.^'IMAD O fü Q) £ u E o > uS o Ü) o u 0) o fN fO Slovenian Economic Mirror ISSN 1318-3826 No. 5 / Vol. XV I / 2010 Publisher: IMAD, Ljubljana, Gregorčičeva 27 Director: Boštjan Vasle, MSc Editor in Chief: Jure Brložnik, MA Jure Brložnik, MA, Matevž Hribernik, Gonzalo Caprirolo, MSc (International environment); Janez Kušar,Ivo Lavrač, PhD, Jože Markič, PhD, Tina Nenadič, MSc, Jure Povšnar, Mojca Koprivnikar Šušteršič (Economic developments in Slovenia); Tomaž Kraigher, Ana T. Selan, MSc (Labour market); Slavica Jurančič, Miha Trošt (Prices); Jože Markič, PhD (Balance of payments); Marjan Hafner (Financial markets); Jasna Kondža, Maja Kozar (Public finance); Matevž Hribernik (World competitiveness of Slovenia according to the IMD 2010), Judita Mirjana Novak (Performance of companies and cooperatives in 2009). Editorial Board: Lidija Apohal Vučkovič, Marijana Bednaš, MSc, Lejla Fajič, Alenka Kajzer, PhD, Rotija Kmet Zupančič, MSc, Janez Kušar, Boštjan Vasle, MSc Translator: Marija Kavčič Data Preparation and Graphs: Bibijana Cirman Naglič, Marjeta Žigman Concept and Design: Katja Korinšek, Pristop DTP: Bibijana Cirman Naglič Print: Circulation: 90 copies The contents of this publication may be reproduced in whole or in part provided that the source is acknowledged. Contents In the spotlight...............................................................................................................................................................3 Current economic trends..............................................................................................................................................5 International environment...............................................................................................................................................7 Economic developments in Slovenia...........................................................................................................................10 Labour market..................................................................................................................................................................16 Prices..................................................................................................................................................................................19 Balance of payments.......................................................................................................................................................21 Financial markets.............................................................................................................................................................23 Public finance...................................................................................................................................................................25 Selected Topics..............................................................................................................................................................29 World competitiveness of Slovenia according to the IMD 2010............................................................................31 Performance of companies and cooperatives in 2009............................................................................................32 Statistical Appendix.....................................................................................................................................................35 Boxes Box 1: Euro area's response to the Greek crisis and policy measures to secure the stability of the euro.........8 Box 2: Economic growth in the first quarter of 2010................................................................................................11 Box 3: Real estate market...............................................................................................................................................14 On January 2008, the new classification of activities of business entities NACE Rev.2, which replaced NACE Rev. 1.1, came into force in all EU Member States. In the Republic of Slovenia, the national version of the standard classification, SKD 2008, which includes the entire European classification of activities but also adds some national subclasses, came into force on the mentioned date. In the Slovenian Economic Mirror, all analyses are based on the SKD 2008, except when the previous SKD 2002 classification is explicitly referred to. More general information about the introduction of the new classification is available on the SORS website http://www.stat.si/eng/ skd nace 2008.asp. All seasonally adjusted data in the Economic Mirror are calculations by IMAD In the spotlight The slight recovery of the euro area economy continued in the first quarter of this year, as GDP increased by 0.2% according to Eurostat's first estimate, being also higher y-o-y (0.5%) for the first time since the onset of the crisis. The recovery is still mainly underpinned by foreign demand, which has a positive impact on European exports and industrial production, but further recovery remains highly uncertain, mainly due to fiscal problems in certain Member States. According to the EC spring forecast, the general government deficit in the EU as a whole widened to 7.2% of GDP this year from 0.8% in 2007 before the crisis, while public debt surged by nearly one third to 79.6% of GDP. The Greek crisis, which jeopardised