Slovenian economic mirror No. 1, Vol. XXV, 2019 Slovenian Economic Mirror No. 1 / Vol. XXV / 2019 Publisher: IMAD, Ljubljana, Gregorčičeva 27 Responsible Person: Marijana Bednaš, MSc, Acting Director Editor in Chief: Tanja Kosi Antolič, PhD Authors of Current Economic Trends (listed alphabetically): Lejla Fajic; Marjan Hafner, MSc; Matevž Hribernik, MSc; Katarina Ivas, MSc; Mojca Koprivnikar Šušteršič; Tanja Kosi Antolič, PhD; Janez Kušar, MSc; Lenart Milan Lah, MSc; Jože Markič, PhD; Tina Nenadič, MSc; Jure Povšnar; Denis Rogan; Dragica Šuc, MSc; Ana Vidrih, MSc Editorial Board: Marijana Bednaš, MSc; Lejla Fajic, Alenka Kajzer, PhD; Rotija Kmet Zupančič, MSc; Janez Kušar, MSc Translator: Marija Kavčič Data Preparation, Graphs, DTP: Bibijana Cirman Naglič, Mojca Bizjak Print: Eurograf d.o.o. Circulation: 80 copies ISSN 1318-3826 (print) ISSN 1581-1026 (pdf) © The contents of this publication may be reproduced in whole or in part provided that the source is acknowledged. Contents In the spotlight.................... Current economic trends 3 5 International environment.......................................................................................................................7 Economic developments in Slovenia....................................................................................................9 Labour market............................................................................................................................................13 Prices..............................................................................................................................................................15 Balance of payments................................................................................................................................17 Financial markets.......................................................................................................................................18 Public finance.............................................................................................................................................19 Statistical appendix...............................................................................................................................21 The Economic Mirror is prepared based on statistical data available by 7 January 2019. On 1 January 2008, the new classification of activities of business entities NACE Rev. 2, which replaced NACE Rev. 1.1, came into force in all EU Member States. In the Republic of Slovenia the national version of the standard classification, SKD 2008, took effect. It includes the entire European classification of activities but also adds some national subclasses. All analyses in the Slovenian Economic Mirror are based on SKD 2008, except when the previous classification, SKD 2002, is explicitly referred to. For more information on the introduction of the new classification see the SURS website http://www.stat.si/eng/skd_nace_2008.asp. All current comparisons (at the monthly, quarterly levels) in the Slovenian Economic Mirror are made on the basis of seasonally adjusted data, while year-on-year comparisons are based on original data. Unless otherwise indicated, all seasonally adjusted data for Slovenia are calculations by IMAD. Slovenian Economic Mirror, No. 1/2019 In the spotlight 3 In the Spotlight The situation in the Slovenian economy continued to improve towards the end of 2018, though more slowly than in 2017. Unemployment fell at a moderate pace in the last months of the year, but, with an increased inflow of foreign workers, the growth of employment nevertheless remained relatively high. This, together with growth in wages and social transfers and a further increase in consumer loans, spurred households to increase consumption in several segments (particularly more durable goods and accommodation and food services). At the same time, they also continued to increase the share of disposable income saved. The rapid rise in investment continued, particularly in civil-engineering works. Besides investment, the government also slightly increased other primary expenditure, but at the same time - amid favourable economic developments and one-off inflows (NLB dividends) - notably widened the general government surplus. Exports also continued to expand, though at more moderate dynamics than in 2017. Lower export growth is a consequence of one-off domestic factors and weaker growth in economic activity in main trading partners. The reasons for the slowdown of economic growth in main trading partners, which has been somewhat faster than forecast by international institutions, include the increase in barriers to international trade and the partly related moderation of global economic growth. The cooling down in some countries is also related to cyclical factors and additionally, particularly in Germany, to temporary standstills of production in the automotive industry. These have already been reflected in somewhat