The Slovenian economy is continuing to expand in the third quarter according to the latest data, but growth is down slightly on the second quarter. It is nevertheless outpacing the euro area average. Inflation has slowed slightly, but continues to be driven by food prices and services prices. The labour market remains tight, despite a fall in the workforce in employment, while wage growth remains high. The general government deficit is widening.
Following weak growth in the second quarter, GDP in the euro area is expected to continue expanding in the third quarter. Expansion is indicated by the PMI, which rose slightly in September, largely as a result of an improvement in the situation in Germany and Spain, while the contraction in France deepened. Inflation in the euro area stood at 2.2% in September.
The mood in the domestic economy improved slightly in the third quarter, while the latest data shows economic growth continuing, albeit at a lower rate than in the previous quarter. The main encouragement came from an uptick in construction, while domestic consumption points to a slowdown in growth, despite the continuing high wage growth and low unemployment. Manufacturing output remains weak, and continues to face cost pressures and inadequate foreign demand. The nowcast models are forecasting quarterly GDP growth of 0.5% in the third quarter.
The labour market remains tight, despite a small year-on-year fall in the workforce in employment. The registered unemployment rate remains low, having stabilised at 4.5%, and there are major labour shortages. Wage growth is slowing but remains high, particularly in the public sector. Real wage growth is outpacing growth in labour productivity, which is weakening the cost competitiveness of the economy.
Inflation fell to 2.7% in September. Food prices have been its main driver since July: they were up 6.4% in year-on-year terms, as price pressures in production chains ratchet up. Service price inflation remains robust and is being driven by relatively high real wage growth. Services prices continue to drive core inflation, which slowed to 2.4% in September, entirely as a result of a slowdown in growth in prices of non-energy industrial goods. Their contribution to inflation remains modest, while energy prices are continuing to slightly reduce headline inflation.
The general government deficit is widening, which is narrowing the space for fiscal policy measures in the event of any new macroeconomic shocks. Growth in general government revenues slowed amid weak economic activity, while expenditure is being raised by the pay reforms, social security benefits, and investment. General government expenditure will also be raised when the pension reform enters into force, which will improve the long-term sustainability of the pension system. The public finance picture over the next two years will be profoundly affected by the structural reforms under preparation and implementation, by investment activity, and by defence spending.
The current issue of the Review of macroeconomic developments provides additional analysis of the external competitiveness of the Slovenian economy and the impact of the pension reform on the public finances and on the sustainability of the pension system.
Publication Review of macroeconomic developments undergoing translation.