Macroeconomic Projections for Slovenia, June 2019

According to Bank of Slovenia forecasts, economic growth in Slovenia will slow slightly this year and next year, but will remain higher than the euro area average. The main factors acting to slow economic growth, which nevertheless remains good, lie primarily in the international environment, while domestic factors remain encouraging. According to our latest forecasts, GDP is expected to increase by 3.2% this year, while growth is expected to be just under 3% over the next two years. The more moderate GDP growth is attributable to a slight slowdown in growth in foreign demand, and a gradual shift into the more mature phase of the business cycle. The downside risks for economic growth are more pronounced, and come primarily from the external environment.

Economic growth in Slovenia will remain broadly based over the medium term, and driven primarily by private consumption and investment. Both will be strongly dependent on the mood on the labour market, where slower employment growth and faster wage growth are expected. The latter will slightly outpace growth in productivity, which will lead to a deterioration in cost competitiveness if unit labour costs rise faster than in the trading partners. Rising labour costs and a shortage of qualified labour will also be factors in the ongoing growth in private-sector investment in machinery and equipment.

The developments on the labour market will however strengthen household disposable income. This will provide for slightly higher growth in private consumption, and continuing demand for residential real estate, where fast-rising prices are primarily the result of a shortage of supply. Growth in private housing investment is therefore expected to gradually strengthen. The financing conditions remain favourable, and alongside firms’ significant internal resources from retained earnings are continuing to provide for solid growth in investment by the corporate sector in Slovenia. Economic growth will also continue to be supported by government investment: the disbursement of EU funds and the execution of major investment projects are expected to pick up pace.

Growth in government consumption over the projection horizon will be slightly lower than last year, primarily as a result of a slowdown in employment growth. Domestic demand will strengthen growth in imports, which will slightly outpace growth in exports throughout the projection horizon. Given the uncertainty in the international environment, growth in exports will be slightly slower than in previous years, but will remain favourable. These developments in international trade will lead to a gradual reduction in the current account surplus, which will nevertheless remain large even at the end of the projection horizon.

Figure 1: Contributions to GDP growth (expenditure approach)

Sources: SORS, Bank of Slovenia forecasts

Under weaker pressure from the external environment, inflation as measured by the HICP will be slightly lower this year than last year, and will fluctuate around 2% over the next two years. As domestic demand remains solid and growth in unit labour costs increases slightly, core inflation (excluding food and energy prices) will gradually rise, primarily on account of faster growth in services prices. At the same time moderate growth is also expected in prices of non-energy industrial goods, which given the fierce competition between providers will remain strongly dependent on price developments in international trade. The contribution to headline inflation by growth in energy prices will decline.

The main risks accompanying the forecasts on this occasion come from the international environment, and are on the downside for economic growth in Slovenia. The realisation of risks related to the escalation of geopolitical tensions and additional protectionist measures could slow growth in foreign demand, which would be reflected in lower growth in exports and in a general deterioration in the economic sentiment, which would mainly act as a brake on firms’ investment activities. By contrast, the risks from the domestic environment remain on the upside, and relate primarily to the possibility of faster wage growth, which would bring a sharper increase in private consumption. Additional uncertainty surrounds government investment, which in the wake of faster disbursement of EU funds and the intensified execution of major infrastructure projects could slightly outperform its current growth projections. The aforementioned stronger upward pressure on wages could also cause a slight increase in core inflation over the entire projection horizon. A further risk of higher inflation comes from developments in oil prices on international markets, which primarily depend on the global geopolitical situation.

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