Economy remained weaker in final quarter of last year
Signs of economic weakness were prevalent in the euro area in the final quarter of last year, but the outlook this year is improving. The Slovenian economy similarly faced a difficult external environment, but domestic demand remained solid. On the labour market, employment remains at a record high. Inflation remains high, with service price inflation increasingly a factor in recent months.
The euro area mainly saw signs of weaker economic activity in the final quarter of last year, but December’s rise in confidence brought an improvement in the outlook for the early part of this year. Like the ECB, the World Bank’s January forecasts are predicting the euro area economy to stagnate or even contract this year, before growth strengthens to 1.6% next year. Thanks to a decline in the contribution made by energy prices, the rise in inflation came to an end in December, but the rate is still above 9%.
In light of the sustained high inflation, major central banks have continued raising their key interest rates, and have signalled their intent to make further rises. This has been reflected on the financial markets, who are expecting several hikes in the ECB’s key interest rates over the coming months. Boštjan Vasle, Governor of Banka Slovenije, emphasised that the intent to make a further rise of 50 basis points in the key interest rates at the next two meetings is an appropriate response to the current inflation trends and expectations. The mood among investors with regard to higher-risk assets has improved slightly over the last three months, amid the persistence of global economic growth, the mild winter in Europe, and the opening of the Chinese economy, which has driven a rise in the value of assets in this class.
In the domestic economy the export sector faced a difficult external environment. The energy and manufacturing sectors in particular faced uncertainties in the international environment and strong cost pressures. Domestic demand remained solid according to our assessments, and the economic sentiment improved in the total economy. The nowcasts suggest quarterly GDP growth of 0.1%, which given the quarterly figures as currently released would entail annual GDP growth of 4.7% in 2022.
The situation faced by the export sector worsened towards the end of the year, but the extreme inflationary pressures in international trade began to ease. Nominal year-on-year growth in merchandise exports slowed to 11.7%, and exports were actually down on a year earlier in real terms. The main decline was in demand on EU markets, and nominal growth in merchandise imports slowed to 17.2%, driven in part by growth in import prices slowing to 14.3%, down 15.9 percentage points on its peak in May.
Employment remains at a record high, while unemployment recorded a seasonal rise in December, although its average over the year of 23.8% was down on the previous year. The situation will remain similar in the first half of this year, according to the survey data. Amid high inflation, a tight labour market, and an increase in the minimum wage and rising wages in the public sector, wage pressures will escalate this year, something that will also be seen across the euro area.
Inflation remained high in December at 10.8%. Service price inflation was a major driver, while energy price inflation eased slightly as a result of government measures and a fall in fuel prices. Domestic demand remains solid, which is allowing higher input costs to be passed through into final consumer prices.
The general government position has deteriorated over recent months, and the deficit is expected to widen this year, driven primarily by measures to mitigate the energy crisis. The general government debt measured as a ratio to GDP continued to decline last year, and had reached 72.3% by the end of September.
Figure: Workforce in employment and unemployment
Sources: SORS, Banka Slovenije calculations and seasonal adjustment
Latest data: registered unemployment December 2022, workforce in employment November 2022
Publication Review of macroeconomic developments, January 2023