In the third quarter, favourable economic conditions continued in both the euro area and Slovenia. Despite heightened geopolitical tensions, economic growth remains resilient and broad-based. At the same time, inflation is gradually rising, particularly due to higher energy prices, and remains above 3% in both the euro area and Slovenia. In the domestic economy, labour market conditions remain stable, while annual wage growth remains high.
Economic activity in the euro area continued to strengthen in the third quarter, as indicated by the composite PMI, which reached its highest level since March 2023 in September. Growth in activity was broad-based, while improved conditions in services and manufacturing were also reflected in an improvement in business sentiment in September. Consumer sentiment, by contrast, deteriorated due to renewed price pressures. Headline inflation in the euro area rose to 3.8% in September, driven by both higher energy prices and faster growth in food prices. The acceleration in food price growth may already reflect the effects of an exceptionally dry summer.
According to the available data, economic conditions in Slovenia remained favourable in the third quarter, although economic growth is expected to have moderated somewhat compared with the previous quarter. Growth is expected to remain broad-based despite a sharp deterioration in geopolitical conditions and renewed increases in energy prices. Manufacturing output has increased this year in most industries, with the exception of some energy-intensive industries, where conditions remain challenging. Construction activity remains high but is expected to moderate as projects related to European funds and local elections are completed. Favourable year-on-year developments in services continue to be supported by private consumption and strong international tourism. Business confidence remained relatively solid in September, although concerns about accelerating inflation are growing. Short-term forecasting models currently point to quarterly GDP growth of 0.7% in the third quarter.
Labour market conditions remain relatively stable. The number of persons in employment remains at a similar level to last year, with employment continuing to decline in predominantly private-sector activities while increasing in predominantly public-sector activities. Registered unemployment was again lower in September than a year earlier and remains close to its historically lowest level. Annual wage growth eased slightly in July but remained high. Nominal wage growth stood at 7.6%, while real wage growth was 4.4% and was stronger in the public sector (8.4%) than in the private sector (7.0%). Robust wage growth continues to support households’ purchasing power, while also adding to domestic price pressures.
Headline inflation, as measured by the HICP, is gradually rising and reached 3.7% in September. This is driven mainly by sharp increases in energy prices, particularly petroleum product prices. Food price growth remains subdued for now, although recent developments in unprocessed food prices and trends in the euro area point to a gradual strengthening of price pressures. Core inflation, measured excluding energy and food prices, declined to 2.3% in September. Unlike headline inflation, it has remained relatively stable in recent months, indicating that the pass-through of the energy shock to core inflation remains limited.
The general government deficit increased in the first half of the year, while cash-flow data suggest that its rise came to a halt in the third quarter. This year, the deficit has been driven mainly by social transfers, investment and wages. The effects of measures to mitigate high energy prices have been moderate so far. As required yields in financial markets rise, debt refinancing costs are gradually increasing. Together with demographic and environmental challenges and commitments on defence spending, this is creating pressures on public finances. Additional short-term uncertainty stems from measures envisaged in the Act on Emergency Measures for Slovenia’s Development and announced, but not yet adopted, fiscal consolidation measures aimed at slowing strong expenditure growth. The latter are essential for preserving fiscal space, which is key to mitigating potential new macroeconomic shocks and structural challenges facing the economy
Conditions in manufacturing and new corporate lending
In this issue, we take a closer look at manufacturing and the structure of new corporate lending in Slovenia and the euro area. Conditions in manufacturing vary considerably across euro area countries, and any further increases in energy prices could widen these differences. Higher operating costs, including those resulting from higher energy prices, increase firms’ working capital financing needs. In the euro area, this is reflected in growth in short-term lending, particularly to larger and less risky firms, towards which banks are also shifting their lending supply. No such shift in lending has been observed in Slovenia so far. In Slovenia, recent growth in manufacturing activity has been supported by more favourable productivity developments. However, as our analyses show, this does not necessarily indicate a broad-based improvement in conditions but may also reflect the contraction of less productive industries and employment moving more closely in line with output again, following a period of labour hoarding.