The Slovenia Times

Despite economic recovery and improvements in labour market conditions, lending activity remains weak



Most confidence indicators for the euro area indicate a continuation of the recovery in the second half of the year: the Economic Sentiment Indicator (ESI) is the highest since 2011 and the PMI continues to indicate a positive trend. The lower value of the Ifo Economic Climate Index, on the other hand, indicates uncertainty about developments in the second half of the year. Uncertainty is also reflected in ECB projections, which, at the beginning of September, lowered slightly its economic growth forecasts for the euro area (2015: by 0.1% to 1.4%; 2016: by 0.2% to 1.7%).

Favourable economic developments in Slovenia continued in the second quarter; in addition to exports, private consumption was a significant contributor to GDP growth. GDP rose by 0.7% (seasonally adjusted) and was 2.6% higher year-on-year. Despite a further moderation in year-on-year growth, exports remained the main driver of the recovery, which was reflected in further growth in value-added in manufacturing. Household consumption picked up more notably this year with the improvement in the labour market situation and the relatively high value of the consumer confidence indicator. Purchases of durable goods increased further, and purchases of other goods also rose for the first time in a long period. In contrast, construction investment has been decreasing for the past three quarters after the strong growth from mid-2013. In the first half of this year, real GDP reached 95% of the average level in 2008 (the lowest level was in 2013: 90.6%).

In the second quarter, the number of employed persons rose further; the number of registered unemployed was down again in August. In the first half of the year, the number of employed persons was up in most areas of the private sector, which also recorded higher indicators of economic activity than for the same period last year. The number of registered unemployed is falling slightly more slowly than at the beginning of the year owing to a smaller outflow into employment. At the end of August, 107,935 persons were registered as unemployed, 6.0% fewer than in August 2014. Average gross earnings per employee rose further in the second quarter (by 0.3%, seasonally adjusted), but year-on-year growth in the first half of the year (0.5%) was half lower than in the same period of 2014. This is explained by modest growth in private sector earnings, which is, amid a higher number of workers with relatively low earnings, largely the result of changes in the employment structure.

In August, consumer prices were down year-on-year again. The continuation of year-on-year deflation (-0.3%) was again the result of lower prices of liquid fuels due to the year-on-year fall in the euro price of oil in global markets. For some time, deflationary movements have also been impacted by lower prices of other goods, mainly durables. Food prices remain up year-on-year owing to the higher prices of unprocessed food. Growth in service prices has slowed notably in recent months. Core inflation remains lower than in the euro area, reflecting lower growth in both service prices and prices of non-energy goods.

The domestic non-banking sectors continue to deleverage. In the first seven months of 2015, enterprises repaid less while NFIs repaid more than in the same period of 2014. Household loans (where new lending for housing is on the increase) and government loans have expanded this year. The growth of household deposits is slowing year-on-year as a result of low interest rates. The low lending activity of Slovenian banks is accelerating the decline in net interest receipts of the banking system and thus slowing the reduction in the share of non-performing claims. This share has stabilised at around 11.5% in recent months, but its further reduction will require higher lending activity and an increase in the proportion of new, high-quality claims.

The general government deficit (EUR 664m) in the first half of the year was slightly lower than in the same period of last year resulting from increased tax revenues and social contributions related to the improvement in labour market conditions, better performance of companies in 2014, the strengthening of private consumption and government measures. The main factors in 2015 growth remain corporate income tax and value added tax. Expenditure rose less than revenue. Among expenditure categories, current expenditure and investment expenditure were up.


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