General economic environment in Slovenia

In 2011 the European debt crisis reached new proportions. Toward the end of the year, the confidence of investors and customers, and along with it international trade, significantly decreased. The Slovene economic recovery was slow and uncertain. Financing conditions and conditions in the labour market were tighter, and the construction crisis has become deeper. According to the first result announcement by the Statistical Office of the Republic of Slovenia, real GDP growth in 2011 decreased by 0.2%. This represents a 1.6 percentage points lower growth compared to the euro area and compared to 2010. Inflationary pressure was negligible compared to low economic activity (1.8% inflation rate). Slovene GDP, measured in current prices, exceeded EUR 35.6 billion and did not change significantly in comparison with the previous year.

In spite of the restricted conditions in the international environment, it was international trade that contributed the most to the growth of the Slovene economy in 2011 (measured by the contribution to the growth of the volume of BDP) with a little less than 2%. However, in most of the EU member states the export was recovering more quickly than in Slovenia, which points to the fall of Slovene export competitiveness. The recorded 6.8% export growth was primarily induced by demand in the EU member sates, while the demand from other countries remained modest. The nominal growth of export into the EU was mostly generated by the export of electric appliances and devices, iron and steel, and general purpose industrial machinery. By the end of the year the balance of payments current account deficit remained relatively low at 1%.

Domestic spending declined again, i.e. by 1.6%. Gross fixed capital formation recorded a 10.7% decrease, while final consumption stagnated. These investment dynamics can be contributed mostly to the tightened conditions in the construction sector. Investments in buildings and facilities decreased considerably, while investments in equipment and machinery stagnated. Domestic consumption remained at the same level as the year before, however, with a decrease in the share of consumption for durable goods. After several years of growth, government consumption decreased by 0.9%, whereas the share of expenditures for social security support increased considerably.

The decrease in the number of employed continued, but to a lesser degree than in the previous two years. Again, the largest fall was recorded in the construction and processing industries as well as traditional market services sectors. The average annual number of unemployed persons was close to 111,000, which is almost 10% more than in the previous year. The average rate of registered unemployment was 11.8% and that according to the workforce survey was 8.1%.

European inter-bank interest rates remained at record low levels, but no major revival of lending activity occurred in Slovenia. Loans to the non-financial sector decreased primarily as a result of lower demand, however, there were also increasingly more reasons for a decrease on the supply side. Financing conditions were tighter due to the general uncertainty and existing indebtedness of companies. The quality of balance sheet assets of Slovene banks worsened, primarily due to their exposure to the construction sector, which forced them to increase the volume of additional impairments and provisions.

The conditions in Slovene public finances did not improve in 2011. According to the latest forecast by the Ministry of Finance, at the end of the year the budget deficit and public debt were 5.5% and 45.1% of the GDP, respectively. Although Slovenia is one of less indebted states in the euro area, its debt has increased at an accelerated rate in the last few years. This is the reason why in terms of financial markets it was compared to Italy, the second most indebted state in the euro area and the required rate of return on long-term bonds exceeded 7%. In accordance with the Stability Programme, Slovenia must reduce the deficit to 3% of the GDP no later than by the end of 2013. In order to accomplish that, it must reduce expenditures considerably. The deficit and credibility can be improved in the long run by political stability and structural reforms.

In 2012, a very slow and uncertain revival of the Slovene economy can be expected. According to the spring forecast by IMAD, GDP growth will again be negative at -0.9%. Domestic and especially government consumption is forecasted to decrease. Investment activity will decline as well, however less than in previous years. International trade will alleviate the drop in GDP. The rate of unemployment will increase to 12.9%, whilst inflation will remain low at 2.0%. Public finance trends will not improve. According to the autumn forecast of the European Commission, the budget deficit will not decrease substantially, however, the gross debt will increase to 50.1% by the end of the year. The forecasts are accompanied by many uncertainties, distributed unevenly in the direction of lower economic growth than anticipated. The majority of risks originate in the uncertainty regarding the development of debt crisis in the peripheral states of the euro area, the political situation in the country and the government's efficacy in the implementation of structural reforms.


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