August 30, 2013 / 10:48 AM / 6 years ago

Slovenian recession eases, but more pain seen ahead

LJUBLJANA (Reuters) - Slovenia’s economy declined at a slower pace in the second quarter, data showed on Friday, but analysts said a steeper fall was looming as the country struggles to overhaul its banks and avoid an international bailout.

GDP shrank by 0.3 percent quarter-on-quarter, versus a fall of 0.5 percent in the first three months of the year as a decline in household consumption eased before the government raised value-added-tax in July.

The statistics office also reported on Friday that annual inflation fell to 2.2 percent in August from 2.8 percent in July while unemployment eased to 10.3 percent in the second quarter from 11.1 percent in the first three months of the year.

Saso Stanovnik, chief economist at investment firm Alta Invest, said the GDP figures were in line with expectations, but warned: “We can expect a steeper fall of consumption, and also of GDP, in the third quarter precisely because of the VAT increase”.

Slovenia raised VAT by 2 percentage points to 22 percent from July 1 to try to boost budget revenues.

But its primary concern is the rising amount of bad loans in its fragile mostly state-owned banking sector, which might force the country to follow other euro zone states in seeking outside aid.

In a positive sign for the export-reliant economy, exports grew by 2.0 percent year-on-year in the three months to June, their best performance since the fourth quarter of 2011.

Analysts said unemployment was unlikely to ease significantly before 2015 when economic recovery is expected, while inflation, which is well above the euro zone average of 1.3 percent, will continue to ease slowly this year and in 2014 amid low economic activity.

BANK WORRIES

Slovenian banks are choking under some 7.5 billion euros ($99.18 billion) of bad loans, equivalent to 21.5 percent of GDP.

Market confidence has been further rattled by delay of a planned banking sector overhaul because of external stress tests required by the European Commission, which have recently been extended to 10 out of 18 local banks.

Prime Minister Alenka Bratusek’s center-left cabinet planned to start transferring bad loans to a “bad bank” in June but had to postpone that after the Commission said it would approve the transfers only after stress tests were completed.

While the government expects the economy to contract by 2.4 percent this year and by another 0.2 percent in 2014, some analysts believe it could return to growth as early as in 2014.

“We can realistically expect mild growth in 2014 if credit activity and market confidence improve,” said Igor Masten, economics professor at Ljubljana University.

Slovenia, whose main exports include cars, car parts, household appliances and pharmaceuticals, boasted the highest economic growth in the euro zone when it joined the bloc in 2007 but was badly hit by the global crisis due to its dependency on exports and failure to enforce market reforms.

It fell into a new recession last year amid lower export demand, credit crunch and a fall in domestic spending caused by budget cuts.

Reporting By Marja Novak; editing by Zoran Radosavljevic and Stephen Nisbet

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