Press release - Summary of Macroeconomic Developments, July 2017
Ljubljana, 19 July 2017
The Governing Board of the Bank of Slovenia discussed and approved the July 2017 Summary of macroeconomic developments.
The economic situation in the international environment is improving. Global economic growth forecasts were again strengthened slightly at the end of the second quarter, while the survey indicators of confidence and activity indicate rising economic growth in the euro area. Economic growth forecasts in Slovenia’s main trading partners are also being raised, which is improving the already favourable outlook for export growth. Price pressures on global energy and commodities markets have eased at the same time, which could neutralise the anticipated inflationary impact of the domestic economic expansion. The appreciation of the euro is also helping to reduce import price pressures.
The restoration of convergence with the more advanced euro area countries is becoming increasingly evident. Economic growth in Slovenia stood at 5.3% in the first quarter of this year, significantly higher than the average across the euro area. Activity in the export sector has increased sharply alongside the rapid growth in domestic final consumption and investment. Net trade consequently made a contribution of 0.8 percentage points to GDP growth. The high growth continued in the second quarter, and the outlook for the third quarter is also favourable for the moment: according to surveys at least, turnover is increasing in all sectors. The growth is also attributable to the cessation of the corporate deleveraging process, as firms are gradually increasing debt financing via domestic banks. Banks are also encouraging private consumption and housing investment through growth in household loans.
The surplus supply of labour is rapidly diminishing, and firms are increasingly facing a shortage of qualified workers. The number of registered unemployed in June was down fully 15% in year-on-year terms. However, for the moment the decline in the surplus supply of labour is not causing wage pressures, as nominal wage growth remains low, while real wage growth was actually negative over the first four months of this year. In the first quarter wage growth was significantly outpaced by productivity growth, which further improved the cost competitiveness of the economy.
The high economic growth is creating the conditions for balanced public finances, as growth in general government revenues is strongly outpacing growth in expenditure. The consolidated general government deficit amounted to just EUR 85 million over the first four months of the year, EUR 360 million narrower in year-on-year terms. The fiscal risks nevertheless remain significant, and are partly related to the upward pressure on expenditure from various interest groups, which has been strengthened by the favourable economic situation, while an electoral season is also approaching. Despite the pressures it is recommended that the government takes advantage of the favourable economic situation to introduce structural reforms in the area of healthcare, pensions and long-term care, supported by changes to labour market legislation and tax revisions, and to gradually balance the structural fiscal position. Over the long term this would strengthen the ability to act countercyclically.
The easing of price pressures on global energy and commodities markets pushed inflation below 1% in June. June’s euro price of a barrel of Brent crude was down 20% on February, while the contribution made to inflation in Slovenia by energy prices declined from 1.1 percentage points to 0.2 percentage points. Growth in services prices remained practically unchanged compared with the second half of last year, while prices of non-energy industrial goods are continuing to fall. Core inflation thus remains below 1%, as the pass-through of high economic growth into price growth remains surprisingly weak.