lower growth in the Slovenian automotive industry. Production growth also remained more moderate than in 2017 in most other sectors, with the exception of high-technology ones. With more moderate growth in merchandise exports (which slowed somewhat more than the growth of merchandise imports), the high surplus of the current account of the balance of payments started to moderately decline. Activity in sectors that are more dependent on domestic demand continued to rise rapidly in the last months of 2018. Amid increased investment by the government, municipalities and infrastructure companies, growth in construction mainly arose from the segment of civil-engineering works. Growth in construction, household disposable income and consumer loans, together with higher spending by foreign tourists, supported the continuation of relatively strong turnover growth in trade and other service activities, particularly accommodation and food service activities, professional and technical activities, road transport, and computer services. The strengthening of the service sector is reflected in increasingly stronger growth in prices of services, while the lowering of inflation at the end of the year was a consequence of the fall in the price of oil. For the most part of 2018, consumer price growth was, besides by prices of services, to a great extent driven by higher prices of oil products and food, but in December their contribution dropped notably and inflation declined. In the last months of the year, a moderation was also recorded for some other financial indicators, such as corporate loans and, after almost three years of relatively strong growth, prices of flats. Amid greater uncertainty, business expectations indicate a further slowdown of growth in the export-oriented part of the economy; the prospects for the remaining part of the economy remain favourable. Confidence in the Slovenian economy otherwise improved slightly in the last months of the year, though remaining lower year on year due to deterioration in the first half of the year. Amid lower export orders, the lag is most visible in manufacturing. Business expectations in main trading partners declined further in the last months of 2018, as did international institutions' forecasts regarding their economic growth. In addition to uncertain conditions in international trade, this was also a consequence of increased uncertainties about (i) the conditions of the forthcoming UK withdrawal from the EU, which, with the rejection of the withdrawal agreement in the UK Parliament, remain unclear and the risk of an unregulated exit even greater, (ii) policies of individual EU countries, and (iii) possible further corrections on the world's main stock markets. The prospects for the part of the economy that is focused predominantly on the domestic market are more favourable. Business expectations in the service sector and consumer expectations are still relatively high. We can also expect further high growth in construction investment, owing partly to the increased dynamics of absorption of EU funds. 4 In the spotlight Slovenian Economic Mirror, No. 1/2019 I Economic growth in the euro area is easing gradually; the prospects are similar. Real GDP growth, EMU (left axis) Economic Sentiment Indicator (ESI), EMU (right axis) 25 T1 1.0 0! to 0.8 "Ö 0.6 0.4 0.2 c 0.0 _c -0.2 < o -0.4 Ol J^ -0.6 0! fC -0.8 u -1.0 S u T il ill ï^ «CL lu Httl II rs rn 120 115 110 105 100 95 90 85 80 75 Jb E OOOOOOOO Source: Eurostat and EC; calculation by IMAD. Note: The ESI figure for Q4 18 is the average for the first two months of the quarter. I Activity in manufacturing is increasing more slowly than in 2017, while growth in activities oriented predominantly to the domestic market remains high. -Industrial production in manufacturing -Merchandise exports -Turnover in trade -Turnover in services (nom.) -Value of construction output (right axis) 160 150 1 140 130 , 120 110 100 90 80 70 3 60 2233 45566 200 180 160 140 120 100 80 60 40 20 0 Source: SURS; calculations by IMAD. Note: real Index unless stated otherwise. I Employment growth remains relatively high mostly on account of the rising inflow of foreign workers. -Employed according to SRE (left axis) -Registered unemployed (right axis) rNrNmm^r^rioiovovor^r^coco 20 -c -12 * -16 2 ra OJ -20 >- I With growth in the wage bill and consumer loans, household consumption is increasing in several segments; at the same time, households are also saving more of their disposable income. Household consumption -Wage bill, real -Social transfers, real -Propensity to save (right axis) Source: SURS, ESS; calculations by IMAD. OOOOOOOO Source: MF, SURS; calculations by IMAD. Note: The Q4 2018 figure Is the average for October and November. I Growth in prices of flats, though not of (existing) houses, started to slow, but in both the number of transactions continues to decline. Prices of new flats Prices of new family houses Prices of existing flats Prices of existing family houses 120 110 o o 100 CO 90 f 1 eg 10 I E 0 £ C o -10 ? 