Slovenia - OECD Economic Outlook June 2020 by OECD

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Slovenia Containment measures to prevent the spread of the COVID-19 virus have led to a domestic shock as large parts of the service sector closed while a negative international demand shock curtailed production in the manufacturing sector that is strongly integrated in international supply chains. In case of the virus outbreak returning later in the year (the double-hit scenario), the second lock-down will have a lasting negative impact on businesses, leading to relatively large shares of underutilised resources at the end of the projection period. In the single-hit scenario, the initial deep shock is followed by a rebound of economic activity, leading to a sustained recovery that quickly reduces unemployment. The containment strategy has limited negative health outcomes. To avoid higher long-term unemployment, active labour market policies should focus on support to the hard-to-employ job-seekers. A further increase in the relatively high number of state-owned enterprises should be countered by limiting strategic considerations and focussing on economically viable firms. If a second shock materialises, a more selective approach to economic relief and support should be applied to allow more businesses to remain open and this should be combined with protection of vulnerable groups. The COVID-19 pandemic has been well contained in the first few months The spread of the COVID-19 pandemic has been limited, with relatively few cases and fatalities compared with other countries. The first case was confirmed in early March and a lockdown was imposed in mid-March. The pandemic has been mostly concentrated in the capital and the eastern part of the country. Since early May, the number of cases and fatalities have stabilised. The efficiency of the health care system compares favourably with peers. Nonetheless, structural problems in the sector (including a prevalence of small general hospitals) raise concerns about inefficiencies in cost, quality and safety. The low and uneven density of general practitioners contributes to a high number of referrals to specialists and emergency units, where the ratio of intensive care beds to population is relatively low. This may raise capacity concerns if the pandemic comes back in a more virulent form.

Slovenia A renewed virus outbreak would slow the recovery Index 2019Q4 = 100, s.a. 110 105

Business and household confidence have started to recover

Real GDP

Balance, s.a. 20

Single-hit scenario

Business confidence indicator

Double-hit scenario

Consumer confidence indicator

100

-10

-20

-30

2019

2020

2021

2017

2018

2019

-40

Source: OECD Economic Outlook 107 database; and OECD Main Economic Indicators database. StatLink 2 https://doi.org/10.1787/888934139898

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION ÂŠ OECD 2020

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Slovenia: Demand, output and prices (double-hit scenario) 2016

Slovenia: double-hit scenario GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation2 Unemployment rate (% of labour force) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2017

2018

2019

2020

2021

Percentage changes, volume (2010 prices)

Current prices EUR billion

40.4 21.8 7.7 7.0 36.5 0.4 36.9 31.5 28.0 3.5

4.8 2.0 0.3 10.4 3.2 0.7 4.2 10.5 10.1 1.2

4.1 2.8 3.2 9.1 4.2 0.2 4.7 6.1 6.6 0.2

_ _ _ _ _ _ _ _

1.6 1.6 0.7 6.6 0.0 89.4 74.1 6.3

2.2 1.9 1.0 5.1 0.7 84.1 70.4 6.1

2.4 2.7 1.6 3.2 2.6 -0.4 2.2 4.4 4.2 0.5

-9.1 -12.4 7.8 -14.5 -8.7 -0.1 -7.9 -16.0 -16.4 -1.2

1.5 1.8 0.4 1.5 1.4 0.0 1.4 -2.3 -3.0 0.3

2.4 0.7 1.8 1.7 1.0 1.7 1.9 1.4 1.7 4.4 6.9 8.1 0.5 -8.8 -8.1 86.6 100.2 108.0 66.1 79.7 87.5 6.6 6.1 6.1

1. Contributions to changes in real GDP, actual amount in the first column. 2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco. Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/888934138663

To contain the virus outbreak, the government restricted movement of people within their municipality, introduced temperature screenings in airports and border controls with Italy, and closed all educational institutions and non-food retailing. Measures to cope with the health emergency included the deployment of an army field hospital, movement restrictions on health personnel, and the imposition of maximum prices for protective medical gear and other medical equipment. After mid-May, the gradual opening of the economy commenced.

