and 11.1%, even after the exceptionally high growth rates recorded in the second quarter. Following a slowdown in the first half of 2007, the increase in the volume of road freight transport rebounded strongly again in the third quarter. After the relatively weak growth in the first two quarters (7.0% and 0.1%, respectively), road freight transport once again recorded a substantial, 30.2% year-on-year increase in the third quarter. The greater part of road freight transport comprises international transport, which surged by 33.9% in the third quarter, while national transport increased half as much. This vigorous rebound of road freight transport appears to be related to the increase in production growth in highly export-oriented manufacturing industries, which totalled 22.4%, and the pick-up in the growth of export of transport services in road transport, which reached 27.0%. Railway freight transport rose much less than road transport in the third quarter, yet its year-on-year growth in the first nine months of 2007 (10.9%) was almost as high as in road transport (11.5%), since railway transport enjoyed stronger growth in the first half of the year. The high year-on-year growth rates in road and railway freight transport are attributable to the strong business cycle in 2007. In the third quarter of 2007, the volume of maritime and harbour transport declined by roughly equal percentages (see table), although these two activities are hardly interdependent, since maritime transport is mostly not bound to the domestic market. While the average increases in the volume of road and railway freight transport in the EU were fairly even in 2003-2006, road transport in Slovenia surged substantially, whereas railway transport hardly grew at all. In the EU, the volume of road freight transport, measured in tonne kilometres, increased by an average of 14.7% in the period analysed, while the volume of railway freight transport increased by 13.0%. Road freight transport rose particularly strongly in small and/or Eastern European countries of the EU, which is linked to the enlargement of the Union and growing traffic on Trans-European corridors. In railway freight transport, there are also larger countries where this mode of transport is growing rapidly. In Slovenia the volume of road freight transport surged by as much as 72.0% in this period, posting the second largest increase in the EU (see graph). However, Greece and Hungary, for example, which recorded similar growth rates as Slovenia, still lag behind the EU average in terms of the volume of per capita road shipments, while Slovenia ranks among the top countries according to this indicator. On the other hand, the volume of railway freight transport in Slovenia increased by a mere 2.9% in this period, and will therefore need to be promoted more in the future. Graph: Growth of road freight transport in EU countries* in 2003-2006 % 80 70 60 50 40 30 20 10 -I 0 -10 -20 rOO GR SI HU PT LT LV EE SK ES PL IT DE IE SE CZ NL FR UK AT FI DK LU BE CY Source of data: Eurostat; calculations by IMAD. Note: * data for three countries are unavailable. Energy Sector Slovenian Economic Mirror IMAD No. 1/2008 p. 15 Selected indicators, growth rates in % QIV 2006, GWh QIV 2007, GWh QIV 2007/ QIV 2006, % I-XII 2006, GWh I-XII 2007, GWh I-XII 2007/ I-XII 2006, % Production of electricity 3,393 2,985 -12.0 13,130 13,052 -0.6 Prod. in hydroelectric plants 586 659 12.5 3,121 2,815 -9.8 Prod. in thermal plants 1,281 1,361 6.3 4,728 4,815 1.8 Prod. in nuclear power plant 1,527 966 -36.8 5,281 5,422 2.7 Consumption of electricity 3,470 3,493 0.7 13,375 13,496 0.9 Through distribution network 2,708 2,850 5.2 10,354 10,629 2.7 Direct consumers 705 590 -16.4 2,786 2,656 -4.7 Transmission losses 56 53 -5.7 236 211 -10.5 Net electricity exports -77 -508 561.2 -246 -444 80.1 Source of data: ELES, Electricity Balance for September and December 2007; calculations by IMAD. In the final quarter of 2007, electricity production declined due to the regular overhaul of the nuclear power plant. At the same time, direct users consumed less and contributed to a low increase in consumption. The output of hydro-electric power plants increased considerably in the fourth quarter of 2007 (see table), yet nevertheless fell 16.2% short of the levels planned in electricity balance (EEB) due to the still low water levels of Slovenian rivers.1 Production in classic thermal plants increased half as much as the output of hydro-electric plants, whereas the production of the nuclear power plant plunged by 36.8%. The latter was linked to the regular overhaul of the plant in October, which has been carried out every 18 months for the last few years. As a result, total electricity output fell by 12.0%. Meanwhile, the consumption of electricity increased modestly. While consumption from the distribution network increased substantially, the consumption of users directly connected to the transmission network dropped sharply, by 16.4%. Two such companies, numbering among the largest individual electricity consumers in Slovenia, abandoned part of their manufacturing range. As production fell substantially and consumption remained approximately the same, net electricity imports increased almost sevenfold and covered as much as 14.5% of consumption. Electricity imports declined by just 0.7%, while exports dropped by almost one quarter and totalled 1,325 GWh.Total electricity production decreased somewhat in 2007 which, coupled with 1According to ARSO (Environmental Agency of the Republic of Slovenia), river flows in October and November were 24% and 50% lower than their long-term average for these months, respectively. the modest increase in consumption, pushed up net electricity imports. Electricity production declined slightly in 2007. Although the production of thermal power plants and the nuclear plant increased by a few per cent, hydro-electric power production dropped by 9.8%. The output of hydro-electric power plants posted an even greater lag (by 17.8%) behind the level planned in the EEB, which means that Slovenian rivers provided even less water in 2007 than the already modest water levels in 2006. The small increase in electricity consumption, which is favourable for the environment, was underpinned by the decrease in the consumption of direct consumers, as well as by the modest increase (2.7%) in electricity consumption