Significant decline in economic activity in the second quarter; initial figures point to recovery over the remainder of the year
As expected, the decline in economic activity in Slovenia in the second quarter was worse than at the height of the previous crisis in 2009. Following another large quarterly decline, GDP in the second quarter was down 13.0% in year-on-year terms, 3.1 percentage points more than in the second quarter of 2009, but slightly less than the euro area average.
Given the nature of the containment measures, the largest decline in value-added came, as expected, in private-sector services, most notably tourism and transport. By contrast, retail turnover began to recover rapidly as soon as the measures were eased. Private consumption declined sharply again in the second quarter, by 16.6%, driven primarily by the strict lockdown measures in April, which denied consumers access to a wide range of services.
There was also a sharp shock in manufacturing, but since May it has been showing signs of recovery in the form of high monthly growth in output. The reverse dynamic was evident in construction, where the quarterly decline in value-added was among the lowest, but with an additional decline in activity in June. This was attributable to a lack of infrastructure investment and investment in production and sales capacity.
The situation on the labour market remains stable, while government emergency measures are still in place and there are signs of economic recovery. Employment in June was unchanged in monthly terms. The average workforce in employment excluding self-employed farmers in the second quarter was down 1.4% in year-on-year terms, driven by manufacturing, employment activities, and food service activities.
Employment expectations over the next three months (Slovenija)
Note: The aggregate indicator is weighted by share of value-added. Sources: SORS, Banka Slovenije calculations
The available data, such as electricity consumption, tax revenues, purchasing manager indices, and economic sentiment, points to a significant recovery in the economy over the summer.
Economic sentiment indicator (Slovenia)
Sources: SORS, Banka Slovenije estimates and calculations
Banka Slovenije drew up three scenarios at the beginning of the crisis, which suggested that the price to the Slovenian economy exacted by the outbreak of the coronavirus pandemic would be high. This year’s decline in GDP was thought likely to range from 6% to 16%, according to our forecasts of that time. The current situation in the economy suggests that economic growth this year will follow the trajectory set out by the less adverse scenario, i.e. in line with our core forecast (a decline of 6.5%) presented in June.
Here we should highlight that the recovery is taking place amid uncertainty, and its further progress will be highly dependent on the evolution of the epidemiological picture and on governments’ responses to any significant deterioration. Given the uncertainty, firms will continue to delay investment, while households will stick with their precautionary saving.
Deflation continued in August
Prices were again down in year-on-year terms in August, as a result of the deflationary pressures from the domestic and international environments. They fell by 0.7%, again driven largely by prices of refined petroleum products, which in recent months have also been reduced by excise duty policy. Service price inflation, which slowed further during the epidemic, stood at 1.5% in August, and was not yet reflecting the depth of the decline in private consumption. Banka Slovenije is expecting inflation developments to remain weak over the remainder of the year, while the principal deflation risk is the potential for a sharper deterioration in the epidemiological situation.