Sharp decline in economic activity this year, 3.1% growth next year

Banka Slovenije is forecasting Slovenia to record a sharp decline in economic activity this year (of 7.6%) as a result of the coronavirus pandemic, before a recovery next year (with growth of 3.1%). In the macroeconomic projections released today, we emphasise that the realisation of this forecast will primarily depend on the success of the rollout of the vaccine. The economic contraction has been profoundly mitigated by economic policy stimulus measures, without which this year’s decline in economic activity would be a third larger. Government measures have also played a large role in maintaining stability on the labour market: thanks to these measures, unemployment is expected to rise by less than previously projected. Consumer price inflation will be negative this year, but price pressures are expected to gradually rise after the epidemiological situation improves, thus strengthening inflation.

Economic activity will decline by 7.6% this year, before growing by 3.1% in 2021. Next year’s recovery will be slightly slower than forecast in the previous projections, as a result of the new wave of cases that hit this autumn.

Given the rapidly evolving epidemiological situation, there is great uncertainty in the economy. Banka Slovenije has therefore drawn up two alternative scenarios alongside its core forecast, a milder scenario and a more severe scenario, which differ primarily in the assumption concerning the future evolution of the epidemic. While the milder scenario anticipates the autumn wave of the epidemic being successfully contained this year, and the gradual lifting of measures towards the end of December, the more severe scenario envisages the bad epidemiological picture lasting for longer, which would be reflected in the extension of stringent containment measures. Under the milder scenario, GDP would regain its pre-crisis level as soon as next year, while under the more severe scenario it would decline further next year, and would only approach its pre-crisis level near the end of the projection horizon.

Strong mitigating effect of economic policy measures

While monetary policy continues to provide for favourable financing conditions, the fiscal aid packages at national and European level are ensuring the conditions for preserving the potential of the economy, and with it the fastest possible recovery after the end of the pandemic. Our assessment is that in the absence of these measures, this year’s decline in economic activity in Slovenia would have been approximately a third larger. Alongside the other economic policy measures, investment activity will be further strengthened over the coming years by funding from the EU Recovery Instrument after the pandemic.

The epidemic’s impact on the labour market is being significantly mitigated by government emergency measures. Despite a decline of more than 7% in the number of hours worked, employment will decline by just 1.5% this year, less than expected. After a sharp rise in unemployment during the first wave of the epidemic, the adverse developments slowed, while amid a renewed but less pronounced downturn the surveyed unemployment rate is forecast to reach 5.4% by the end of the year. The situation is expected to gradually ease next year. The unemployment rate will nevertheless rise slightly further, but will remain below 6%, significantly less than during the previous financial crisis. Modelling suggests that the government measures, most notably the furlough scheme and the subsidisation of short-time work, have for now succeeded in preserving approximately 16,000 jobs that would have been lost this year and next year in the absence of these measures.

Epidemic’s major impact on inflation

Consumer prices will have fallen by 0.2% over the course of this year. After rising last year, core inflation excluding energy, food, alcohol and tobacco will slow to just 0.9% this year. This will be largely driven by the contraction in the economy and the uncertainty on the labour market, which is being reflected in a sharp decline in capacity utilisation and in reduced domestic price pressures. This year’s decline in private consumption has had a sharp impact on growth in prices of services related to tourism, arts, recreation, culture and transport. Energy prices are the largest factor in the slowdown in headline inflation, while upward pressure is mainly being applied by food price inflation, which stands at 3%. Allowing for the changing structure of household consumption, the epidemic’s negative impact on inflation would be slightly smaller. The gradual recovery in domestic and foreign demand that will follow an improvement in the epidemiological picture is expected to bring an increase in domestic and foreign price pressures. Inflation will reach 1.6% by 2023.

Figure: GDP over the projection horizon, by scenario

Note: The dotted line represents the GDP trend prior to 2008. Sources: SORS, Banka Slovenije forecasts

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