the stability of the entire euro area in the first quarter this year, led to coordinated action of EU governments and the ECB, drawing attention to the pressing need to improve fiscal policy coordination, but uncertainty in international financial markets persists and is one of the main risks to the economic recovery in the euro area. The first quarter saw no signs of economic recovery in Slovenia. In the first quarter, GDP declined by 0.5% in real terms compared with the previous quarter (for the second quarter in a row, according to the revised seasonally adjusted data) and y-o-y (by 1.2%), which shows that in the first quarter of 2010, economic activity dropped to the lowest level since the beginning of the economic and financial crisis. While the improvement in the international environment positively affected Slovenian exports, our predictions from the Spring Forecast that hurdles to faster growth stem from the domestic situation are being confirmed. That export and domestic demand recover at different speeds is also reflected in results by individual activities. In the first quarter of this year, manufacturing and transport recorded higher value added than in the same period last year, which can be attributed to the pick-up in merchandise exports. Y-o-y drops in wholesale and retail trade, hotels and restaurants, architectural activities and related technical consultancy, and mining, on the other hand, are related to unfavourable conditions in construction and on the labour market. Value added continued to increase in public services, except in health and social work. Such movements corroborate the expectations from IMAD's Spring Forecast (also allowing for the possibility that GDP may decline in individual quarters) that the recovery will be slow and indicate that our forecast of 0.6% economic growth is still valid, even if it is the lowest of all forecasts by other institutions. In March, the number of persons in formal employment remained at a similar level as in February; in the first quarter, the average number of employed persons according to the statistical register of employment dropped 3.8% y-o-y; the number of the registered unemployed fell somewhat in May and is hovering just below 100,000. Employment continues to decline in manufacturing, construction, wholesale and retail trade, transport and in financial and insurance sectors, while it grows further in professional, scientific and technical, and administrative and support service activities, as well as public services. The number of registered unemployed persons amounted to 98,401 at the end of May. Employment according to the labour force survey also declined further in the first quarter of this year while unemployment increased. Strong growth in the average wage in March resulted from high wage rises in the private sector. The total average wage was also higher y-o-y. The average gross wage per employee in the private sector usually increases in March, partly due to a higher number of working days, but also due to payments related to business results and overtime work in the previous year, which tend to be disbursed in March. This year, the noticeably higher growth in the private sector gross wage (6.9%) also reflected the increase in the minimum wage. In the first quarter, y-o-y growth in the total gross wage amounted to 3.7%, 1.8 p.p. less than in the same period of last year; due to the base effect and changes in the structure of employment, wage growth in the private sector (5.0%) exceeded the comparable wage growth in the public sector (-0.6%). Amid a monthly price increase of 0.4%, y-o-y inflation dropped from 2.3% in April to 2.1% in May. In the first five months of 2010, inflation increased somewhat more in Slovenia than in the euro area, where y-o-y inflation averaged 1.6% in May. The key differences still lie in the contribution of liquid fuels for transport and heating, which have a higher weight in Slovenia's consumer price index. Prices of services also increased somewhat more in Slovenia than in the euro area due to accelerating prices of public utility services. Among other price groups, outstanding increases were observed for prices of clothing and footwear, which made a higher-than-expected contribution to inflation in the first five months of this year. In April, the lending activity of domestic banks remained at the level of the first quarter. Unlike in March, the bulk of April's net flows resulted from corporate and NFI borrowing, while household borrowing eased significantly. As to the sources of finance, banks continued to make net repayments on foreign loans, government deposits recorded net outflows for the third month in a row, while the volume of household deposits shrank somewhat again. Higher inflows were recorded for issued debt securities, as a result of a bond worth EUR 750 m issued by one of the banks, which is, according to our estimate, also reflected in the strengthening of bank deposits and loans of domestic banks in the domestic banking sector. In the first four months of 2010, revenue from taxes and social security contributions was 3.8% lower compared to the same period last year. The gap between revenue and expenditure amounted to EUR 438 m in the first two months, according to the consolidated balance of the MF. Revenue from taxes and social security contributions increased markedly in April relative to March, as a consequence