Economic activity slowed abruptly The pandemic has manifested itself in a historically large drop in consumer confidence and business sentiment, which only recently have begun to recover. The initial collapse reflected the sudden evaporation of domestic and international demand and led to a large contraction in economic activity. In the first month of containment, the volume of retail trade contracted by 15% (y-o-y). The tourism sector is the worst affected, where overnight stays have collapsed. Also hard hit is road transport with a 20% decline (y-o-y) in domestic freight transport on motorways and twice as much for international freight, although activity of the latter has started to recover. Manufacturing has been strongly affected, notably with the ceasing of production in the automotive sector. In April, day-time electricity consumption fell by a fifth compared with a year earlier. Overall, the OECD estimates the output loss in the first half of 2020 at 13% at an annualised rate. The rise in registered unemployment is still relatively modest, reflecting government measures to support jobs. Amid heightened uncertainty, the yield on government bonds has more than doubled, pushing the spread with German bonds to 120 basis points.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION ÂŠ OECD 2020

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Slovenia: Demand, output and prices (single-hit scenario) 2016

Slovenia: single-hit scenario GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation2 Unemployment rate (% of labour force) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2017

2018

2019

2020

2021

Percentage changes, volume (2010 prices)

Current prices EUR billion

40.4 21.8 7.7 7.0 36.5 0.4 36.9 31.5 28.0 3.5

4.8 2.0 0.3 10.4 3.2 0.7 4.2 10.5 10.1 1.2

4.1 2.8 3.2 9.1 4.2 0.2 4.7 6.1 6.6 0.2

2.4 2.7 1.6 3.2 2.6 -0.4 2.2 4.4 4.2 0.5

_ _ _ _ _ _ _ _

1.6 1.6 0.7 6.6 0.0 89.4 74.1 6.3

2.2 1.9 1.0 5.1 0.7 84.1 70.4 6.1

2.4 1.7 1.9 4.4 0.5 86.6 66.1 6.6

-7.8 -11.3 7.8 -12.2 -7.5 -0.1 -6.7 -14.4 -14.9 -1.0

4.5 4.1 0.4 7.6 3.9 0.0 3.9 0.7 -0.6 0.9

0.7 1.9 1.0 2.0 1.4 2.0 6.4 5.4 -8.0 -5.7 99.0 103.5 78.4 82.9 6.3 6.7

StatLink 2 https://doi.org/10.1787/888934138682

A substantial fiscal effort has been put in place Crisis-related fiscal measures amount to nearly 4½ per cent of GDP. A key objective is to provide income support for employees working in companies that have partially or fully suspended their operations. In addition, the government pays for pension insurance contributions for firms that continue operations during the crisis. The unemployed are entitled to benefits from the first day of unemployment and the self-employed are guaranteed a monthly basic income equivalent to the net minimum wage. Firms are supported by a 24-month deferral of corporate income tax payments and accelerated payments for public procurements. Support for other groups include 80% wage compensation for parents that stay at home for child caring reasons and a crisis bonus for pensioners. Banks have to defer liabilities of crisis-affected solvent businesses by 12 months, and the government has issued guarantees of up to EUR 2.2 billion (4½ per cent of GDP) to banks. Effective from 1 June, the government is implementing measures to stimulate the economy, amounting to 1% of GDP, which includes the issuance of tourist vouchers to all Slovenians, the extension of support measures for the most affected sectors and co-financing of part-time work. The emphasis of fiscal support on maintaining incomes and supporting firms has so far limited increases in unemployment and bankruptcies.

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The economy is expected to recover gradually The double-hit scenario assumes a new shock at end-2020 of half the size of the initial shock. In this scenario, the initial rebound of the economy following the lifting of current restrictions will be followed by a second contraction, leading to a decline in economic activity of 9.1% in 2020. This leads to higher long-term unemployment and more bankruptcies, holding back the economy’s growth potential and leading to a large share of underutilised resources at the end of the projection period. The single-hit scenario has containment measures in place for two months with a gradual lifting of restrictions. As restrictions are lifted, released pent-up demand is projected to lead to a sharp rise in economic growth, which, nonetheless, is projected to contract by 7.8% in 2020. This is most evident in private consumption of durable goods, but also for business investments. After this initial boost to demand, the economy is projected to enter a more stable growth path, reflecting that in some sectors, such as in tourism and automotive industry, demand will remain subdued for longer. Following the initial labour market shock, unemployment is expected to gradually recede towards pre-crisis levels. The main risks to both scenarios are a larger-than-expected number of bankruptcies and the increase of new job seekers, which would both reduce the economy’s ability to bounce back. Demand could also be held back by a further increase in bond yields. On the upside, growth would be stronger if foreign demand rebounds faster than projected, especially if international supply chains are restored rapidly.

Additional measures are needed to sustain long-term prospects To avoid higher long-term unemployment, it is important that active labour market policies focus on the hard-to-employ job-seekers by providing adequate job search support and skills upgrading. Another concern is to avoid a further increase in the already relatively high share of state-owned enterprises, which are present across all sectors. This requires limiting the scope for strategic considerations and focussing on economically viable firms. To minimise the economic effects of a second wave of the pandemic, a more targeted approach could protect vulnerable groups, while limiting confinement measures to allow more businesses to remain open, drawing on experiences from the current outbreak.