The merchandise foreign trade deficit narrowed by 3.1% y/y to EUR688m in September and improved from the downwards revised EUR743m gap in August, our calculations based on the latest data by the stat office showed. The annual narrowing was on the back of exports expanding at faster pace than imports – by 5.3% y/y and 2.2% y/y, respectively. Nevertheless, the foreign trade gap to GDP ratio stagnated at 18% for the 12-month period ending in September.
We believe that the export recovery in September reflects the end of the summer outages in the country’s main producers, as well as the execution of orders received in the past. The September print is also positive surprise in view of the continued slowdown of the economic activity in Europe, especially the fact that Italy is in recession, while Germany is on the brink of a recession. Given average July-September foreign trade developments, we may expect net exports to have had positive contribution to GDP growth in Q3. The stats office is to release Q3 GDP data on Nov 27.
In January-September, exports rose by 6.1% y/y, while imports — by slightly stronger 6.2% y/y — as imports continued to exceed exports, the deficit widened by 6.4% y/y in the period. The increase in exports was on account of higher export sales to both EU and non-EU countries. Imports from the EU rose by 9.6% y/y while those from third countries were lower by 5.8% y/y. The deterioration in the overall gap YTD was on account of the EU market, which is consistent with the moderation of the economic activity in Europe.
Going forward, exports growth might again moderate in October as economic sentiments among industrialists and in the EU deteriorated in the month with those among local industrialists worsening on the back of less upbeat production and selling price expectations, more downbeat assessment of order books, including for exports. The continuing crisis in major shipbuilding Uljanik group that has been put into bankruptcy procedure and has been failing to deliver the ordered ships due to lack of money for materials and leaving employees might also have a negative impact on industrial production in the next months, hence on exports. The gradual easing of the economic activity in the country’s main trading partners, the EU in particular, specifically Italy and Germany, might additionally constrain exports’ expansion going forward. The outlook on imports is overall balanced. On the one hand, we may expect them to remain relatively strong in the next months on the back of the likely to remain overall strong domestic activity. In addition, mounting upward wages pressured by labor shortages, the administrative 9% hike of the minimum wage in 2019 (it is to grow further in 2020), the hike of base pay of civil servants and public sector employees will continue to favor domestic demand and, respectively, import growth over the short run, in our view. At the same time, the worsening sentiments among industrialists and the cooling global activity might result in them delaying their investment and expansion plans, thus reducing the imports of investment goods and materials as well, we think.