of very low inflows in March when the first effects of tax assessments according to business results for 2009 began to show, and of statutory changes instituting shorter deadlines for VAT refunds (changed from 60 to 21 days). The movements of general government revenue at the beginning of the year suggest that by the end of the year general government revenue will be lower than what was envisaged in the budget documents. The government has therefore already adopted the starting points for drafting the supplementary budget for 2010. According to the consolidated balance, revenue was 2.3% and expenditure 6.0% highery-o-y in the first two months. ■ö £ Q) E o £ O u Q) £ Q) 3 U International environment The slight recovery of the euro area economy continued, as expected, in the first quarter this year, as GDP expanded by 0.2% according to Eurostat's first estimate, and was also up y-o-y (0.5%) for the first time since the onset of the crisis. Among Slovenia's main trading partners, the first quarter saw greater q-o-q rises in GDP than predicted in the EC Spring forecast in Germany and Italy, and smaller in France and Austria. The recovery is still mainly driven by foreign demand. On the expenditure side of GDP this has a positive impact on exports, and on the production side of GDP on industrial production, which strengthened significantly in the first quarter. After a significant weather-related drop in February, the value of construction put in place also increased more notably in March, but nevertheless remained much lower than in the same period last year. Sentiment indicators temporarily ceased to improve in Figure 1: Forecast of quarterly GDP growth in selected trading partners Q1 10 «04 09 »03 09 Q2 09 -Q1 10 forecast -0.6 EMU Germany France Italy Source: Eurostat, EC Forecast (May 2010). Austria May, mainly owing to decreased confidence in the euro area related to uncertainty regarding fiscal sustainability in certain Member States. Uncertainty about the European economic recovery was also confirmed by the OECD, which published its new forecasts for economic growth in May. Its forecast for the euro area is otherwise the most optimistic among all forecasts by international institutions, yet still lower than the forecasts for the US, Japan and other non-European OECD members. The EC predicts that this year the general government deficit in the EU will be 6.4 p.p. higher than in 2007 before the beginning of the crisis and will account for 7.2% of GDP (in the euro area: 6.6% of GDP). The general government balance will mainly deteriorate as a result of the functioning of automatic stabilisers (a reduction in tax revenues and a rise in expenditure on social protection) and adoption of anti-crisis measures. Eleven EU members ended the year 2007 with a surplus, Slovenia's public finance was balanced, Figure 2: General government balance in EU countries Source: Eurostat, EC Spring Forecasts (May 2010). Note: Arranged by level of deterioration between 2007 and 2010. Table 1: Economic growth forecasts by international institutions and IMAD's assumptions used in the Spring Forecast of Economic Trends 2010 Real GDP growth, in % EU EMU DE IT AT FR UK ZDA CZ HU PL RUS 2009 real growth -4.2 -4.1 -5.0 -5.0 -3.6 -2.2 -4.9 -2.4 -4.2 -6.3 1.7 -7.9 2010 IMAD Mar 10 0.8 0.8 1.3 0.7 1.1 1.3 0.6 3.1 1.2 -0.2 2.6 3.5 IMF Apr 10 1.0 1.0 1.2 0.8 1.3 1.5 1.3 3.1 1.7 -0.2 2.7 4.0 EC Apr 10 1.0 0.9 1.2 0.8 1.3 1.3 1.2 2.8 1.6 0.0 2.7 3.7 CONS May 10 1.1 1.1 1.6 0.8 1.3 1.5 1.3 3.3 1.6 0.1 2.9 5.1 OECD May 10 N/A 1.2 1.9 1.1 1.4 1.7 1.3 3.2 2.0 1.2 3.1 N/A 2011 IMAD Mar 10 1.6 1.4 1.6 1.1 1.5 1.6 1.9 3.0 2.6 2.8 3.0 4.0 IMF Apr 10 1.8 1.5 1.7 1.2 1.7 1.8 2.5 2.6 2.6 3.2 3.2 3.3 EC Apr 10 1.7 1.5 1.6 1.4 1.6 1.5 2.1 2.5 2.4 2.8 3.3 4.0 CONS May 10 1.7 1.5 1.7 1.1 1.7 1.6 2.3 3.1 2.6 2.6 3.4 4.6 OECD May 10 N/A 1.8 2.1 1.5 2.3 2.1 2.5 3.2 3.0 3.1 3.9 N/A Source: IMAD Spring Forecast of Economic Trends 2010, March 2010 ; Consensus Forecasts, May 2010; Eastern Europe Consensus Forecasts, April 2010; IMF World Economic Outlook, April 2010; EC Spring Forecasts, May 2010, OECD Economic Outlook, May 2010.. 2010 2007 Box V. Euro area's response to the Greek crisis and policy measures to secure the stability of the euro The unravelling of the Greek crisis, which jeopardised the stability of the euro area as a whole in the first quarter this year, led to coordinated action of EU governments and the ECB, i.e. adjustment of fiscal and monetary policies. At the beginning of the year, government bond yields of certain euro area countries with relatively weak fiscal positions (Portugal, Spain, Ireland) started to increase and the euro itself came under pressure from financial markets. The euro area policymakers and the ECB therefore took extraordinary measures to restore confidence and bring stability to the euro area. After a period of hesitation, the euro area summit agreed, at the beginning of May, on the procedures to implement a EUR 110 bn support package for Greece with the first disbursement on 19 May. As the risk that the crisis might spread to other euro area members heightened, and due to the falling value of the euro and aggravated access of European business entities to US dollars, further extraordinary measures were adopted by the euro area members and the ECB, as well as by the IMF. On 10 May, the euro area summit agreed on establishing a permanent crisis resolution framework