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Slovenia's economy contracted by an annual rate of 0.1 percent (seasonally and working days adjusted) in the third quarter of 2011, and shrunk by 0.2 percent on the quarter before. The finance ministry blames the contraction on the Euro debt crisis and its impact on exports. Also responsible, it says, is the prolonged credit crunch which has caused a more pronounced slowdown in Slovenia than elsewhere in the EU.
And the blame for the credit crunch itself? That lies, the ministry argues, with the demands for higher capital adequacy ratings of banks made in July last year. Lending activity has deteriorated explicitly since then.
Despite the drop - which comes after five consecutive quarters of growth - Slovenia's economy expanded by 0.8 percent in the first nine months of 2011 compared to the same period last year. The trend however suggests that growth will be very weak at the end of the year, especially considering that the situation in both the eurozone and the broader international environment is deteriorating.

Lower growth

The Organisation for Economic Cooperation and Development (OECD) expects Slovenia's economy to expand by one percent this year, but GDP growth is expected to slow to a mere 0.3 percent in 2012 before ticking up to 1.8 percent in 2013.
The Institute of Macroeconomic Analysis and Development (IMAD) revealed last month that it is also likely to downgrade its GDP growth forecast for this year and next due to the severe deterioration of the international economic environment.
"Some of the downside risks are being realised and we can expect that in the coming quarters economic growth will be lower than forecast," IMAD director Boštjan Vasle told the press.
In its autumn forecast IMAD put GDP growth at 1.5 percent this year and two percent in 2012, but Vasle said the figures were based on assumptions of international economic conditions, which have deteriorated sharply. Whereas forecasts for euro area growth had hovered around 1.6 percent in July, they do not exceed 0.6 percent now, according to Vasle.

Rising bond yields

To add to the worrying developments, 10-year government bond yields reached and exceeded the psychologically important seven percent benchmark last month. Greece, Ireland and Portugal had to ask for a bailout from the IMF and EU after reaching this ceiling. However, outgoing finance minister Franc Križanič was not worried by the rising bond yields. He argued Slovenia was relatively well supplied as far as financial resources go, which is why he does not expect any "major shocks" at least until 2014.
The European Commission has also not shown concern. It said it is not worried by the situation in Slovenia, expressing belief that the Slovenian authorities and economy would be able to tackle the main challenges in the coming months. The Commission added, however, that Slovenian economy would have to introduce important structural reforms by 2013.
Export drives
According to the latest results, growth in Slovenia is still propelled by exports. These are, however, rising at a significantly slower pace than in the first six months of the year. At an annual level exports grew by 5.6 percent in the third quarter. Imports grew even more slowly, by 3.7 percent, which resulted in a positive external trade balance of 1.3 percentage points.
Domestic spending showed no signs of recovery in the third quarter, contracting by 1.9 percent over the third quarter in 2010. Continuing a marked contraction, although at a slightly slower pace than in the previous quarters, was the construction sector, which shrank by 19.7 percent on the same quarter of the previous year.
Commenting on the third quarter drop, IMAD said it was in line with short-term indicators and that "uncertainty in the international environment is increasingly reflected in the export segment of the economy", a key motor of growth.
The slowdown in exports was reflected the most in manufacturing, where added value fell by 0.1 percent in the third quarter year-on-year after having grown by 5.1 percent in the second quarter, IMAD said. The Institute also pointed to domestic spending remaining below last year's level in the last two quarters, with gross fixed capital formation dropping by 13 percent in the third quarter over the same period last year. Also down year-on-year was government spending, by 0.5 percent, while household spending increased by 0.2 percent. IMAD added the latest Eurostat data put EU-wide GDP growth in the third quarter over the previous quarter at 0.2 percent, with only three countries performing worse than Slovenia.
With such bleak developments, a lot of pressure is being put on the yet unformed government to act quickly in order to avert a further slide in the Slovenian economy.