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The economic climate in Slovenia is strengthening, and the decline in GDP was lower than expected

Last year, due to the coronavirus epidemic, the economic climate fell sharply. The general climate started to recover slowly when some of the activities reopened but slightly fell again in autumn due to the renewed restrictive measures. However, regardless of the restrictive measures that have been in place for the past couple of months, the economic climate is showing growth, mainly due to the positive impact on the service activities, higher consumption, retail trade and construction. In the last quarter of the year 2020, according to the analysis of the Institute of Macroeconomic Analysis and Development, there was a sharp decline in activity in the services, the operation of which was disabled or limited; however, exports and industry were already close to the levels before the outbreak of the epidemic, and what is especially positive is that Slovenia is becoming bigger and bigger in its role of a net exporter – after many years of imports exceeding exports. 

The economic sentiment indicator was 3.3 percentage points higher in February 2021 than in January 2021 and 2.4 percentage points lower than the long-term average. ON a monthly basis, all indicators contributed to the improvement of the economic climate, except for the confidence indicator in manufacturing. According to the statistical office, the consumer confidence indicator and the indicator of confidence in service activities had the greatest impact, while the confidence indicator in retail trade had the least impact, as certain shops were only able to reopen a few weeks ago due to the restrictive measures.

The economic sentiment indicator was 8.1 percentage points lower in February 2021 than in February last year, before the onset of the coronavirus crisis. The decrease in the value of this indicator on a yearly basis was mostly due to the closure of lots of activities, the lowered confidence in service activities, the indicator of confidence in retail trade and the consumer confidence indicator. The annual value of the indicator was positively influenced by the manufacturing confidence indicator and the construction confidence indicator.

In the second wave of the coronavirus epidemic, the impact of containment measures on the economic activity was, expectedly, very pronounced in the service activities, the operation of which was disabled or limited, such as the entertainment, sports, recreational and personal services; catering and most of the trade activities. The decline in activity in these sectors was comparable to that in the spring and, similarly to the first wave, also significantly lowered the average household consumption.

On the other hand, some of the activities, especially those related to international trade – transport, construction and export-oriented manufacturing – were significantly less affected in the last quarter and recovered throughout the second half of the year, after a sharp decline in the second quarter. The trends in exports and imports of goods were also in line with this, where year-on-year developments have already become positive in the last quarter. In general, however, the economic climate is recovering after last year’s sharp decline, despite all of the restrictive measures, which may also lead to a smaller decline in GDP in the future.

According to the Institute of Macroeconomic Analysis and Development, despite the aggravated epidemiological situation and the introduction of large-scale containment measures, real gross domestic product – GDP fell by 1 percent quarterly in the last quarters and by 4.5 percent year on year. The decline was smaller than in the second quarter and also slightly lower than predicted by the Institute in its winter forecast. Throughout the year, GDP fell by 5.5 percent, which is also less than expected, mainly due to the favourable developments in the export part of the economy and construction.

After a sharp decline in the spring, the investments in fixed assets also grew quarterly, mainly due to the recovery of investments in equipment and machinery in the third quarter and the construction investments, both infrastructural and housing, throughout the second half of the year. Among the consumption aggregates, only government consumption was higher last year, as it grew under the influence of rising employment and expenditure on epidemic control.

The epidemic has reduced the added value of businesses
Last year, the added value fell in most activities due to the severe limiting of activity for the time of the duration of the protection measures related to the coronavirus epidemic. The largest decline happened in the entertainment, sports and recreational sectors and personal services, due to the closure or limited operation during the time of the stricter measures in spring and the last few months of the year, and in the interim period, due to maintaining certain restrictive measures of physical distancing and wearing masks and the self-protective behaviour. The containment measures in the first and second wave also caused a sharp drop in the sectors of hospitality and trade.

However, the containment measures had a relatively smaller impact on some other activities at the end of the year than they did in the spring. “After a sharp decline in the second quarter, traffic gradually recovered in the second half of the year. Similar dynamics were also present in the construction and export-oriented manufacturing, where the added value already became positive in the second half of the year,” the Director of the Institute of Macroeconomic Analysis and Development, Maja Bednaš, said.