and enhancing the existing fiscal framework to ensure long-term fiscal sustainability in the euro area. The measures include: setting up a European Financial Stabilisation Mechanism worth up to EUR 500 bn to address potential needs of other euro area members with severe debt refinancing difficulties; complementing existing fiscal framework to ensure fiscal sustainability based on the recommendations of the EC; and monitoring additional fiscal consolidation measures of Spain and Portugal in the years 2010 and 2011. According to the European Financial Stabilisation Mechanism, which is yet to be finalised, access to funding will be granted to members facing exceptional circumstances. Activation of funds will be subject to strong conditionality, in the context of a joint EU/IMF support, and on terms and conditions similar to those set by the IMF. The mechanism foresees a permanent component of up to EUR 60 bn and a temporary component expiring after three years, up to EUR 440 bn, guaranteed on a pro rata basis by the participating Member States. Regarding further steps to enhance the legal fiscal framework, a task force was created by the EU president to propose further measures in three policy areas: crisis prevention, crisis correction and crisis resolution. Regarding the crisis prevention policy area, the recommendations include reinforcing the preventive dimension of fiscal surveillance and structural reforms by harmonising budgetary cycles in euro area countries ("European semester"). Based on the Stability Programmes and EC forecasts, the EU Council will identify main economic challenges of the EU and euro area and give strategic guidelines for their implementation, while the Member States should take these recommendations into account when preparing their Stability and Growth Programmes and National Development Programmes. Other measures include surveillance of structural reforms; imposing sanctions to members not making progress on their medium-term objectives; upgrading the peer review of macroeconomic imbalances of euro area members now being carried out by the Eurogroup into a structured surveillance framework that should include a policy action scoreboard; giving more prominence to public debt and sustainability in the Excessive Deficit Procedure. Measures in the area of crisis correction involve. speeding up correcting procedures concerning members that repeatedly breach the Pact; using the suspension of the Cohesion fund as a sanction; devising conditionality with regard to the use of EU budget expenditure (i.e. provide timely and effective incentives for compliance with the Stability and Growth Pact rules); using cohesion funds with the view of strengthening institutional capacity and efficiency of public administrations. Regarding crisis resolution, it is foreseen that in the event that crisis prevention measures fail, financial assistance for a euro area member should be provided in the form of lending. The latter should be subject to detailed conditionality concerning policies aimed at tackling the underlying imbalances of the affected Member State. Further crisis resolution measures involve an appropriate mix of fiscal consolidation and the strengthening of fiscal governance including tax policies; financial sector stabilisation; and other policy interventions needed to restore macroeconomic stability and external viability. Figure 3: Yield to maturity of government bonds 8.5 7.5 Key changes also occurred in the monetary policy of the ECB. The ECB made two steps in addressing the crisis. First, it withdrew from the exit strategy and increased funds for commercial banks,1 and re-established US dollar liquidity 4.5 3.5 1 Conducting a 6-month longer-term refinancing operation with full allotment, at a rate fixed at the average minimum bid rate of the main refinancing operations over the life of this operation (EUR 36 bn was drawn until 12 May); adopting a fixed-rate tender procedure with full allotment in the regular 3-month longer-term refinancing operations (on 26 May and 30 June, 2010) 2.5 Box 1: Euro area's response to the Greek crisis and policy measures to secure the stability of the euro - continued swap facilities in cooperation with the Fed. The second step involved direct purchasing of government and private securities to ensure stability in dysfunctional parts of the market, amid sterilisation of additional liquidity from purchasing bonds. When explaining its decision on purchasing government bonds, the ECB recalled the new euro area governments' commitments to adhere to their fiscal targets and the need to step up consolidation measures where needed. These measures prevented an even greater expansion of the crisis, but at the same time, serious doubts were raised concerning conflicting ECB policy goals. and in only two EU countries the deficit exceeded 3.0% of GDP. The public finances deteriorated at the end of 2008, after the crisis had already started. In the three years from 2007 to 2010, public finances will deteriorate the most in Ireland, Spain, Cyprus and Denmark, according to the EC forecasts. The Member States entered the crisis with different states of public finances, while this year, the greatest deficits will be recorded in the United Kingdom, Ireland, Spain and Greece. The public debt is also increasing visibly in EU Member States and is set to rise by nearly one third compared with 2007, to 79.6% of