3 -20 S c -30 S c J5 -40 ¿8 Source: SURS; calculations by IMAD. Note: Sesonally adjusted. Real exports and imports of goods continued to expand towards the end of the year, though more slowly than in 2017 (seasonally adjusted).2 In the first 10 months of 2018, exports were up 7.4% year on year. Their growth was still mostly driven by exports of motor vehicles, though their contribution gradually declined. The more modest growth than in 2017 was a consequence not only of one-off factors,3 but also of lower import growth in main trading partners, in the last few months partly due to the temporary standstills of production growth in the automotive industry. Imports were up 8.9% year on year in the first ten months of 2018, under the impact of strengthening investment and further export growth. Amid moderating growth in world trade and uncertainties in the international environment, export expectations remained lower than in 2017 despite a minor improvement. 2 According to the national accounts statistics. 3 The effect of the start-up of production of a new car model in the middle of 2017. 25 20 15 10 in 5 0 10 10 Current Economic Trends Slovenian Economic Mirror, No 1/2019 I Figure 6: Trade in services - nominal -Exports of services Imports of services m e 650 600 .. & 550 £ § 500 ¡S E 400 350 300 250 rN rN m m vo vû Source: BoS; calculations by IMAD. Nominal exports of services have increased further in recent months; imports have remained high (seasonally adjusted).4 Besides by exports of construction and ICT services, export growth has mainly been driven by higher spending of foreign tourists in Slovenia, while the growth of exports of transport services, which are strongly related to international trade, is easing. In the last few months, the growth of services imports, following a temporary slowdown, has picked up again due to increased imports of transport and technical, trade-related services. According to the balance of payments statistics. 700 2 i= 450 I Figure 7: Volume of industrial production by group of manufacturing activity Manuf. of fabricated metal products Manuf. of electrical equipment Manuf. of machinery and equipment Manuf. of rubber and plastic products Manuf. of motor vehicles, trailers and semi-trailers Other manuf. activities except pharmac. -20 -40 20 .Eki The second half of 2018 recorded a continuation of more modest output growth in manufacturing activities than in the same period of 2017. In recent months production strengthened particularly in certain high-technology industries, the largest contribution, according to our assessment, coming from the pharmaceutical sector. In most other industries growth remained considerably more moderate than in 2017, largely reflecting weaker growth in foreign demand and, most recently, a standstill of production growth in the European car industry. In the last few months, besides in motor vehicle manufacturing, growth also slowed in several other sectors, especially those that mostly produce intermediate products for the automotive industry. rNrNmm^r^rioiovovo Source: SURS; calculations by IMAD. 60 40 I Figure 8: Value of completed construction works Total -Residential buildings -Non-residential buildings -Civil-engineering works A ' V 7V ft In the last months of 2018, the surge in construction activity continued, particularly in the segment of civil-engineering works. The two-year strengthening of construction activity thus continued. Growth was related to higher investment by the government, municipalities and infrastructure companies, which was reflected in strong growth in the segment of civil-engineering works. The construction of buildings, having strengthened significantly towards the end of 2017, stabilised at a somewhat lower level in the last months of 2018, though this still higher than in the same period of 2017. Amid signs of labour shortages, the high growth of activity also showed in upward pressures on prices: price growth in construction was last so high in 2008.5 rN rN m m vo vû Source: BoS; calculations by IMAD. Year-on-year price growth (measured by the deflator of the value of completed construction works) exceeded 5% in October. 80 60 40 250 Slovenian Economic Mirror, No 1/2019 Current Economic Trends 11 I Figure 9: Prices and transactions in new and existing residential properties -Transactions in existing residential properties (left axis) -Transactions in new residential properties (left axis) -Prices of existing residential properties (right axis) -Prices of new residential properties (right axis) 200 oj is 180 eg .