When it comes to the manufacturing activities, the year-on-year growth in the last quarter was mainly due to the production in the medium-tech industries (mainly the production of electrical appliances and metal products). Throughout last year, only high-tech industries (pharmaceutical industry and ICT equipment) increased their value, despite their slightly more modest results in the second half of the year.

In the last quarter of last year, services contributed the most to the fall in added value due to another decline in activity
Household consumption made a significant impact on the decline in GDP in the last quarter of last year and throughout the year. After a sharp decline in the second quarter, it temporarily recovered in the third quarter and then fell sharply again in the last quarter, due to the re-closure of non-essential stores and services. In addition to limited spending options and the so-called forced savings, increased uncertainty also contributed to the fall throughout the year, which led to the postponement of non-essential purchases and an increase in prudent savings. Disposable income has expectedly not changed significantly last year, which was mainly due to the government measures adopted to help preserve jobs and mitigate the effects of the epidemic on the incomes of the most vulnerable groups.

The labour market was most affected by the measures adopted in April and May of last year, especially in the service sector. “The effect of the epidemic and the containment measures on the labour market was most pronounced in April and May, but later in the year, the measures significantly mitigated the negative effects,” Bednaš explained. With a 5.5 percent drop in GDP, the drop in employment amounted to 1 percent, and the number of unemployed people increased by around 15 percent, compared to the previous year. After a seasonal increase in December and January, the number of unemployed persons began to fall again in February, while the containment measures are still in place, which is a good sign.

Last year’s 4.1 percent decline in fixed capital formation contributed to a decline in economic activity, mainly due to a sharp decline in the second quarter. With a significant increase in the third quarter, especially in terms of investments in equipment and machinery, the year-on-year decline lowered later in the year, and in the last quarter, last year’s level was already exceeded. In the second half of the year, construction investments also strengthened and recorded year-on-year growth.

We recorded a larger decline in imports than exports, which had a positive effect on the GDP
Exports and imports were hit quite hard last year, mainly due to a drop in world trade, the international restrictions and restrictive measures at home and in the countries of the EU. The decline in exports (-8.7 percent) and imports (-10.2 percent) was particularly pronounced in the second quarter, which also had a key impact on the decline throughout the year. After a sharp fall in April, the year-on-year decline in exports of goods gradually declined in the second half of the year, with exports of goods already being positive in the last quarter of last year. Recovery was noted in most of the major product groups, and especially in the products used for intermediate consumption.

Similarly, the import of goods also recovered and reached the level of 2019 by the end of the year. The decline in trade in most services was greater than in goods, and it was most pronounced in tourism-related services, while the trade in the transport services also declined significantly in the second quarter. The contribution of the foreign trade balance to the GDP growth was positive (0.4 percentage points), which means that Slovenia exported more goods than it imported. According to publicly available data from the year 2000 onwards, for the first time in 20 years, we reached a record positive level of the trade balance, as the balance was negative until 2014.

The economic climate is rising again after the gradual release of the restrictive measures
The economic expectations of businesses and consumers in Slovenia and the EU have improved after the all-time low of last April. Due to the gradual releasing of the restrictive measures from May and September and the recovery of certain sectors, the climate rose again. However, with the epidemiological situation deteriorating once again at home and abroad, and with the introduction of extensive protective and restricting measures, the climate deteriorated again in October, reaching another low in November, which was still higher than the level in spring. Currently, despite the restrictive measures, the indicators are improving. According to Bednaš, the consequences of the epidemic will continue to be most obvious in the service sector rather than in international trade.

“In the second quarter, given the prevailing assumptions regarding the changing of the epidemiological situation, we can expect growth in economic activity. The pace of recovery will, of course, be most dependent on the epidemiological situation in Slovenia and in our major trading partners; the speed of vaccination and the response of the policies with the measures to mitigate the effects of the epidemic on the economy and household incomes,” the Director of the Institute of Macroeconomic Analysis and Development concluded her report.

Sara Rančigaj

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