GDP (84.7% of GDP in the euro area). The greatest relative increases in public debt are predicted for Ireland, Latvia, the United Kingdom, Greece, Spain and Portugal. The increase in public debt is especially problematic in EU countries which already had high public debt before the crisis and also have poor prospects for economic growth. This is particularly true for Greece, where public debt is set to mount to 124.9% of GDP this year, but also for Portugal. In other above-mentioned states, public debt will remain below the EU average this year, despite the strong increase. Figure 4: Public debt in EU countries 140 at the level of January 2010. The value of the 3-month LIBOR on interbank deposits in US dollars increased by half in May, averaging 0.449%. Key interest rates of the main central banks were left unchanged (ECB: 1.0%, Fed: 0.0%, BoE: 0.5%). In May, the value of the euro dropped to the lowest level in the last four years. The average exchange rate of the euro against the US dollar totalled USD 1.2578 to EUR 1, down 6.2% from April and 13.9% from December last year. Even if the euro has lost value with regard to the US dollar in recent months, the average exchange rate in May was 47.5% higher than in June 2001, when the value of the euro was the lowest to date. In May, the euro also depreciated against the Japanese yen (by 7.5%, to JPY 115.99 to EUR 1), the British pound sterling (by 1.9%, to GDP 0.8576 to EUR 1) and the Swiss franc (by 1.1%, to CHF 1.4179 to EUR 1). In May, the oil price movement was characterised by a strong drop in prices and great volatility, as oil prices moved between USD 67and USD 88 a barrel. The average monthly price of Brent crude oil fell by 10.5% to USD 75.94 a barrel in May (in EUR, by 3.7% to EUR 61.62 a barrel). The average monthly oil price in US dollars increased by 32.5% y-o-y, in euros by 43.9%. 120 100 Q e) Source: Eurostat, EC Spring Forecasts (May 2010). Note: Arranged by level of deterioration between 2007 and 2010. After declining for quite some time, the reference interest rate for the euro (EURIBOR) increased on the money market in May and there was also a significant increase in the LIBOR interest rate on interbank deposits in US dollars. The value of the 3-month EURIBOR rose in May for the first time in 18 months, totalling 0.687% in May as a whole, which is Figure 5: Oil price and the USD/EUR exchange rate -Price in USD (left axis) -Price in EUR (left axis) — Exchange rate of USD to EUR (right axis) 160 140 120 100 : 80 60 40 20 lO VO s; s; 1.6 1.5 1.4 Source: ECB, EIA,; calculations by IMAD. 1.0 2007 80 > 60 1.3 40 1.2 20 1.1 0 0 Economic activity in Slovenia According to seasonally adjusted data, the values of short-term indicators of economic activity in Slovenia increased in March as well as in the first quarter as a whole, except for construction. The values of merchandise exports and imports and production volume in manufacturing continued to grow modestly in March, seasonally adjusted. The values of other indicators, which had all dropped in February, also increased (the value of construction put in place, real total turnover in retail trade and nominal turnover in wholesale trade). March saw much higher values of merchandise exports and imports and of the production volume in manufacturing y-o-y than February, also due to the low-base effect. Furthermore, real total turnover in retail trade also increased y-o-y in March, while the values of the other three indicators remained lower than in the same period of last year. Figure 6: Values of short-term indicators of economic activity in Slovenia -Merchandise exports (nom.) -Industrial production in manufact. ---------Value of construction put in place -Turnover in trade ra 110 E 105 ,100 "D C^ 80 75 \ —J*-», i \ • \ V ^ "'■■•--I. Source: SORS; calculations by IMAD. Merchandise trade increased again in March, according to seasonally adjusted data; in the first quarter of this year, it was higher y-o-y after five quarters of decline. Growth in nominal merchandise exports strengthened again in March, totalling 5.3% according to seasonally adjusted data. In the first quarter of 2010, merchandise exports were also higher y-o-y (7.2% in nominal terms), after five quarters of decline, mainly due to a higher volume of exports as a result of the economic recovery in the EU. The greatest contribution to the y-o-y increase in exports to the EU in the first quarter (10.7%) came from growth in exports of the manufacture of transport and electrical equipment, with exports of chemicals and chemical products, and rubber and plastic products also showing signs of recovery. Non-EU countries were hit by the recession with a delay, which is, by our estimate, the main reason why merchandise exports to non-EU countries were still lower y-o-y in the first quarter of 2010, even if their drop slowed significantly (-1.2%). Nominal merchandise imports, which are recovering more slowly than exports and are also showing more volatility at the monthly level, also increased in March (seasonally adjusted by 2.8%). Like exports, imports also increased y-o-y (4.4% in nominal terms) in the first quarter of this year, for the first time since the beginning of the crisis. The nominal increase in imports is also largely a result of quantity flows. With a higher level of value added in manufacturing, imports of intermediate products increased y-o-y in the first quarter, according