Macroeconomic Projections for Slovenia

Favourable economic activity in Slovenia, while increasing uncertainty in the international environment.

Average annual economic growth is projected to be somewhat higher over the medium term than predicted in the previous projections, at 4.6% this year, 3.9% in 2019 and 3.4% in 2020. Domestic demand and the export sector are expected to strengthen further, while there is also an extremely strong carry-over effect from previous year in 2018. The projection for export growth is based on the good outlook of the international environment: economic growth projections for Slovenia’s trading partners remain favourable for now, while investment will increase the export sector’s production capacity. However, it is assessed that economic growth will more and more depend on domestic factors. Growth in private consumption will remain high, as employment growth is expected to be rapid, at least at the beginning of the projection horizon, while wage pressures will strengthen in line with the decline in unemployment. The private-sector investment cycle will continue, as conditions for investment will remain favourable both from the perspective of demand and from the perspective of the availability of financial resources. The government will also contribute more significantly to investment growth as the disbursement of EU funds picks up pace. The government will also increase its consumption, albeit at moderate rates, in part because employment growth in the government sector will slowdown. As a result of a stronger dynamic in the domestic market, the positive contribution made to GDP growth by net trade will decline sharply, while the current account surplus will also decline, which will also reflect a deterioration in the terms of trade, at least in the early part of the projection horizon.

The pace of economic growth will be somewhat slower compared with last year, as the economy moves into a more mature part of the business cycle. The positive impulse from the international environment will become moderate, and with it growth in the export sector. Growth in private consumption over the projection horizon will be at its highest this year, as employment growth remains high, while wage growth strengthens and the supply of consumer loans remains favourable. A moderate slowdown is expected afterwards: employment growth will slow as unemployment falls towards its natural rate. An increase in wage pressures is expected because of increasing structural imbalances on the labour market, although it is assessed that the negative effect of the slowdown in employment growth on private consumption will be stronger than the effect of higher wage growth. Although growth in aggregate demand will gradually slow, it will remain strong enough for the investment cycle to continue, thereby strengthening the country’s potential output. Growth in total investment will peak this year due to somewhat higher government investment related to the local elections, but will subsequently slow in line with aggregate demand dynamics. Growth in imports will gradually slowdown in line with the dynamic in investment and private consumption, although it will outpace growth in exports over the entire projection horizon.

Inflation will be higher than projected in the previous projections. Over the medium term it will be slightly above the rate targeted by the ECB, and will increasingly be driven by domestic factors. This year it will reach 2%, with approximately equal contributions from external and domestic factors. The rise in inflation will primarily be the result of higher oil prices and services prices, and unexpectedly high growth in food prices. As economic activity remains robust and wage pressures increase, inflation factors from the domestic environment will later prevail, which will strengthen core inflation. This will rise as a result of the pass-through of higher energy prices into other categories of goods, rising labour costs, and the increase in final consumption and investment, and will be the principal factor in the rise in headline inflation to slightly above 2% towards the end of the projection horizon.

The downside risks to the economic growth projections are significantly larger than in previous projections. They primarily come from the international environment, which is becoming increasingly unpredictable. The increase in geopolitical tensions, sanctions, and the spread of protectionism are affecting the existing order in international trade, and are reducing confidence in the real sector. For now there is no sign of any stronger impact on economic activity, but these are factors that could strongly curb growth in foreign demand. The risks coming from the domestic environment are mostly on the upside, where the prevalent risks are those related to the strength of the government's (and government-linked firms') investment cycle. This could be stronger than anticipated as a result of the uneven disbursement of EU funds and the accelerated execution of major infrastructure projects. Growth in private consumption could also be higher, as the rapid reduction in the surplus labour supply is improving the negotiating position of employees, while the demonstrative effect of the expected rise in wages in the government sector on wage growth in the private sector could also be strong. In contrast to economic growth, the risks in connection with inflation are slightly on the upside, and mostly relate to growth in wages and oil prices.

Macroeconomic Projections for Slovenia