Somewhat favourable economic developments will continue this year, although they will be influenced by the consequences of Russian military aggression

The forecast of economic growth issued by Banka Slovenije today is marked by the consequences of Russian military aggression in Ukraine. We expect it to cause a slowdown in current activity this year, although the total annual growth will still be a high 5.8%, in particular because of the explicit statistical effect of the transfer of growth from the previous year. In the next two years annual growth will settle at 2.4% or 2.5%. The labour market, which is becoming increasingly marked by employers’ difficulties in finding workers, will also be under the influence of a rather favourable economic situation. The average inflation this year will be 9.0%, mostly due to the high prices of energy products, with the contributions of other price groups also increasing. In the next two years price growth will be reduced to 4.5% or 2.3% with the decreasing impact of energy product prices. The risks accompanying the forecast arise primarily from the continuation of the Russian military aggression in Ukraine.

Current economic activity growth will slow down but remain broadly based

Economic growth will be broadly based over the entire projection horizon. Private consumption will be driven by high employment, further salary growth and accumulated savings from the period of the pandemic. Following the strong growth at the beginning of this year, investment activity will gradually slow down later this year and in the next year, mainly due to reduced growth in foreign demand and less available capital goods. With the stabilisation of the situation in the external environment and gradual resolution of problems in supply chains, the growth in private investments and exports is expected to accelerate, particularly in 2024.

The forecast of rather high growth this year mostly arises from the statistical effect of the transfer of strong economic activity in the second half of the previous year. Simultaneously with the explicit effect of the transfer it is also expected that the deteriorated situation in the external environment and stronger inflationary pressures will gradually slow down the current economic growth for the rest of this year and the beginning of the next.

The labour market situation under the influence of the broadly based economic activity

With strong current activity and a rather favourable economic outlook, employment will increase throughout the projection horizon. This year, it will increase by 2.8% and then by 1.1% in 2023 and 0.7% in 2024. The forecasts for labour market development reflect the expected increase in the discrepancies between supply and demand in the labour force. Together with the current inflation forecast, they also affect the projected nominal growth of assets per employee, which is expected to increase by 4.5% annually on average in the projection horizon.

Inflation will decrease gradually following this year’s high price growth

The situation in the domestic economy and external environment is reflected in the inflation forecast, which is 9.0% for this year, to be followed by 4.5% and 2.3% in 2023 and 2024, respectively. The prevailing factor in this year’s high inflation will be the high growth in energy product prices, with the contributions of other price groups also gaining strength. With the gradual reduction of the impact of energy product prices, inflation will remain at a high level in 2023, mainly due to the growth in the prices of food and services. Both factors will contribute to keeping overall price growth above the inflationary goal of 2% in 2024.

Risks arise from the continuation of the Russian military aggression

Macroeconomic developments are mainly exposed to the risks arising from the continuation of the Russian military aggression in Ukraine.

The central forecast is thus supplemented by the alternative, severe scenario which foresees the continuation of the war in 2023 and escalation of the sanctions, including the complete prohibition of the import of Russian energy products to the EU. If such a scenario were to be realised, this would markedly increase the prices of energy products and food, reduce the growth of global demand and result in a partial loss of production capacities due to the scarcity of raw materials. If the severe scenario were to be realised, the economic growth for this year would be 4.3%, for 2023 -0.4% and for 2024 3.6%. Compared to the central forecast, the consumer price inflation would be higher over the entire period and would reach 9.8% this year, 6.6% in 2023 and 2.5% in 2024.

Publication Macroeconomic Projections for Slovenia, June 2022