to our estimate, while imports of consumer and investment goods remained lower than in the same period of the previous year. Figure 7: Merchandise trade 20 10 " -20 a a a Source: SORS; calculations by IMAD. After improving year-on-year since the first quarter of2009, the terms of trade2 remained unchanged in the first quarter this year (y-o-y). Amid recovering global demand, euro prices per barrel of Brent crude oil and other primary commodities increased y-o-y in the first quarter as a whole, by 59.2% or 21.0%.3 Prices of Slovenian producers on the foreign market, which are less volatile, were still lower y-o-y. Given these price movements, export and import prices increased 0.3% y-o-y in the first quarter of this year. In the first quarter this year, trade in services remained lower than in the same period of 2009. The y-o-y drop in services exports, while still strong (-12.3%) in the fourth quarter last year, slowed significantly in the first quarter this year (-1.3%). Growth in exports mainly came from railway and road transport, while exports of travel 2 As the terms of trade can be monitored using the external trade statistics or national accounts statistics, the calculations of changes in real values of merchandise trade may differ. This time we state implicit deflators of exports and imports according to the national accounts statistics, which ensures comparability of real movements within the expenditure structure of GDP. 3 Primary commodity prices in euros are own calculation of dollar prices of the IMF's index of primary commodity prices. 70 Box2: Economic growth in the first quarter of 2010 GDP declined in real terms in the first quarter compared with the previous quarter and was even lower than in the same period last year, which shows that economic activity in the first quarter of 2010 was at the lowest level since the beginning of the economic and financial crisis. In the first quarter of this year, GDP declined 0.5% compared with the previous quarter, according to SORS, being 1.2% lower y-o-y. Along with the figure for the first quarter, SORS also published slightly revised seasonally adjusted data on GDP movements between individual quarters for previous years, showing that GDP has been declining in the whole period since the final quarter of 2008, except in the third quarter of 2009 when it increased minimally (0.1%). In the first quarter this year, Slovenia thus recorded the lowest level of economic activity since the beginning of the crisis. As expected, there were already some positive signals reflecting higher foreign demand, while domestic consumption was still lower than in the same period of last year. Such movements corroborate the expectations from IMAD's Spring Forecast that the recovery will be slow also allowing for the possibility that GDP may decline in individual quarters and indicate that our forecast of 0.6% economic growth is still valid, even if it is the lowest of all forecasts by other institutions. While the improvement in the international environment, with Slovenia's main trading partners in the EU already beginning to recover, positively affected Slovenian exports, it is being confirmed that hurdles to faster economic growth stem from the domestic situation. In the first quarter, Slovenia's exports were 4.5% higher in real terms than in the same quarter last year, which is a result of growing demand for Slovenian merchandise in the EU; merchandise exports to other markets remained lower y-o-y, as did services exports. Import growth was somewhat lower (3.8%); the greatest contribution to growth came, by our estimate, from stronger imports of intermediate goods in the manufacture of export-oriented manufacturing industries, given that domestic demand and related import components were still weak. Household consumption remained at the level of the first quarter of 2009, as households were not inclined to increase spending, given the bad situation on the labour market. Investment activity was down one tenth in real terms over the same period of last year. Y-o-y, construction investment declined (-13.3%) more than investment in machinery and equipment (-6.6%), which was expected. Some positive signs have already been perceived in non-residential construction, the first construction sector to see activity drop as a result of the crisis. Civil engineering and residential construction show no signs of improvement, given a high stock of unsold flats and the current situation on the real estate market. That export and domestic demand recover at different speeds is also reflected in results posted by individual activities. In the first quarter this year, manufacturing and transport enjoyed higher value added than in the same period last year, which can be attributed to the pick-up in merchandise exports. Y-o-y drops in wholesale and retail trade, hotels and restaurants, architectural activities and related technical consultancy, and mining, on the other hand, are related to unfavourable conditions in construction and on the labour market. Except in health and social work, value added continued to increase in public services, one of the few sectors where employment increased y-o-y in this period. In the first quarter of 2010 as a whole, the number of employed persons was 3.5% lower y-o-y, according to the national accounts statistics, dropping most notably in sectors with the greatest declines in economic