“Economic recovery in the Eurozone is losing momentum in the autumn months due to the rapid deterioration of the epidemiological situation. At the same time, the Bank of Slovenia notes that the crisis in the Eurozone would be much deeper without a rapid and comprehensive economic policy response. The situation is very similar in Slovenia, where the outlook has deteriorated sharply in recent weeks. In the publication Economic and Financial Trends, we also point out that the situation on the labour market, under the influence of state intervention measures, remains solid for now”, says the Bank of Slovenia in its analysis of the current situation.
In the Eurozone, as it is stated, the current indicators of economic activity are deteriorating again in the period from May to July, and the impact of the new wave of virus spread will be even greater in the coming months. The decline in confidence in companies and consumers, together with the further deterioration of the situation on the labour market, will lead to a further decline in domestic demand, thus increasing the risks for the latest forecasts of international institutions regarding the decline in economic activity. Deflationary pressures are also expected to increase.
Economic policies have responded to the crisis quickly and extensively. The fiscal response of Eurozone members is strong, as this year’s growth in their general government spending has been estimated by the European Commission at close to 540 billion euros. At the same time, the Eurosystem provided additional liquidity to the economy in the amount of close to EUR 2,000 billion until September 25, and the multiannual financial framework and the new generation instrument of the EU worth more than 1,800 billion euros are in the process of being approved within the European Commission.
In Slovenia, the rapid recovery of the economy continued in the third quarter, which began after the first wave of infections subsided in May. With strong economic policy measures, the responses of economic operators to this year’s corona crisis until the fall were different than during the previous financial crisis, because households did not give up buying durable products in the long run, and companies strengthened their stocks.
Even worse in relation to the domestic market is the situation in foreign trade, where the recovery during the summer has stopped. Export growth has stalled in many groups of goods. Difficult travel and changes in people’s behaviour are further hampering the recovery of trade in services.
“In recent weeks, however, as in the Eurozone, the outlook has deteriorated sharply again. The most vulnerable will again be services that depend on direct contact between suppliers and customers, and further growing uncertainty will, among other things, prolong delays in investment decisions,” said the Bank in the analysis.
The situation on the labor market, with the fall in GDP and great uncertainty, is still solid for the time being. The monthly decline in employment stopped in the summer months, and after the May summit, unemployment also fell continuously. At the end of September, 84,000 unemployed people were registered, which is only six thousand more than before the epidemic was declared, but with a high probability of an increase before the end of the year.
As intervention measures prevented the transfer of most of the fall in GDP to the labour market, a 15.8% year-on-year decline in hours worked is a more appropriate indicator of the situation in the second quarter of this year compared to only 1.9% reduction in employment. The younger generations and employees in insecure forms of work have so far mostly felt the consequences of the new crisis. The growth of the average monthly salary remains high in relation to the level of economic activity.
In the area of consumer price movements, deflation has been recorded in recent months, which continued in September. Cheaper oil derivatives again again contributed the most to the fall in prices of 0.7% on an annual basis. Along with the slowdown in the growth of world prices of food raw materials, the growth of food prices also slowed down somewhat after May, which remains high, mainly due to more expensive fruit. There are also domestic deflationary pressures in the form of weaker private consumption and lower utilization of production capacity, which reduces core inflation.
“The fiscal implications of the pandemic are far-reaching, and future fiscal developments are subject to a number of uncertainties. In the first half of this year, the general government deficit was 11% of GDP. Revenues fell slightly more than nominal GDP, and Government spending growth was high, mainly due to measures under anti-corona laws. Debt stood at 78.2% of GDP at the end of June, up 12.6 percentage points from the end of last year. Lending conditions have remained favourable due to the highly stimulating monetary policy, as well as the solid macroeconomic situation compared to many Eurozone members, which has a positive effect on the country’s credit rating,” the Bank of Slovenia’s analysis of the current situation concluded./ibna