on the distribution network. Electricity exports declined by 16.1%, while imports fell slightly less, by 14.5%. Net imports increased by 199 GWh (by 80.1%) and covered 3.3% of electricity consumption. Although electricity production has been falling and its consumption growing over the last few years, the deficit is not expected to widen further in 2008. From 2004 to 2007, electricity production declined particularly due to falling river flows, while consumption increased relatively slowly, by 2.2% annually on average. Exports and imports increased until 2006, yet both decreased in 2007 (for an explanation see SEM 11/2007: 15). As no regular overhaul is planned in the nuclear power plant this year, this plant could produce approximately 500 GWh more electricity. The partial closures of the manufacture ranges in the two direct consumers mentioned above will result in lower growth of consumption, so that the need for net electricity imports should not exceed last year's levels. Graph: Electricity production and consumption, and imports and exports in Slovenia, 2004-2007 14,000 13,500 13,000 12,500 12,000 11,500 11,000 10,500 10,000 9,500 9,000 9,000 8,500 ,000 7,500 7,000 6,500 6,000 5,500 5,000 4,500 4,000 2004 2005 2006 Source of data: ELES, Electricity Balance, various issues. 2007 Statistical Appendix Slovenian Economic Mirror IMAD No. 1/2008 pp. A 1-17 Scholarships in Tertiary Education Slovenian Economic Mirror IMAD No. 1/2008 p. 19 Scholarship recipients in tertiary education, 2001-2006 Scholarship recipients to total students, in 0/ % Structure of scholarship recipients in tertiary education, in % 2001 2005 2006 2001 2005 2006 Total: 22.6 20.9 21.5 100.0 100.0 100.0 - national scholarship 11.7 10.9 11.3 51.9 52.2 52.4 - Zois scholarship 6.1 6.1 6.5 26.9 29.2 30.1 - sponsorship 4.6 3.2 3.1 20.4 15.4 14.6 - other funds 0.2 0.7 0.6 0.7 3.2 2.9 Source of data: SORS, Rapid Reports - Scholars No. 300, 2002; No. 60, 2007, Scholars, Slovenia 2000-2006, 21 December 2007, First Release, SI-STAT; calculations by IMAD. Notes: 2007 saw the adoption of the Scholarship Act, which will enter into force in September 2008. Among other things, the law provides for an increase in the number of recipients of national scholarships, reform of the Zois scholarship and promotion of regional scholarship schemes. 1 Tertiary education includes post-secondary vocational studies, higher undergraduate studies and post-graduate studies. 2 Other funds include various foundations, etc. The purpose of scholarships is to improve access to education, to better match the supply of graduates and the demand of employers, and to enhance the participation of foreign students in domestic universities. In Slovenia, scholarships are granted for different purposes. National scholarships are intended for socially deprived students, Zois scholarships for gifted students, while sponsorships aim to improve the balance between the supply of graduates and the needs of employers. The Resolution on the National Programme of Higher Education 2007-2010 foresees an increase in the number of national scholarships and sponsorships (primarily in the natural sciences, technical studies and health care), and the number of scholarships provided to foreign students. The increase in the number of scholarship recipients in tertiary education between 2005 and 2006 was largely attributable to the higher number of national scholarship recipients. In 2006 the total number of scholarship recipients amounted to 24,910, 3.8% more than in 2005. In addition to national scholarship recipients, the number of Zois scholarship recipients also increased in this period. In absolute terms, the growth of their number fell short of that of national scholarship recipients, while in relative terms it enjoyed the most rapid growth (7.1%). By contrast, the number of sponsorship recipients declined by 1.4% to total 3,640 in 2006 (for changes in shares see table). The share of sponsorship recipients contracted between 2005 and 2006. In Slovenia in 2006, their share in tertiary education reached 3.1%, having contracted considerably since 2001 (see table). Companies' lack of interest in sponsoring students is one of the reasons for the imbalance in the supply of graduates and the demand of the business sector. In 2006, the structure of tertiary education graduates was dominated by graduates in the social sciences, business sciences and law (49.6%), while the share of science and technology graduates,1 who are in great demand on the labour market, was much lower (16.1%). The decrease in the number of sponsorship recipients was chiefly linked to the drop in their number in public administration, defence and social insurance (L; see graph). We assume2 that in this activity, a large proportion of scholarships are granted to students in the social sciences, business sciences and law, and that within manufacturing (D), electricity, gas and water supply (E), construction (F), and health and social care (N), a higher share of scholarships than in other sectors is granted to students of science, technology and health care. However, these four sectors recorded a minimal increase, or even a decline, in the number of sponsorship recipients between 2005 and 2006 (see graph). The new Scholarship Act, adopted in 2007, promotes student sponsorship, and we can therefore expect the number of sponsorship recipients to increase over the next few years. The share of foreign students with a Slovenian scholarship increased somewhat. According to the Resolution, the main purpose of increasing the number of foreign scholarship recipients is to attract more foreign students to Slovenian universities. The number of foreign scholarship recipients increased in 2006 to 92 students (from 60 in 2005). Nevertheless, the share of foreign scholarship recipients is still low in comparison with the total number of foreign students in Slovenia. In 2006, it totalled 6.1% (4.3% in 2005). 1 The field of science and technology is divided into two broader fields according to ISCED 97: "science, mathematics and computing" and "engineering, manufacturing and construction". 2 Data on the number of sponsorship recipients by education field for each industry are unavailable. Graph: Sponsorship recipients in tertiary education by activity of the sponsor, 2005-2006 1,200 1,000 800 600 400 200 0 •§E 2% - o .2 E "S w s « « " Ç m - (D WfO1- O