The current indicators for the early part of this year show growth continuing in the domestic economy and in the euro area overall. The escalation of the war in the Middle East is increasing the risks to both economic growth and inflation. The new Review of macroeconomic developments provides detailed analysis of the domestic macrofinancial environment, and also features our finding that financing is among the least constraining factors for corporate investmentin Slovenia, but weaknesses are evident in the support for SMEs and in the promotion of innovation and the digital transformation of the economy.
The euro area economy continued to expand in the early part of this year. The growth in activity continued to be driven mainly by services, but there was also a slight improvement in manufacturing, where February’s PMI (which admittedly does not yet reflect the escalation of the warin the Middle East) rose into the zone of expansion for the first time in six months. Headline inflation in the euro area stood at 1.9% in February, close to the monetary policy target rate, while core inflation rose to 2.4% amid persistent price pressures in the service sector.
The escalation of the war in the Middle East in early March increased the risks to economic growth and to inflation. March is already expected to see a rise in prices, as a result of the sharp rise in energy prices accompanying the disruption to global oil and gas supplies.
In the domestic economy, year-on-year GDP growth reached a relatively favourable 2.0% in the final quarter of last year. According to the survey data, the conditions for exporters remains challenging in the early part of this year, while there are also certain signs of a slowdown in consumption on the domestic market. In value terms, real growth in card payments slowed, while invoices registered with tax authorities fell. Meanwhile survey assessments of demand in construction and services also weakened slightly in February. Under the given set of indicators, the nowcast for the first quarter points to quarterly economic growth of 0.5%, but the domestic economy too now faces increased risks as a result of the worsening conflict in the Middle East.
Following a year of decline, the labour market saw a year-on-year rise (of 0.3%) in the number of persons in employment in December – driven primarily by hiring in the public sector – but its average over the year was down by the same amount owing to the contraction in the private sector, most notably in manufacturing. The average gross wage was down in year-on-year terms (by 0.5%) in December, its first fall in a long time, largely as a result of smaller bonus payments at the end of the year, which firms most likely replaced in part with the mandatory Christmas bonus. The gap between the public and private sectors widened: wages in the latter fell, while the former saw growth of almost 10%.
Headline inflation as measured by the HICP rose to 2.8% in February. The rise was primarily driven by energy prices, most notably a one-off base effect in electricity prices, which were cut sharply in February of last year by government measures. Food price inflation remains elevated at 4.3%, but is continuing its moderate slowdown in line with the stabilisation of the situation on global food markets and among euro area producers. Service price inflation strengthened by contrast, in parallel with a sharp rise in labour costs.
The consolidated general government balance deficit is widening, and last year reached 2.5% of GDP, just over 1 percentage point more than in the previous year. The widening deficit is mainly a reflection of the slowdown in economic growth, and the effects of the public sector wage system reform. According to the government plans, the deficit is expected to widen even further this year, despite the projected rise in economic growth, thereby reducing the room for fiscal policy to act countercyclically.
Access to finance is not the key factor behind the lag in corporate investment relative to comparable countries in the euro area.
The current issue gives detailed analysis of the macrofinancial environment in Slovenia, and the extent to which it is providing adequate support for corporate investment. Our finding is that investment by Slovenian firms has trailed that in comparable countries in the euro area – despite lower corporate indebtedness and comparable financing conditions – particularly when it comes to investing in intellectual property. Access to financing was not highlighted to be a key constraint. The main limiting factors cited by firms were uncertainty and the unpredictability of the business environment, shortages of skilled labour, the cost burden, and bureaucracy and taxes.
Although financing remains one of the least important limiting factors in corporate investment, the structure of the macrofinancial environment continues to show weaknesses in its support for SMEs and its encouragement of innovation and the digital transformation of the economy. Firms still perceive banks as supportive in traditional types of investment, such as machinery, equipment, and real estate. From the perspective of the anticipated structure of corporate investment over the medium term, this poses the risk of a further downgrading of the banking system’s role in corporate financing, which has been evident in Slovenia ever since the debt crisis.