£ 160 I 140 I 120 fC §■ 100 j 80 0 "il 60 8 00 40 2 S 20 / 7/ \ S 105 100 95 90 85 80 75 70 65 60 OOOOOOOOOO Source: SURS; calculations by IMAD. In the third quarter of 2018, growth in residential property prices continued at a more moderate pace and trading in them slowed further. After accelerating in the first half of the year, the growth in the average price of residential properties (15.1% year on year) eased in the third quarter, this as a consequence of a halt in the growth of prices of existing flats6 (which account for two-thirds of total transactions) and a decline in prices of new residential properties. The prices of both were around one tenth higher year on year. On the other hand, prices of existing family houses increased strongly (by around a quarter year on year) and numbers of sales again fell, similarly as for other property types. Amid a limited supply of suitable properties, the decline followed the significant price rises in the recent period, which have made houses and flats less affordable and less attractive as an investment. The prices of existing flats in Ljubljana fell for the first time since 2015. f Figure 10: Nominal turnover in market services Total * -Transportation and storage (H) -Information and communication activities (J) -Professional and technical activities (M) -Administrative and support service activities (N) -Accommodation and food service activities (I) o E 130 x Ï S iS 120 ? ? 110 div s I 100 # £ 90 an ^o 80 ro Y S" 70 The relatively strong growth in nominal turnover continued in most service activities. The continuation of rapid growth in accommodation and food service activities in the last months of 2018 was boosted by higher spending by both domestic and foreign tourists. Turnover growth in professional and technical activities accelerated again, supported by higher investment demand and favourable conditions in construction, which stimulated growth in architectural and engineering services. Further relatively strong turnover growth was also recorded in more export-oriented services, such as road transport and computer services. Turnover in administrative and support service activities maintained its high level from the summer months. Source: SURS; calculations by IMAD. Note: * Including real estate. 150 140 I Figure 11: Household consumption, wage bill, social transfers and the household saving rate ■ Household consumption -Wage bill, real -Social transfers, real -Household saving rate (right axis) 115 110 105 100 95 23 OOOOOOOO Source: MF, SURS; calculations by IMAD. Note: The Q4 2018 figure is the average for October and November. Household disposable income increased further towards the end of last year; at the same time, in 2018 the proportion of disposable income saved continued to increase. The last quarter of 2018 saw further growth in the net wage bill, social transfers (including pensions) and new consumer loans. This encouraged households to increase spending in several segments (particularly on durable goods and accommodation and food services). According to SURS data, an increasing proportion of disposable income is being saved. The saving rate, up 0.9% to 13.9% in 2017, rose by a further 1 pp year on year in the first three quarters of 2018. The saving rate in Slovenia is indeed among the highest in the EU.7 Of 25 EU countries, only Luxembourg, Sweden, Germany and The Netherlands had a higher saving rate than Slovenia in 2017 (the average for the EU-28 was 9.7%). 120 15 14 13 12 10 12 Current Economic Trends Slovenian Economic Mirror, No 1/2019 I Figure 12: Business trends c CT T5 ■! -Economic sentiment -Retail trade -Construction -Manufacturing -Service activities -Consumers k V Economic sentiment improved slightly in the last months of 2018 but remained lower year on year due to the deterioration in the first half of the year. Particularly confidence in manufacturing and consumer confidence improved in the last few months, following earlier deterioration. Confidence in other activities reached similar levels year on year at the end of 2018. CNCNfOfO^t^tLOLOVOVOrvr'vCOCO Source: SURS; calculations by IMAD. t. - Slovenian Economic Mirror, No 1/2019 Labour market Current Economic Trends 13 f Figure 13: Persons in employment by activity -Manufacturing (C) -Market services (G-N) -Employed persons, total -Construction (F) -Public services (O-Q) cn CN m m vo vû 90 80 70 60 Source: SURS; calculations by IMAD. The number of employed persons continued to rise relatively rapidly, despite ever greater shortages of appropriately skilled workers. Difficulties in finding workers on the domestic labour market are reflected in increasing hiring of foreign nationals. These already account for more than one-half (in October 57%) of growth in the total number of employed persons and around one-tenth of all employed persons. Growth in the number of employed persons is also attributable to the rapid increase in labour market participation, this also due to the inclusion of those who thus far had not been actively seeking employment. The number of registered unemployed persons continued to decline, though amid more moderate growth in employment from unemployment than in 2017. A total of 78,534 persons were registered as unemployed at the end of December and 78,474 in 2018 as a whole, 7.7% and 11.5% less respectively than one year before.