Domestic economic growth in the second quarter significantly exceeded expectations. Available data indicate that favourable developments are continuing in the third quarter, although growth is expected to be more moderate. The economy therefore remains highly resilient for now, similarly to the euro area, despite the war in the Middle East, higher energy prices and considerable uncertainty. Inflation remains elevated, with higher energy prices and an exceptionally dry summer posing risks to its persistence. In this issue of the Review of Macroeconomic Developments, we provide an additional analysis of the effects of higher energy prices on the economy. We find that their effects are significantly more adverse when higher energy prices result from constrained energy supply than when they are driven by stronger global demand. In such circumstances, the scope for economic policies to mitigate the consequences is also limited, making a coordinated response across different policy areas important.
Economic growth in the euro area exceeded expectations in the second quarter, increasing by 0.4%, which points to its resilience despite heightened geopolitical tensions and high energy prices. Survey indicators for July and August point to continued growth, while risks to further growth remain elevated due to persistent geopolitical uncertainty. Following a renewed escalation of the conflict in the Middle East, headline inflation increased to 2.9% in July.
In Slovenia, economic growth in the second quarter also significantly exceeded expectations, with GDP increasing by 1.8% quarter-on-quarter and by 5.0% year-on-year. High growth continued to be supported primarily by domestic consumption and investment, particularly in construction, which continued to receive significant support from government infrastructure projects. Services also strengthened, while growth in value added in manufacturing accelerated markedly despite heightened conditions in the international environment. The limited set of available data and estimates point to continued growth in the third quarter, although growth is expected to be more moderate. Our short-term forecasting models currently estimate quarterly GDP growth at 0.5%.
The labour market remained robust, while unemployment stayed at historically low levels. Considerable differences across sectors persist, with employment in manufacturing continuing to decline, while employment in services increased. As economic activity accelerated, firms’ employment expectations strengthened, while labour shortages remain pronounced and firms continue to recruit foreign workers. Wage growth accelerated to 8.3% in June, driven primarily by the continued implementation of the public sector wage reform.
Headline inflation, as measured by the HICP, increased to 3.4% in August. Price developments in recent months have been driven primarily by energy prices, particularly those of petroleum products, the marked increase in which was partly mitigated by government measures. Food price growth has remained relatively low so far, but higher energy prices and an exceptionally dry summer in Slovenia and elsewhere in Europe pose a significant risk of an acceleration in food price growth.
The deficit of the consolidated general government financing balance increased year-on-year to EUR 1.3 billion in the first seven months of the year, despite solid revenue growth. Social security contributions recorded strong growth, while on the expenditure side, public sector wages, investment and long-term care services stood out. Public finances are exposed to numerous risks related to defence spending, energy prices, demographic developments, the green transition and post-flood reconstruction. The potential implementation of measures under the Act on Intervention Measures for the Development of Slovenia also adds to uncertainty.
The impact of energy shocks on the European and domestic economies
In the Review of Macroeconomic Developments, we analyse energy shocks and their impact on the European and domestic economies in greater detail, both of which are heavily dependent on energy imports. Through higher energy costs, energy shocks feed into inflation and dampen economic activity by putting pressure on cost competitiveness and reducing households’ purchasing power and firms’ profitability. They also intensify competitive pressures from third countries, which are more energy self-sufficient, while high energy prices may reduce the attractiveness of investment. An analysis of bank financing shows that energy shocks do not encourage banks to finance investments aimed at improving energy efficiency.
Adapting to energy shocks, however, depends not only on the response of firms and the financial system, but also on adequate support from all economic policies. Monetary policy cannot fully offset the direct inflationary effects of energy shocks, but it can limit their persistence and contribute to anchoring inflation expectations. Taken together, economic policies can help mitigate the short-term effects of energy shocks and create the conditions for the economy’s longer-term adjustment.