Meeting of the Governing Board of the Bank of Slovenia of 5 July 2011
1) The Governing Board of the Bank of Slovenia discussed current economic and financial developments, and approved the publication of the June 2011 Economic and Financial Trends document, and the April 2011 document of Slovenia’s International Economic Relations.
The current economic developments confirm the economic growth and inflation projections given in the April 2011 Price Stability Report. GDP growth is expected to stand at close to 2% this year, and at between 2% and 3% in the next two years. The main contribution to economic growth will continue to come from export-oriented sectors, while developments in construction are proving worse than anticipated. Inflation will rise temporarily in the second half of the year, primarily as a result of one-off base effects, but in the next year it is expected to approach the euro area average, at around 2%.
Global economic growth has slowed in the second quarter. The slowdown in the foreign economic climate is being reflected in stalled growth in industrial production in Slovenia. The situation on the labour market is improving only slowly, which has been reflected in moderate growth in employment in the last few months. Given the persistent adverse situation on the labour market, no significant strengthening in domestic consumption can be expected. Growth therefore remains low in those branches of the service sector tied to domestic demand.
The risks surrounding future growth in the rest of the world are increasing, primarily as a result of public finance problems in certain countries and the potential consequences for financial stability. Recently uncertainties have also been increasing in the domestic environment, partly as a result of the general government deficit and the potential hold-up in the implementation of structural reforms. A revision to the budget for 2011 is vital, in keeping with the commitments in the Stability Programme. Any further downgradings could additionally contribute to an increase in the financing costs of the economy, parts of which are highly indebted. Improving price and cost competitiveness and carrying out the requisite fiscal consolidation will be the key to maintaining sustainable economic growth and eliminating macroeconomic imbalances.
2) The Governing Board discussed the current operations of banks, developments on the capital markets and developments in the area of interest rates. There was no significant increase in the banking system’s total assets in May 2011, while lending to non-banking sectors continued to stagnate. Lending to the relatively heavily indebted sector of non-financial corporations regressed, but the banks recorded an above-average increase in lending to households. The restructuring process continued on the funding side with an increase in household deposits, which was partly seasonal in nature, and in deposits by other financial institutions, and with the ongoing process of debt repayments to banks in the rest of the world. Impairment and provisioning costs increased in May 2011, but the banking system nevertheless recorded a profit of EUR 63.1 million over the first five months of the year.
The key to a longer-term recovery in lending and economic growth is to encourage and increase the effectiveness of financial restructuring at corporates and banks, and to increase their capital strength.