Further Deterioration in the Financial Sector
In the first quarter of 2012, economic activity in the euro area stagnated, while for the full year, the European Commission and the OECD project a contraction of economic activity. The key reason why economic activity in the euro area exceeded the the EC’s spring forecast in the first quarter was GDP growth in Germany. The EC and the OECD nonetheless expect a decline in euro area GDP for this year.
The forecasts continue to be accompanied by significant downside risk mainly due to uncertainty regarding the sovereign debt crisis. Unfavourable labour market conditions will continue and the high unemployment rate will, amid continued fiscal consolidation and bank deleveraging, additionally impede domestic demand. In the first quarter, Slovenia’s GDP increased relative to the last quarter of 2011, but Slovenia remains among those EU Member States with the largest drop in activity during the crisis. Year on year, GDP contracted by 0.2%. Net exports, once again, made the largest contribution to growth but the year on year growth in exports slowed further with import also declining. The key reason for the smaller year on year decline in GDP than in the previous quarter, was growth in household and government consumption. The latter is the likely result of the relatively strong growth in employment in the general government sector. For household consumption, spending on durable goods continues to drop and current data shows a continuation of this trend. The year on year decline in investment was greater than for the previous quarter, aside from construction, investment in machinery and equipment also dropped year on year.
Labour market conditions remain unfavourable, despite declining unemployment; the average gross wage rose in the first quarter on the back of extraordinary payments in the private sector. The number of employed persons, excluding self-employed farmers, dropped further in the first quarter of 2012, once again most notably in construction, while public service employment continued to grow. However, data from the labour force survey show a seasonally adjusted improvement in employment, possibily due to an increase in informal work. In April, registered (seasonally adjusted) unemployment declined further but remained high at 109,084 registered persons. Year to date to the end of April, the annualunemployment rate was down 1.2%, largely as a result of a lower number of registered persons and a greater number of unemployed persons being deleted from the register, mainly for neglecting their responsibilities. In the first quarter, wage movements in the private sector were marked by extraordinary payments and in the public sector, wages were down year on year due to intervention measures. Consumer prices rose by 0.6% in May, with annual growth falling to 2.4%. Monthly growth was underpinned by stronger seasonal price movements of food, clothing and footwear, while growth in the last twelve months remains low due to modest economic activity. Liquid fuel prices reduced monthly inflation by 0.2% but contributed 0.6% to annual inflation. According to Eurostat’s flash estimate, annual inflation in the euro area also stood at 2.4%. In April, the situation in the financial system continued to deteriorate.
Lending activity declined again in April. The volume of household and corporate loans was down, in particular, while the crediting of the government sector slowed significantly. In the first quarter, banks strengthened the repayment of all types of foreign liabilities while increasing short-term borrowing. In March, the volume of banks’ bad claims increased by the highest amount thus far, reaching almost EUR 6 bn or as much as 11.8% of the total exposure of banks. Around a third of the increase was attributable to the strengthening of non-performing claims, especially claims against the construction sector and financial and insurance services.
In May, the National Assembly adopted a revised state budget for 2012, setting revenue at EUR 7.9bn and expenditure at EUR 9.0bn. With the goal of avoiding a further increase in the deficit, as happened in previous years, the revised budget envisages much lower expenditure than the previous 2012 budget and 3.7% lower than in 2011. To achieve this goal, the Public Finance Balance Act (ZUJF) was passed in addition to the revised budget, putting in place a breadth of measures and amending 39 laws. At the time of the adoption of the revised budget certain ZUJF provisions were still being reconciled, with the total cut in expenditure less than planned, requiring additional reallocation of expenditure within the budget. With revenue estimated to be 1.4% higher than in 2011, the revised budget projects a deficit of EUR 1,071 m, i.e. 3.0% of estimated GDP. The decline in the budget deficit is in line with Slovenia’s commitments in the Stability Programme – Update 2012, which address the consolidation of public finances.