activity ever since the beginning of the crisis (in manufacturing and construction, as well as in mining). Figure 8: GDP growth 10 8 6 Figure 9: Structure of value added growth I -4 -6 -8 -10 ■ Quarterly growth - Y-o-y growth, % Manufacturing (D) s Market services (G -K) ■ Other (A,B,C,E) ■ Construction (F) ■ Public services (L -P) 6 4 0 I -2 -6 -8 -10 8 4 2 0 services stagnated y-o-y. The contribution of other services was negative, almost solely due to lower exports of construction services, which led to a y-o-y decline in services exports. Services imports increased slightly y-o-y in the first quarter this year (0.3%), after a modest y-o-y drop in the final quarter last year (-3.1%). Imports increased only as a result of transport services imports. Imports of travel services and the group of other services declined y-o-y. -Imports of services Figure 10: Trade in services -Exports of services 30 25 20 SP 15 o 10 != 5 o C ^^ 0 -5 -10 -15 -20 a a a Source: SORS; calculations by IMAD. Table 2: Selected monthly indicators of economic activity in Slovenia in % 2009 III 10/ II 10 III 10/ III 10 I-III 10/ I-III 09 Exports1 -18.2 23.3 12.6 5.4 -goods -19.2 24.4 15.6 6.9 -services -14.3 18.4 -0.3 -1.3 Imports1 -23.0 18.1 9.3 4.1 -goods -25.9 18.3 10.4 4.8 -services -3.9 17.4 2.6 0.3 Industrial production -16.9 3.92 6.63 -0.43 -manufacturing -18.1 4.72 7.43 0.33 Construction -value of construction put in place -21.0 4.12 -19.73 -18.93 Distributive trade - total turnover in retail trade -12.8 3.62 1.53 -1.83 Hotels and restaurants - turnover in hotels and restaurants -11.3 -0.72 -0.93 -1.73 Sources: BS, SORS; calculations by IMAD. Notes: 1balance of payments statistics, ^seasonally adjusted, 3working-day adjusted data. Production volume in manufacturing strengthened again in March and in the first quarter exceeded slightly the volume recorded in the same quarter last year. Amid January's contraction, production activity rose slightly in the first quarter (0.5%, seasonally adjusted) relative to the previous quarter, continuing its weak and gradual strengthening from the second half of 2009. For the first time since the last quarter of 2008, it was slightly higher y-o-y (by 0.3%, working-day adjusted). Amid a stronger pick-up than in Slovenia q-o-q (3.2%, seasonally adjusted), the increase in production activity in the EU-27 average was also more pronounced in y-o-y terms in the first quarter (4.2%, working-day adjusted). Production volume in Slovenia's main trading partners in the euro area (Germany, France and Italy) also increased y-o-y, which had a positive effect on production volumes of more export-oriented manufacturing industries in Slovenia. Figure 11: Volume of industrial production in manufacturing I Y-o-y ■ Seasonally adjusted, q-o-q E3 8B 55 ^ cS cS cS cS Source: SORS; calculations by IMAD. ^ With foreign demand picking up, current indicators of most export-oriented industries increased y-o-y in the first quarter, while indicator values for industries that are mainly oriented to the domestic market remained lower y-o-y, reflecting weaker domestic demand. Turnover on foreign markets also strengthened in the first quarter (by 3.1%, seasonally adjusted), exceeding the level of the same period last year. New orders from the foreign market also rose compared with the first quarter of 2009, by 16.9%; orders from the domestic market increased less (3.0%). Strengthening by 1.3% (seasonally adjusted), turnover on the domestic market was nevertheless still lower y-o-y. The falling of production otherwise slowed in the first quarter in all industries that are mainly oriented to the domestic market (production volume in the wood-processing industry increased), while production in more export-oriented industries was, on average, higher y-o-y; among these, production dropped less in low-technology industries, which had already experienced the greatest declines last year. In other low-technology and in most of the high-technology industries, production volume increased y-o-y. The first quarter 2009 levels were exceeded the most by the manufacture of transport vehicles and ICT and electrical equipment, where production had already increased y-o-y in the final quarter of 2009. Figure 12: Turnover and volume of industrial production in manufacturing ■ Q4 09/Q4 08 1 01 10/Q1 09 20 15 10 5 ä 0 . -5 -10 -15 -20 Turnover by geographical Production volume by area export orientation Domestic Euro Foreign Highly Mainly Domestic- market area currency export- export- market-ori area oriented oriented ented Source: SORS; calculations by IMAD. The confidence indicator in manufacturing improved again in May, mainly owing to better prospects for the coming months. The situation indicators still lagged behind the long-term average values but the indicators of expectations improved significantly and mainly reached above-average values in May (except the indicator of expected employment). The indicators of expected exports and total demand improved the most, which was reflected in an increase in the indicator of expected demand. The volume of production is expected to strengthen, but most of the surveyed enterprises nevertheless still anticipate cuts in the number of employees. In the first quarter, the number of employed persons declined by close to one tenth y-o-y (9.3%), the Figure 13: Indicators of expected business trends in manufacturing -Production expectations -Selling