Strong uptick in economic growth accompanied by sharp rise in inflation; uncertainty caused by Russian military aggression

Economic growth in Slovenia increased markedly in the final quarter of last year and was well above the euro area average, while the mood remained strong at the beginning of this year. Future developments will be affected by events related to the Russian military aggression: the Slovenian economy’s direct dependence on the Russian and Ukrainian markets is relatively low, although the impact on economic growth and inflation could be considerable. Inflation has been rising for eight months now, and is increasingly broad-based.

Quarterly economic growth in Slovenia increased to 5.4% in the final quarter of last year, 5.1 percentage points higher than the euro area average, leaving GDP fully 6.6% higher than in the final quarter of 2019. Annual GDP growth thus exceeded 8.0% last year, the highest figure to date. The key factor is sharp growth in exports, which rose strongly at the end of the year. Alongside household consumption, domestic activity continued to be driven by heavy investment, including in machinery and equipment. Domestic demand also drove growth in imports, which was even stronger and more robust than export growth last year. The current account surplus narrowed sharply.

The latest figures indicate that economic growth remained strong in the early part of this year. The economic sentiment improved again in February, and the high-frequency activity indicators showed continuing growth in domestic consumption and international trade.

Economic activity over the remainder of the year will depend largely on developments in connection with the Russian military aggression and the resulting sanctions. The Slovenian economy’s direct dependence on the Russian and Ukrainian markets is relatively low, although there might be a considerable impact on inflation, the financial markets, confidence and supply chains.

Inflation is continuing to rise sharply amid the issues on the supply side of the economy and rising energy prices. Inflation in the euro area has reached its highest level to date, and is increasingly broad-based. Core inflation has already passed 2.0% in the majority of euro area countries.

Inflation in Slovenia is also rising, reaching 7.0% in February, as core inflation outpaces the euro area average amid strong domestic price factors. The war in Ukraine is driving up energy prices, commodity prices and food prices, which is further increasing inflationary pressures in the international environment. Supply is still being hindered by disruptions to supply chains, while demand in future months will also depend significantly on the outcome of wage negotiations in the public and private sectors.