25/01/2022 / Press release
Indicators for the euro area as well as for Slovenia in the last quarter of last year suggest that the impact of the epidemiological situation on economic activity has been relatively weak. Economic growth has slowed slightly since Slovenia regained its pre-crisis level of activity, but it remains good. The situation is also reflected in the financial markets, where we are moving away more quickly from an accommodating position by the central banks. The national labor market remains very dynamic, with companies increasingly opting to hire foreign nationals as the national pool dries up. Banka Slovenije’s assessment is that some macroeconomic risks nevertheless remain significant, due to the record number of cases and high energy prices.
The economic growth in the eurozone remained high at the end of last year, but slowed slightly in the face of challenges faced by businesses. The situation varies greatly from sector to sector, depending on the reimposition of certain containment measures, shortages of raw materials and increasing difficulties in finding qualified workers in certain segments of the economy. Work processes are also disrupted by absences caused by the strong resurgence of the pandemic.
One of the main features of financial markets in the last quarter of last year was the more rapid reduction in central bank accommodative policy. The ECB was no exception, although its monetary policy stance nevertheless remains among the most favorable in the eyes of market participants, compared to other central banks in advanced economies. Market interest rates in the Eurozone have risen further and suggest that financial markets are pricing in a possibility of exiting the negative interest rate environment much faster than expected before the pandemic.
Against a backdrop of excess demand and strong price pressures in the international environment, inflation in the euro area and in Slovenia reached its highest levels in many years in December, and forecasts of a slowdown in subsequent quarters involve major risks. The January figures will be available at the beginning of February, as every year.
In the domestical economy moreover, the negative impact of the deterioration of the epidemiological situation is relatively low for the moment. Strong economic growth has slowed slightly since Slovenia regained its pre-crisis GDP level. In a context of significant public investment, growth is clearly driven by domestic demand, which is much stronger than the euro zone average. This translates into a rapid reduction in the current account surplus. Our assessment is that some macroeconomic risks remain elevated, including from rising work absences amid record high caseloads, high energy costs and high inflation, which are already dampening real income growth for households.
Employers face increasing shortages in the national labor market. The employed labor force again reached a record high in November, and the rise in employment is evident in almost all sectors. The rapid decline in domestic unemployment is pushing companies to hire foreign nationals, who last fall accounted for around half of the annual increase in the employed labor force (excluding self-employed farmers).
Figure: Limiting factors in Slovenia
Note: * Banka Slovenije estimate based on value added share. Includes companies in manufacturing, construction and other services that in the survey cited labor shortages as a limiting factor.
Sources: Eurostat, Banka Slovenije calculations
The strength of the economy is also reflected in the position of public administrations. The general government deficit in the first nine months of last year amounted to 5.2% of GDP, down 1.8 percentage points year-on-year. Growth in general government revenue was strong, at nearly 11%, thanks to strong economic growth driven largely by booming final consumption and strong employment and wage growth. Growth in general government expenditure was about 4 percentage points lower. Public investment growth was notable at 26%, and the year-on-year rate reached around 40% in the third quarter. The magnitude of anti-coronavirus measures in the second half of the year was weaker than in the first half, following the expiry of the most important measures in June. Nominal debt remains well above its pre-crisis level, despite the improvement in public finance indicators.