price expectations -----Expected employment Expected export order-books 40 30 1Ž 20 J^ I0 0 -10 cu -20 -30 !5 45 -40 J! —»--- Expected total demand most in industries mainly oriented to the domestic market (13.0%). In export-oriented industries, the y-o-y falling in employment slowed significantly in comparison with the previous quarter (from 11.2% to 7.6%). Construction activity picked up in March, but it dropped again in the first quarter as a whole and was still much lower than in the same period last year. According to seasonally adjusted data, in March the value of construction put in place was 4.1% higher than in February, but 19.7% lower than in March last year. In the first quarter as a whole, construction activity was down 18.9% compared with the same period last year, a similar drop as in the previous four quarters. The greatest y-o-y decline was recorded for residential construction (-37.2%),4 which is related to the high stock of unsold flats and the situation on the real estate market. The decline in civil engineering deepened (-29.3%), while activity in non-residential construction already increased y-o-y (6.9%). Non-residential construction was otherwise the first construction sector to see activity drop as a result of the crisis. Figure 14: Value of construction put in place -Construction -total -Buildings -Total -----Residential buildings —•—Non-residential buildings ----Civil engineering works a a a Source: SORS; calculations by IMAD. The total floor area planned by issued building permits dropped again in the first quarter of 2010. It was 10.1% lower than in the same period last year. The total floor area planned for residential buildings declined by 8.7% and that for non-residential buildings by 12.5%. Non-residential construction saw a further decline in the total floor area of wholesale and retail trade buildings; the total floor area of industrial buildings rose for the second quarter in a row, suggesting intensified business investment. 4 In interpreting the figure on the value of residential construction put in place, it should be noted that it does not include the activity of smaller enterprises, which we estimate are mainly engaged in construction of residential buildings. Box 3: Real estate market After growing for two quarters, the number of reported market transactions in flats dropped significantly in the first quarter of 2010. The figures on transactions in flats arise from data on second-hand flats as monitored by SMARS (Surveying and Mapping Authority of the RS) and on newly built flats as recorded by SORS surveys. The number of transactions increased y-o-y according to both measurements, mainly as a result of a low base in 2009, when the decline was deepest. The level of transactions in second-hand flats is, however, still 39% lower than the peak level in the time of favourable economic trends, and in newly built flats, nearly half lower than the highest value recorded in the third quarter of 2007. In other real estate types, the number of transactions also dropped, except for bar and shop premises. Yet again it has been confirmed that the market remains weak and unstable, despite the first signs of revival on the real estate market. Figure 16: Floor area planned by building permits Non-residential buildings ■ Residential buildings 1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 vo O cS Source: SORS; calculations by IMAD. Prices of sold second-hand as well as newly built flats remained nearly unchanged in the first quarter of 2010. Prices persist around the level reached after the significant drop in the first quarter of 2009, i.e. approximately at the level recorded when they began to be monitored in the first quarter of 2007. Prices of second-hand flats dropped by 6% with regard to their peak, and prices of newly built flats by 16%. Price movements of other real estate types send mixed signals, and there have been no major changes on the market as yet. Figure 15: Movements of prices of second-hand and newly built flats and transactions of flats ■ Prices-SORS, second-hand dwellings 130 120 110 100 90 80 cy 70 ^^ 60 50 40 30 ---Prices-SORS, new dwellings -Prices-SMARS ---Registered transactions-SMARS .;.... :\,IV\........... 1 y ■i ■■ i ............ ■ ■■■ i i t i ■? i m 7 w / a a Source: SORS, SMARS; calculations by IMAD. Electricity production increased one third y-o-y in April and consumption by 14.2%. Production was as much as 33.1% higher y-o-y, due to last year's regular overhaul of the nuclear power plant in April. Production in hydroelectric power plants was nearly one half lower than in April 2009 (45.3%), while production in thermal power plants increased only marginally (2.6%). Posting y-o-y growth for the fourth consecutive month, electricity consumption strengthened to 14.2% in the period to April (also due to a low base). Close to one third of consumption growth came from a 46.7% increase in consumption by direct users (metal industry) and almost two thirds from other electricity consumption, which was up 10.9%. Not including the Croatian part of nuclear power plant production, Slovenia's net imports of electricity accounted for 6.4% of consumption. Figure 17: Electricity production and consumption Output in thermal power plants Output in nuclear power plant (50%) Output in hydroelectric power plants 1200 _ -Electricity consumption 1100 1000 900 800 700 600 500 400 300 200 100 0 D o cu 3